Why Nigeria’s debt profile will continue to rise – DMO

The Director General of the Debt Management Office (DMO), Patience Oniha, has explained why Nigeria’s debt profile will continue to rise.

Oniha said the Nigeria’s debt profile will continue to rise as long as long as the nation is not able to generate enough revenue to fund the annual budget.

He stated this on Thursday while speaking at an interactive session with the House of Representatives Committee on Finance on the Medium Term Expenditure Framework and Fiscal Strategy Paper.

The DMO boss, who puts the nation debt stock at the end of March 2022 at N41.6 trillion, explained that the Federal Government was owing about 85 percent of the debt while the balance of 15 percent was owed by the various state government who also have their own laws on borrowing.

She explained that one of the ways to address the increasing debt profile is for the National Assembly to query the various expenditure lines and see what can handle, saying “if the deficit is lower, the borrowing will be lower.

Onihi further stated that Nigeria has been running a deficit budget from decades, leading to increase borrowing to fund the budget, stressing that World Bank survey put the country in the 195th position out of 197 countries in term of debt to GDP growth.

She said: “As at December 2020, the debt stock of Nigeria which includes the federal government, state governments and the federal capital territory was N32.92 trillion. By December 2021, it was N39.556 trillion. As at March of this year, it was N41.6triilion.

“On the average, federal government debt stood at about 85 percent of the total. Technically, the bulk of our debt is owed by the federal government.

“Debt has grown and that has come from the annual budget. There are 3 levels where those borrowings have increased. We have been running deficit budget for many, many years. So, each time you approve a budget with a deficit, you approve it giving us a mandate, an authority to borrow and it will reflect in the debt stock, so debt stock will increase.

“Also remember that states are also borrowing. So we add their own. They also have laws governing their borrowings.

“The Second leg to that really is that as debt stock increases, debt service will also increase. So, the clear message is for us to go through the budget because we have been having deficit budget for many years and have been borrowing significantly.

“From the Covid period in 2020, the level of borrowing had increased significantly as you know. Those budgets pass through this House. The issue is how do we reduce that debt. One of it is revenues which we have talked about.

“So, if revenue is high, your deficit will be lower and new borrowing will be lower and then your new borrowing will be less and your debt stock will be lower and debt service to revenue will now be so high.

“So, the challenge is, we have been borrowing because of shortfalls. The other thing to do is to look at our expenditure profile. What can we do to reduce it because you are asking me what is the remedy? It is coming from the budget.

“There is revenue, there is expenditure listed in various categories, personnel, overhead and capital. So, those are what bring out the deficit we borrow for. It is those things that should be interrogated in addition to increasing revenue significantly.

“Let me say that a World Bank report just show that in terms of debt to GDP ratio, Nigeria is low but for debt service to revenue ration, we are very high. So, if you look at tax to GDP ratio of these other countries, they are in multiples of Nigeria.

“The World Bank did a survey of about 197 countries and Nigeria is listed as number 195. That mean we beat only two countries and these countries are Yemen and Afghanistan and I don’t think we want to be at those places.

“We can’t talk about borrowing without talking about revenues and we can’t say why is the debt stock growing? It’s growing because we are running deficit budget and some of you may be aware that we are also issuing promissory note to refinance arrears of government which also comes to the national assembly for approvals.

“What we as DMO has been saying particularly since 2020, when the MTEF for 2021 to 2023 was being prepared is to say hey, let’s begin to look at revenues because as debt is growing, debt services are increasing.

“So, the language we used was for debt to be sustainable in the medium term. Sustainable means you can service your debt without difficulty, without it consuming all your revenues because you have very little for other projects.

“You must look at revenues very closely and I think the discussions you have had with the Customs is on part of it. There are many other revenue generating agencies. So, we must increasingly begin to look out our revenue for funding out activities as opposed to deficit.

“We talk about N11 trillion deficit and borrowing for 2023, how much is the revenue there? That’s one. When we looked at the first tranche that was 10 trillion for full year of subsidy and 9 trillion for subsidy next year, the size of the borrowing was 62 percent of the budget. That’s high.”

“I have just said what the sources of those debts are and we need to focus on revenue. We did say this in 2020 at a public hearing in the national assembly. If you listened to us, we have been talking about it a lot.

“Revenue can’t grow at low rate of 2 percent to 3 percent. It has to grow significantly to be able to ensure that we can service our debt and still have for capital projects and for other overheads and important activities. So that is what it is.”

Responding to a question, she explained that the World Bank and IMF who typically set standards and use these standards to measure countries can be benchmarked, saying “for countries like Nigeria, meaning, we, Egypt, Kenya some other countries in Asia and other parts, their advise or recommendation is that your debt to GDP ratio, meaning that total debts should not exceed 55 percent.

“They didn’t specify a ratio for debt service to revenue ratio. But let me explain that 55 percent of debt stock to GDP. I believe they stopped at that ratio because they expect that the other component which is revenue will be growing.

“From the data that is available, you will see that all those countries including Kenya, they have higher debt to GDP ratio than Nigeria but debt service to GDP ratio is much lower than that of Nigeria because they are generating revenue.”