Debt and Systemic Concerns of the Developing Countries: Rising Debt in Nigeria

To achieve the 17 sustainable development goals (SDGs) by 2030, governments need to align their fiscal policies to their development plans and put in place sound macroeconomic policies and sustainable debt management. Debt is akin to a double-edged sword. On one hand, it can yield the desired outcome of improving welfare by increasing revenues of developing countries. If properly utilized, debt can enhance economic growth and public services. On the other hand, debt can be disastrous and lead to economic crisis when accumulated unsustainably and used recklessly. Therefore, it is important to prudently manage debt and properly utilize it in implementing government’s development plans.

Nigeria has maintained a relatively healthy debt profile since the debt relief negotiated in 2005. However, the fall of crude oil prices and the reduction of oil revenues, which accounts for about 70 percent of government revenues, has exacerbated the government’s budget deficits. This, coupled with declining official development assistance, are threats to timely meeting the SDGs.

At over 57 billion USD in 2016, Nigeria’s public debt represents 19 percent of its GDP. Nigeria’s public debt to GDP ratio remains low as it falls below the IMF and World Bank Debt Sustainability Framework’s threshold of 56 percent. Additional research suggests that the optimal debt to GDP ratio for Nigeria would be below 74 percent. By these standards, Nigeria’s public debt profile seems healthy.

Yet, other aspects of Nigeria’s debt profile show vulnerabilities. Financing terms are unfavorable, especially on domestic debt. And given a decline in government revenue, the debt service to revenue ratio has risen from about 10 percent in 2009 to 66 percent in 2016. Further, the results of the 2016 Debt Sustainability Analysis for Nigeria showed that for the first time since the 2005 debt relief, Nigeria’s debt position deteriorated from a Low-risk to a Medium-risk; indicating that the debt portfolio is vulnerable to various shocks associated with revenue, exports, and substantial currency devaluation.

Given the vulnerabilities outlined above, the government should prioritize concessional loan agreements with the private sector and pursue more public-private partnerships. Thereby, shifting the financial burden of building key infrastructure to the balance sheets of competent and well capitalized local and foreign firms. Furthermore, there are three things that Nigeria can do to improve public revenues and their deployment towards achieving the SDGs.

First, the government can improve its revenue growth rate by reforming its tax administration, in line with its domestic resource drive. Remarkably, Nigeria’s tax collection is one of the lowest in the world: having a tax to GDP ratio of 2 percent compared to the global average of about 15 percent. There is a lot of room for improvement by expanding the tax base and improving Nigerians’ tax paying culture.

Second, capital expenditure needs to be given more priority in budget implementation. In Nigeria’s case, budgets have historically been skewed towards recurrent expenditure rather than developmental capital expenditure. Worse still, while recurrent expenditure is largely implemented, capital expenditure suffers weak implementation. Over the past five years, implementation of capital expenditure averaged 60 percent compared to 99 percent for recurrent expenditure, which is deemed non-discretionary. Therefore, borrowing to finance Nigeria’s fiscal policy that is not pro-growth is not particularly promising for championing the needed economic recovery. Rather than being useful for achieving the 2030 Agenda, the government’s current debt drive is more useful for curtailing potential labor crisis from its failure to pay workers’ salaries and in lessening the adverse effects of the economic recession on aggregate demand by keeping civil servants liquid.

Third, curbing illicit financial flows and enhancing gains in asset recovery will free-up more resources for SDGs implementation. Nigeria will require international cooperation to be able to achieve this. Additionally, diligent implementation of the Economic Recovery and Growth Plan (ERGP), Nigeria’s medium term plan consistent with the aspirations of the SDGs, will do well in mobilizing more domestic revenues, improving private sector financing and participation, and diversifying the economy.

Nigeria’s debt situation presents a developing country case study on the SDGs implementation amid inadequate financial resources. This snapshot of Nigeria’s experience provides useful insights for monitoring progress on SDGs implementation and identifying strategies for developing countries to better position themselves towards achieving the 2030 goals.

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