In recent years, Nigeria’s public debt has surged to record levels, sparking concerns about the country’s fiscal sustainability and its ability to manage repayments without triggering a full-blown debt crisis. As of 2024, Nigeria’s total public debt stock exceeds N87 trillion, with external debt accounting for a significant portion. Coupled with rising interest rates and dwindling revenues, the risks of a debt crisis are mounting.
This article examines Nigeria’s borrowing trends, the potential risks they pose, and the possible solutions to avoid a fiscal meltdown while ensuring long-term economic growth.
The State of Nigeria’s Public Debt
Rapid Debt Accumulation
Nigeria’s debt stock has grown substantially over the past decade. Key factors driving this trend include:
- Budget Deficits: Persistent budget deficits, often funded through borrowing.
- Revenue Challenges: Over-reliance on oil revenues, which are highly volatile, and low tax collection rates (currently 6% of GDP, one of the lowest globally).
- Exchange Rate Pressures: Currency depreciation, which increases the cost of servicing external debt.
Debt Composition
- Domestic Debt: Accounts for a larger share, financed through instruments like Treasury bills and government bonds.
- External Debt: Includes multilateral loans, Eurobonds, and bilateral agreements with countries like China. Rising dollar interest rates have made external debt more expensive.
Risks of Rising Public Debt
1. High Debt Servicing Costs
Nigeria spends over 70% of its revenue on debt servicing, leaving little room for critical investments in infrastructure, healthcare, and education.
- Impact: This creates a vicious cycle where more borrowing is needed just to meet existing obligations, further exacerbating the debt burden.
2. Vulnerability to External Shocks
Nigeria’s dependence on oil revenue makes it highly susceptible to global oil price fluctuations. A sharp decline in oil prices could undermine the country’s ability to meet debt obligations.
3. Currency Risk
With a significant portion of debt denominated in foreign currencies, naira depreciation increases the cost of servicing external debt, putting additional strain on public finances.
4. Crowding Out Private Investment
High government borrowing can raise domestic interest rates, discouraging private sector investment and slowing economic growth.
5. Reduced Sovereign Creditworthiness
Rising debt levels and repayment risks may lead to credit rating downgrades, increasing the cost of future borrowing and deterring foreign investment.
Possible Solutions to Avoid a Debt Crisis
1. Boost Revenue Collection
- Tax Reforms: Expanding the tax base, improving compliance, and introducing progressive tax policies could significantly boost government revenue.
- Non-Oil Revenue: Diversifying the revenue base through sectors like agriculture, manufacturing, and technology can reduce reliance on oil.
2. Rationalize Expenditure
- Cut Waste: Addressing corruption, inefficiency, and excessive spending in government operations can free up resources.
- Prioritize Investments: Focus on high-impact projects that generate economic growth and improve debt sustainability.
3. Optimize Borrowing Strategies
- Focus on Concessional Loans: Borrowing from multilateral institutions like the World Bank at lower interest rates reduces debt-servicing costs.
- Shift to Domestic Debt: Reducing exposure to foreign-denominated debt can mitigate currency risks.
4. Strengthen Debt Management
- Transparent Reporting: Enhancing transparency in debt reporting can build investor confidence.
- Debt Restructuring: Renegotiating repayment terms with creditors may provide fiscal relief.
5. Economic Diversification
- Industrial Growth: Investing in value-added industries can increase export earnings and reduce trade deficits.
- Regional Trade: Leveraging the African Continental Free Trade Area (AfCFTA) can open new markets for Nigerian goods and services.
6. Public-Private Partnerships (PPPs)
Partnering with the private sector to finance infrastructure projects can reduce the government’s financial burden while accelerating development.
Lessons from Other Nations
Ghana
Ghana’s recent debt crisis highlights the dangers of excessive borrowing and poor fiscal management. The country was forced to restructure its debt under an IMF bailout, resulting in severe economic hardship for its citizens.
South Africa
South Africa’s approach to fiscal discipline and debt transparency offers valuable lessons. By maintaining a strong focus on revenue collection and efficient public spending, it has managed to avoid a full-blown debt crisis despite economic challenges.
What Lies Ahead?
While Nigeria’s debt trajectory is concerning, it is not beyond correction. With proactive measures, the government can stabilize the fiscal situation and steer the country away from a debt crisis. Key priorities include:
- Enhancing domestic revenue mobilization.
- Rationalizing expenditure and eliminating waste.
- Building resilience through economic diversification.
However, time is of the essence. Delayed reforms could exacerbate the situation, leading to economic stagnation and social instability.
Conclusion
Nigeria’s rising public debt poses significant risks, but it also presents an opportunity for reform and innovation. By addressing structural weaknesses and implementing sound fiscal policies, the country can avoid a debt crisis and lay the foundation for sustainable economic growth.
The question is not whether Nigeria can navigate this challenge—it is whether the political will exists to take bold, necessary actions. For the sake of its citizens and future generations, Nigeria must rise to the occasion.
