As an ardent observer of our economic activities, have you for once sit back to ask yourself the question: why is Nigeria borrowing with confidence, despite its debt status?
Developments in the country show that Nigeria is yet to exceed its debt limit, measured through specific criteria initiated by the World Bank and the International Monetary Fund, IMF.
In recent times, these criteria interpreted by the Debt Management Office, DMO, place Nigeria in a comfortable zone that it may further embark on future borrowings if the need arises.
A more straightforward interpretation is the borrowing limit fixed by the Economic Community of West African States, ECOWAS. For every nation under the ECOWAS umbrella, the limit is 70 per cent after duly considering the Gross Domestic Products, GDP of such country.
Our findings have revealed that Nigeria is currently at 21% of its borrowing capacity, which invariably means that about 49 per cent of borrowing possibility is still available.
But According to the Debt Management Office, DMO, the limit for external loans is 40 per cent. Nigeria has only exhausted 8 per cent of that privilege which shows that there is about 32 per cent room remaining.
Why is Nigeria Borrowing?
DMO presented a subject centred around Nigeria’s Local and Foreign Debt Management during West African Region- Debt Advocacy and Training Sessions in Abuja. Patience Oniha, the Director-General, DMO, was represented by Mr Monday Usiade, who Coordinated the presentation.
The Seminar was organised by the African Network on Environment and Economic Justice, ANEEJ, in partnership with African Forum and Network on Debt and Development, AFRODAD.
A concrete point made by DMO to help understand why Nigeria is borrowing at the present rate can be found in their presentation of a Debt Sustainability Analysis, strongly backed by the World Bank/IMF template.
The World Bank/IMF template shows the limit a country is expected to borrow. DMO employed the concepts to analyse Nigeria’s debt yearly to advise the government whether it’s in the position to receive loans or not.
DMO’s research has placed Nigeria in a favourable position to borrow because the economy may not be performing to expectation; it remains the largest in Africa. This is evident in its debt to GDP ratio as in 2019, which stood at 19 per cent, a figure several experts would describe as relatively low.
To understand why it looks safe underneath the surface, for Nigeria to continue borrowing without considering the consequences of having a long-term adverse effect is partly because its total external debt as of December 2020 is $33.8 billion (N12.7 trillion), of which the Federal Government owes $28.5 billion while the states owe $4.7 billion.
Meanwhile, the domestic debt was put as $53.04 billion. While the Federal Government’s obligation was set at $42.1 billion, the states owed $10.9 billion, putting the total debt at $86 billion (N32.9 trillion).
The debt office expressed confidence that Nigeria can service all its debts if the country could still generate the needed revenue, adding that it is not under any repayment pressure from lenders.
Borrowing for Infrastructure Development
Another argument in favour of Nigeria’s borrowing is that of the Minister of Transportation, Rotimi Amaechi, who expressed satisfaction with the actions of President Muhammadu Buhari to fund infrastructure projects with borrowed funds.
He mentioned this while at the recent inspection of the Lagos/Ibadan standard gauge railway ahead of its inauguration in Moniya, Ibadan.
The Minister’s confidence on why Nigeria needs to borrow to fund projects is coming from the backdrop that the American Government is also borrowing trillions of dollars to operate its economy.
The decision to pay directly to contractors was part of the terms and conditions agreed upon before the funds were released. Amaechi restated that Nigeria is only borrowing less than N100 billion, that critics should not look at the loan as a payment that enters the federal government’s coffers but directly to contractors.
But an expert in the sector thinks otherwise. He believes Nigeria and Africa, in general, should be wary of the loans received from international lenders. The warning was that the loans be adequately managed; else, thousands of debtors are liable to face an early grave.
The expert, David Ugolor, who doubles as the Executive Director, African Network on Environment and Economic Justice, ANEEJ, said borrowings could throw millions of Africans into poverty as economies of some West African countries are already showing early signs.
Making a case, in what projected reasons why Nigeria needs to adjust its borrowing habits, Ugolor made mention of the IMF debt sustainability analysis as of February 2021, which shows that the majority of countries in West Africa have remained in moderate debt distress.
It would be noted that among all the member states of ECOWAS, five are already suffering heavy debt burden, which may continue for several years to come.
Furthermore, research indicates that debt accumulation before the outbreak of COVID-19 outpaces the ability of growth performance to support debt servicing.
In plain words, the aforementioned simply means debts incurred overtime may be hardly repaid if the revenue generated is not huge enough to service the loan.