Why is everyone concerned at the alarming revenue-debt ratio of Nigeria even when the debt-GDP ratio shows Nigeria is not only creditworthy but also has the capacity to pay its debts.
While the debate on the boundaries of the GDP-Debt ratio belongs to policy economics, the focus on the government’s revenue as a safe measurement of general economic wellbeing can be traced to oil extractives being the major contributor to the revenue of all the tiers of government in Nigeria.
This situation makes many commentators on the country’s debt profile point to the revenue-debt ratio. This is because many believe the only money the government really has to pay back its accumulating debts is oil revenue.
For richer for poorer: An Oil-rich country and its poor Government
Nigeria’s government rode on the easy money from oil rent that made up over 65% of its revenue for 5 years straight, from 2010 to 2014.
During this period, the lowest debt to revenue ratio was 34% in 2014, which meant the country’s revenue of N3,062 billion in that year alone could pay 34% or one-third of all its accumulated debts of N8,985 billion at the end of that year.
However, as oil revenue declined, the governments at all levels began to falter in their financial commitments, showing that, but for oil rent, the governments in Nigeria were actually poor, going by the level of revenue needed to fund their costly bureaucracies and widely perceived profligate officials.
Due to its poor state of retained revenues, the federal government and its state counterparts have repeatedly gone borrowing, building Nigeria’s debt stock from N10.3 trillion in 2015 to N32.9 trillion at the end of 2020.
As of 2020, the annual revenue of N3,418 billion that year could only pay a tenth of 10% of the country’s outstanding debts of N32,915 billion, which approximates to N32.9 trillion.
Alternative to Declining Earnings from Oil Rent: Why Tax Revenue is also low?
Nigeria has the lowest Tax-to-GDP ratio among 30 African countries that Tax foundation selected for a comparative study between countries in Africa, Latin America and the Caribbean (LAC), and the Organisation for Economic Co-operation and Development(OECD) countries.
Unlike Oil rent, tax revenue relies on the level of output and income. High level of unemployment lowers aggregate output and discounts general income levels. Increased Employment increases income and spendings, and these are the cash points for the government’s varied taxes.
Thus, to increase government revenue from taxes, and to complement dwindling oil revenues, is to aspire towards full employment of resources. Production efficiency in turn requires investments in labour (health and education) and disincentives for ineptitude and sleaze in private and public sector leadership.
Till Debts do us part: Moving on from an Oil-dependent Economy to an Output-driven one
To reduce the propensity for debts and the accompanying is to seek government revenue that is backed up by full employment and optimal income solutions.
Planning the Budget relying solely on Oil rent to provide for overheads, capital and recurrent expenditures of the government, is no longer sustainable, and the assumption that oil revenue is sufficient to pay off a public debt is no longer plausible.
By 2020, The federal government spent a total of N3,342 billion to pay its various debt instalment for that year, which amounted to 98% of its N3,418 retained revenue.
Dataphyte Research foresees the country getting to a point where its total annual revenue will not be able to meet up with its debt servicing obligations by 2022, let alone finance recurrent and capital expenditures of the government.
Debt Servicing as a percentage of revenue is projected to hit 105% by 2022 and go beyond this to 113% by 2023. This may create a situation where the government would need to borrow, not only to meet its primary governance requirements, but also to pay back outstanding debts obligations.
Increasing the GDP and GDP Per capita should be the first priority. This can lead to increased tax revenue for the government. Increased tax revenues may in turn slow down the building up of the debt stock and ease the high cost of servicing debt.
This creates more revenue for the government’s spending, reduces the rate of debt accumulation, and may as well boost the level of employment, and the country’s gross output.