Nigeria’s fiscal collapse

19 Dec 2022, 12:00 am
Jide Akintunde
Nigeria’s fiscal collapse

Feature Highlight

How Buhari and his technocrats used infrastructure-based development orthodoxy to plunge Nigeria into unsustainable debt.

Nigerian President Muhammadu Buhari

On the ideological spectrum, Nigerian President, Muhammadu Buhari, is more of a conservative. A recognised Fulani nationalist before coming into office, he was not known as an advocate for the educational and cultural progress most of his downtrodden political supporters needed. Yet, he was successfully sold to the Nigerian voters in 2015 as a “progressive”.

Once he got into office, he quickly asserted his conservative leaning. His presidential inner circle comprised people he said he had always known. His cabinet reversed progress on gender inclusion in appointive positions and largely isolated the youth, whom he described as lazy.

But leading a government by a self-described progressive party, Buhari had to embrace some leftist economic agenda, including introduction of a social investment programme and infrastructure investment. The latter, which is the strongest pivot of his economic policy, has been pursued with orthodox policy thinking.

Infrastructure-based development

The Nigerian economy was unravelling before President Buhari came into office on May 29, 2015. Oil prices, which had trended above $110 per barrel (pb) in much of H1 2014, started a downward spiral in September of that year before crashing to $35 pb in January 2016. The economy subsequently went into a recession. To reverse the economic decline, the 2016 budget increased by 35%, compared with the previous year’s under Buhari’s predecessor. The expansionary budget, saw a 185% increase in capital expenditure and 111.8% increase in the budget deficit, according to an analysis by PwC Nigeria.

The record-level budgetary figures ostensibly reflected a bold move by the new administration to stimulate the economy. Cautionary notes on the expansionary, deficit budgeting were countered by the conventional idea that investment in physical infrastructure is the best way to stimulate recovery from recession and spur long-term growth. Funding such physical infrastructure by debt is not a problem, the argument goes. Delivery of the infrastructure projects, and the economic growth they will catalyse, would putatively more than pay off the debt.

Several countries have successfully implemented infrastructure-based economic development. Keynesian economics provides the theoretical underpinning for fiscal expansion to stimulate growth during an economic crisis. Post-World War II rebuilding in the United States and the Marshall Plan, which pumped investments into Western European infrastructure, are examples of successes of the strategy. They both catalysed economic growth and shared prosperity.

Other countries, including Singapore, South Korea, and China have modernised and grown their economies by investing in transportation, energy, and social infrastructure, such as education and healthcare. Even more recently, the oil-rich Gulf countries have invested their wealth in aviation and tourism infrastructure as a strategy for diversifying their economies, apart from building sovereign wealth funds that invest in real and financial assets worldwide.

Maria Vagliasindi, Lead Economist at the World Bank Chief Economist’s Office, recently posited: “Investments in energy, telecommunications, and transport networks directly impact growth, as all types of infrastructure represent an essential input in any production of goods and services.”

Fundamental oversight

Infrastructure-led economic growth and development strategy often entails centralised economic planning and significant public funding. However, a policy brief by Cecil Bohanon of Mercatus Center, George Mason University, shows private consumption expenditure and gross domestic private investment as a major complement to government expenditure during the US post-war rebuilding and economic growth. And when government began to “de-stimulate” the economy, real consumption rose by 22% between 1944 and 1947, while gross private investment rose by 223%. The professor of economics concluded that this outcome was influenced by the free price mechanism that efficiently directs resources to their best valued uses.

In contrast, public infrastructure investment has been a facet of statist control that has stifled the free-market mechanism theorised by Bohanon in Nigeria. The Buhari administration has extensively used non-tariff barriers, including border closure, banning the importation of consumer staples like rice, and support for the Import Prohibition List of the Central Bank of Nigeria (CBN). But the petrol subsidy programme and the fixed exchange rate system are the most harmful price distortionary policies under the administration. Although the policies were not first enunciated under Buhari, their scale and negative impact have ballooned during his presidency.

In the note to its rating downgrade of Nigeria in November, Fitch Ratings said it expects that the implicit subsidy on petrol will cost the government approximately N5 trillion (2.4% of GDP) in foregone revenue from the Nigerian National Petroleum Corporation (NNPC) in 2022, thereby contributing to a widening of the general fiscal deficit to 6.1% of GDP – more than twice the limit set in the Fiscal Responsibility Act 2007. The gap between the US dollar exchange rate in the official and parallel markets rose to over 80% last month, deepening foreign investor apathy towards the country. Similarly, the control of electricity tariff has continued to discourage investment in the critical sector.

Fuelling public debt

President Buhari set out to complete existing infrastructure projects and start new ones. The projects include Lagos-Ibadan Expressway, Second Niger Bridge, East West Road, Abuja-Kaduna-Kano Road, Abuja-Kaduna Rail Project, and Lagos-Ibadan Rail Project. The need for the projects is arguable. But the country could not afford them, neither did it have the technology and technical expertise to deliver the projects.

But the country had a headroom to borrow to fund the projects and the government was unabashed in outsourcing the delivery of the rail projects to China – where the project loans were also to be sourced. Between 2004 and 2006, the government of President Olusegun Obasanjo repaid Nigeria’s external debt to the Paris Club and London Club, leaving the country virtually foreign-debt-free. He also instituted a robust institutional and market framework for managing domestic debt.

According to Trading Economics, Nigeria’s debt-to-GDP ratio was 17.5% in 2014. This did not only provide the scope for borrowing for Buhari’s administration but also a rationale for doing so (more on this in a moment). Seven years on, the total public debt has grown by 253.7%, from N12.11 trillion in June 2015 to N42.84 trillion in June 2022, with the Federal Government accounting for 83.12% of the latest figure and the states and the Federal Capital Territory contributing 16.88%.

Short-sighted technocrats

The pivot to infrastructure-based growth and development may have derived from Buhari’s stint as the Chairman of the Petroleum (Special) Trust Fund (PTF) in the mid- to late-1990s. The PTF was mandated to rehabilitate the country’s infrastructure using part of the savings from the removal of petroleum subsidies. Buhari’s re-enactment of massive intervention in the infrastructure space through the national budget could mean the previous experience stuck with the president.

A wider thinking within the ruling All Progressives Congress on infrastructure development was also plausible. The credence to this would be the portfolio allocated to the lynchpins of the improbable Buhari victory in the 2015 presidential election (no Nigerian president had lost re-election until then). Erstwhile Rivers State Governor, Rotimi Amaechi, was appointed Minister of Transportation and Babatunde Fashola, a former Governor of Lagos, got the triple-barrelled Ministry of Power, Works, and Housing.

But a strong technocratic argument for infrastructure-led development was not in short supply from the technocrats who served or are still serving the administration. Then-Director-General of the Debt Management Organisation (DMO), Abraham Nwankwo, pithily laid out his argument in an op-ed he also published on DMO’s website on 28 September, 2016, titled: “Is Nigeria’s External Debt of Investment Grade?” At the time of his writing, domestic borrowing to fund the large budget deficit was already set in motion. What Dr. Nwankwo argued for was that external borrowing should also be marshalled to support the bet on infrastructure investment as a means to spur growth. In the same breath, he was also attacking the notion that the country should maintain a safe external borrowing position, having ended the costly debt service obligations to the Paris Club that gulped up to 75% of government revenue in the 1990s.

Nwankwo highlighted that the country’s external debt was below the “optimal target.” He argued that the external debt service constituted an “insignificant proportion of the total public debt service expenditure.” The then-DG of DMO also explained the leeway the country had for external borrowing, stressing that the external debt stock was about 23% of total export earnings, whereas the “applicable threshold is 150%,” meaning that “the indicator is seven times stronger than it needs to be.”

His hubris continued, as he noted that the country’s external debt service was “27 times stronger than what is required to guarantee that the external debt can be serviced as and when due.” Given the foregoing, he argued that Nigeria’s external debt was “uniquely of top investment grade” and that the country’s Eurobonds were trading at stable low yields “relative to the weight of the challenges and compared to other countries’ Eurobonds.”

He concluded that Nigeria’s external debt was “indeed, of a top-class grade” and “adequately insulated from shocks, even deep ones”; investors were confident the country was moving from economic downturn to turnaround and prosperity; “real investors” knew better to ignore “unimaginative and analytically-static credit rating and news agencies” because of the country’s boundless investment opportunities, market resilience and impact of ongoing reform; and “investors have substantial appetite for new Eurobond issues from Nigeria – an appetite which, in spite of acknowledged alternative investment destinations, only Nigeria can satisfy.”

Other technocrats, including the last and current finance ministers (Kemi Adeosun and Zainab Ahmed, respectively), and President Buhari’s first Minister of Budget and Planning (Senator Udoma Udo Udoma) sold the idea that Nigeria would remain on the path of sustainable debt with the borrowing plans of the administration to finance infrastructure development. Whether they were genuinely mistaken in advocating a public finance strategy that is now clearly no longer tenable, or they simply said what they had to say to satisfy the president, is a warning to the next president in 2023.

When he was CBN governor, Lamido Sanusi (as he then was) was committed to the bank’s policy of defending the value of the naira with the country’s external reserves. But after he left office, he became a vocal critic of the same policy. He told Financial Times of London that the drawbacks of the policy "far outweigh its dubious benefits." When reminded that he had supported the same policy as CBN governor, he retorted: “we could afford it then.” Similarly, the reality has changed dramatically with Nigeria’s fiscal policy posturing.

Where things are now

Virtually all the points of Nwankwo’s hubris have reversed. Following the recent rating downgrades of Nigeria by Fitch and Moody’s, the current Director General of DMO, Patience Oniha, was quoted as saying, “Where there is an issue is the new external borrowings. What was provided for in the 2022 budget is N2.57tn of new external borrowings and this, in naira terms at the budget exchange rate, is $26bn. The reality is that if it were before, by now we would have issued Eurobonds to raise the money and we would be in good business. But let us say from the fourth quarter of last year, the international capital markets have not been opened to countries like Nigeria. So, in 2021, there was about $6bn to raise. We raised $4bn for that one. But this year, it is $1.25bn.”

She continued, when she appeared before the House of Representatives Committee on Aids, Loans and Debt Management to defend the DMO’s 2023 budget, “The international markets are not looking for countries with our ratings: –B ratings.” She said that because of global high inflation and interest rate increases by major central banks, investors are no longer interested in Nigeria’s Eurobonds and their yields have “gone up significantly.”

In downgrading Nigeria's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B-' from 'B', with a stable outlook, last month, Fitch said the action reflected continued deterioration in the government’s debt servicing costs and external liquidity despite high oil prices in 2022.

According to Fitch, Nigeria has the highest debt servicing metrics among its rated sovereigns. It forecast government debt-to-revenue ratio to increase to 580% in 2022 with interest as a percentage of revenue to reach 47.7%, compared with the current 'B' medians of 282% and 10.8%, respectively. Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024, the rating agency said. Moreover, interest payments reached 108% of government’s revenues by half-year 2022.

But the more telling metric of the collapse of the country’s fiscal strategy under President Buhari is rising poverty. Last month, the National Bureau of Statistics released the national poverty report. It shows 133 million Nigerians (63% of the population) are living in multidimensional poverty. This is not surprising, given that the infrastructure-based development strategy of the government has failed to deliver significant economic growth. Between 2016 – 2021, the GDP growth rates averaged 0.85%.

Key lessons for the next administration

Two of the major 2023 presidential candidates – former Vice President, Atiku Abubakar, and former Governor of Lagos State and the grand patron of the state’s politics, Bola Tinubu – are candidates of the status quo. They are likely to give more of the same policy performances of the administrations since Obasanjo left office. The third candidate – Peter Obi – is recognised by his co-contestants as a political disruptor. His rhetoric also shows him as capable of disrupting the economic orthodoxy that has so badly failed under the current administration.

The lessons of the past seven years plus especially – but certainly before it – should be learnt. First, the electorate that has historically separated leadership and governance, should understand that they are inseparable for performance. The middle class, sadly a subset of that undiscerning electorate, should have become familiar with the term Environmental, Social, and Governance (ESG) and be better advised. ESG has become a key pillar of sovereign ratings. In its note on Nigeria’s rating, Fitch wrote: “Nigeria has an ESG Relevance Score of '5' for Political Stability and Rights as WBGI (World Bank Governance Indicators) have the highest weight in Fitch's SRM (Sovereign Rating Model) and are therefore highly relevant to the rating and a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.”

Second, the Nigerian economy still requires central planning, and public investment needs to indicate the country’s investment priority. Nevertheless, private consumption and domestic investment are very key for a sustainable economic growth. Thus, in as much as investment in infrastructure will remain in focus, areas that will directly boost national productivity, strengthen local consumption, and reduce national poverty are the most critical.

Third, the country needs to overhaul its key price mechanisms for the naira, petrol, and electricity. Enabling market pricing for the commodities is key for boosting investor confidence and stimulating local and foreign investment. With dramatic improvement in private financing of the economy, government can increase its spending in well-targeted social safety net.

And four, the next president would need to carefully construct a technocratic cabinet. Following that, the economic policy direction of the government must be carefully determined and devoid of the hubris that doomed performance under the current administration.


One of the legacies of the Buhari administration would be uncompleted projects. He will also leave the economy and public finance in far worse states than he met them. But if the country can learn the lessons from his mistakes, we will start to claw back from high unemployment, immense poverty, unsustainable debt, and weak economic growth. And by significantly improving the security situation in the country and forging national unity, Nigeria can still unleash its potential for greatness.

Jide Akintunde is the Managing Editor of Financial Nigeria publications and Director, Nigeria Development and Finance Forum.

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