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Leeways for addressing Nigeria’s debt burden 15 Jun 2023

Adoption of deficit financing to stimulate growth during an economic downturn is a good policy. This is true regarding the Nigerian economy. However, debt is not the only instrument for financing fiscal deficit. But because of the reliance on debt financing, the annual budgetary deficit has soared from N2.22 trillion in 2016 to N10.64 trillion in 2023. Instead of stimulating economic growth, financing the deficits through debt has exposed the fiscal vulnerability of the federal government.

Nevertheless, it is important to stress the point that there is nothing inherently wrong with debt financing. But if the loans are channeled towards unproductive activities and they are not able to facilitate their repayment, they can create a debt spiral, with debt-service cost necessitating additional public borrowing. This has been a Nigerian policy conundrum in the last decade. In particular, the Buhari administration of the last eight years arguably overused debt financing, leaving a legacy of high-interest rates, unsustainable public debt accumulation, high inflation, and low revenue-to-GDP ratio.

For the foreseeable future, the debt burden will continue to weigh on public finance, judging by the size of debt-service cost and capital repayments. Based on the 2023 budget, N6.41 trillion will be spent on interest payments this year, while N10.57 trillion non-debt spending will be financed by obtaining new loans. The fiscal woe is further compounded by a decline in foreign direct investments (FDI), which dwindled to just $13,300.53 in Q2 2022, according to data from the Central Bank of Nigeria (CBN).

To be sure, there are a few options available to the new administration of President Bola Tinubu on fiscal strategy that can deliver debt relief. Such options can complement any positive outcome from the international discussions on delivering debt relief for developing countries that are stressed by their external debt obligations. Even then, such relief is unlikely to completely address the huge problem, leaving further actions for the debt-stressed countries to take.

For Nigeria, one of the pragmatic actions is to convert a portion of the existing debt to equity. The debt-to-equity conversion can involve the exchange of foreign debts – not only domestic debt – to local equities. Foreign investors like multinational manufacturing companies could be encouraged to buy some of the existing loans at a discount from the federal government and redeemable by the CBN. Such foreign loans, which would be converted into the local currency, would be channelled to acquire equity stakes in the local manufacturing industry.

Such deft transactions would help in reducing the national debt stock while boosting the creditworthiness of the country. Through further policy interventions, the investee companies can be tasked to invest in import-substituting and export-oriented goods. This will act as a stimulus for economic output growth. Other positive externalities to this strategy include increased local demand, employment creation, improved trade performance, higher tax revenue, capital accumulation, and availability of foreign expertise.

To make this happen, the government and CBN would have to incentivise the potential investors. The incentives could include an offer of discounts and ease of obtaining the local currency on favourable terms. To benefit from the debt-to-equity swaps, without making it a mere reclassification of debt, the CBN must redeem the loans at rates lower than the face value. If this is successfully done, it will stimulate additional foreign capital inflows and help to raise CBN’s foreign currency reserves.

Amongst other conditions, the dividend payments on the foreign capital inflows must exceed the interest payments on the converted debt to achieve a favourable balance of payment position. Since the dividend payments will be based on investment performance, rather than the interest rate, the debt-servicing burden will shift from Nigeria to the foreign investors as that portion of the external debt is converted to FDI. But such investments have high prospects for good returns.

A second strategy would entail broadening the fiscal revenue base. The total debt-servicing obligations of N6.41 trillion in the 2023 budget is more than the proposed revenue, which is N6.34 trillion. This puts the debt service-to-revenue ratio at 101 percent and compels generation of more revenue. The frontier for such additional tax income is the non-oil sectors.

Nigeria’s non-oil revenue generally comes from duties on imports, exports and excise; fees and special levies; consumption (value added) tax; and taxes on business transactions and profits. However, the contribution of taxes on business transactions and profits to the gross non-oil revenue declined from 44 percent in 2015 to 33 percent in 2022, according to CBN data. While not advising a higher tax burden on the existing business entities already paying their fair share of taxes, more individuals and businesses should be brought to the tax net through tax policy reforms and a sound tax administration. Furthermore, the ability to generate revenue from public assets – including rental income from government properties and returns on public investments – will help in reducing the debt burden.

The third approach is to reduce the cost of governance, which has witnessed a phenomenal increase in the last few years. It is imperative that non-debt recurrent expenditure must be tamed now. The 2023 aggregate expenditure estimated at N16.98 trillion includes N8.5 trillion recurrent expenditure – approximately 50 pecent of the total expenditure, rising from 41.7 percent in 2022 and 31.5 percent in 2021.

Growth in total expenditure is justifiable, given the rising population, need for infrastructure development, and response to security challenges. However, the cost of governance is unjustifiably too high relative to the total budgetary outlays. The high cost tends to widen the resources-investments gap.

Breaking the yoke of debt in Nigeria requires a combination of many strategies; one single strategy cannot provide the needed panacea for the crisis. Debt-to-equity conversion, if well executed, will reduce the country’s debt obligations and contribute to economic growth through foreign capital inflows in the real sector. Bringing tax evaders into the tax register, tackling oil theft activities, promoting critical sectors – like agriculture and manufacturing – and using government assets efficiently to increase public revenue base are other strategies that can be helpful.

Efficient management of public expenditure will safeguard the national income. It is unwise to generate more revenue when leakages are not blocked. The new administration should encourage stakeholders to be committed to making their contributions in lifting the burden of debt. A carrot and stick approach is necessary in this regard.

Olusola Dahunsi, PhD, who is a chartered accountant, is a lecturer in the Economics Department at KolaDaisi University, Ibadan.