Nigeria’s total debt stock as at the end of March 2012 was N6.8 trillion ($44 billion), according to the most recent data from the Debt Management Office (DMO). Out of this amount, N5.96 trillion ($38.3 billion) is domestic debt while N919 billion ($5.9 billion) is external debt.
Nigeria’s current debt to Gross Domestic Product (GDP) ratio, at 17.45 percent, is lower than the international standard threshold for Nigeria’s peer group at 40 percent. For example, South Africa’s debt to GDP ratio for year end 2011 stood at 35.6 percent, while Egypt’s stood at a high rate of 85.7 percent. The country, according to the DMO, has also been operating on a self-imposed more conservative threshold of 25 percent of GDP.
Nigeria in 2005 paid off most of the $30 billion external debt it owed the Paris and London club of creditors and in the process reduced its debt to GDP ratio from 52 percent to less than 7 percent. The DMO in 2003 also set in motion the process to restructure Nigeria’s domestic debt portfolio, with the objective of lengthening the maturity of the instruments and deepening the government bond market. It has also succeeded in developing a sovereign yield curve for Nigeria, through the issuance of longer tenured Federal Government (FG) bonds, which has reduced the use of ways and means to finance government deficit.
We applaud the role the DMO, since its resuscitation in 2000, has played in the management of Nigeria’s domestic debt, and while we have no quarrel with the current nominal domestic debt levels, we, however, believe that looking at the debt sustainability ratios alone, in isolation of other factors, may lead to the misreading of problems or dislocations that may arise from having the public sector as the lead issuer of debt in any nation.
The first problem to be identified is the crowding out effect of the private sector that occurs when the government borrows at an average yield of 15 percent. This makes it impossible for private sector companies to issue corporate bonds at a sustainable interest rate since those bonds are priced off the FG bond benchmark. The high interest rates that FG bonds attract have also led to the problem of banks choosing to invest in these bonds, rather than perform their primary role of financial intermediation in the economy through the provision of credit to private sector operators, small and medium scale enterprises, and consumers.
There is also the escalating cost of servicing the domestic debt. The Federal Government’s budget for domestic debt service in 2012 is N559.6 billion (more than the budget allocation to Works, Power, Agriculture and Water Resources combined), leaving less money for infrastructure and other needs.
The government should let Nigerians know what the borrowed money has been used for. Specifically, Nigerians need to know what projects have been funded with the money. In other words, it will be interesting to know if the money was used to fund recurrent or capital expenditure. Answer to these questions will help the people to know how transparent government has been in deploying the money.