Debt or funds borrowed by the Nigerian government augment revenue generated and provide a fiscal balance for the country to meet its obligations. However, they could put the country at fiscal risk, which affects both present and future fiscal policy measures.
Nigeria and other developing countries face complex challenges due to weaker growth prospects, limited fiscal space, and higher refinancing risks due to shorter maturity public debts.
COVID-19 put the world in a tight situation, leading to tighter monetary policies in advanced countries. This pushed up international interest rates, making it even more difficult for low and middle-income countries who now have to acquire loans at increasing rates, increasing the chances of defaulting on repayments, giving the state of their economy.
Nigeria is not exempt from this tougher loan system, and there was an increase in the average interest rate on external debt for Nigeria in 2020. It averaged 6.83 in 2018, dropped to 1.79 in 2019 but increased again to 1.85 in 2020.
Nigeria’s weak economic growth has further jeopardised its debt situation. The country’s debt management is worrying with an increasing debt-to-GDP ratio.
Debt-to-GDP increased from 2013 to 2017, dropped from 2018 through 2019 and then increased again in 2020 and 2021.
Nigeria’s debt risk is high and is likely to continue to be so for several years. This is due to the gross financial need of the country and its weak revenue generation profile. Though the government has explored domestic borrowing chances, there is a limit to domestic borrowing due to inflationary pressures.
Thus, it looks to external loan sources for development projects with varying repayment and maturity periods. This exposes the country to greater risks of a sudden stop in external financing. For instance, the International Monetary Fund (IMF) places some conditional requirements for accessing loans. Amongst them are the minimum levels of the government’s primary balance, revenue collection, and social assistance spending.
One common feature of debt crises is the continuous rise in debt levels. This has been the situation with Nigeria as its debt has increased steadily over the last years, closing at N39.56 trillion in 2021.
This debt increase is often fueled by local currency depreciation and exchange rates. This has seen debt rise above the credit level of debt servicing. Despite the low-interest rates recorded in the near past, external debt servicing has increased in the last five years in Nigeria.
While it is evident that Nigeria will continue to depend on external debt to finance its development, the considerations and potentiality of a crisis are legitimate. This is due to the slow economic growth rate, higher inflation rates, and the country’s struggle to fight poverty, all of which pose a great threat to the country’s economic and social wellbeing.