Nigeria’s total public debt which stood at N46.25 trillion ($103.1 billion), as at the end of December 31, 2022 shows that the country is at the tip of a debt crisis.
According to the Debt Management Office (DMO), which released the data, the figure accounted for the total debt owed by the federal and state governments, as well as, the Federal Capital Territory, Abuja.
The huge debt burden, worsened by dwindling revenue and possibility of interest rate remaining high throughout the year, are indications that the country should take immediate steps to avoid debt default.
Member, Presidential Economic Advisory Council, Bismarck Rewane, listed three options that Nigerian could adopt to quickly resolve ongoing debt crisis.
Firstly, Rewane, who is Managing Director, Financial Derivatives Company Limited, advised Nigeria to approach the International Monetary Fund (IMF) for a policy support instrument (PSI).
In the latest Financial Derivatives Monthly Economic Update, Rewane explained that the PSI option permits the IMF to provide policy advice and support to Nigeria on expertise and guidance on economic policies.
“The PSI is intended to provide a flexible and tailored approach to policy support, with the goal of helping the country develop and implement sound economic policies and promote sustainable economic growth,” Rewane said.
Continuing, he said the PSI will necessarily usher in the implementation of critical reform policies such as exchange rate reforms, subsidy and pricing reforms, and other market reforms aimed at removing production impediments and increasing public revenue.
“The PSI will help Nigeria meet the “conditionalities” for a talk with its creditors. A sovereign debt restructuring can take several forms, depending on the severity of the country’s financial situation and the willingness of its creditors to negotiate. Some possible forms of debt restructuring include debt cancellation, debt restructuring, and debt conversion,” he said.
The alternative to the PSI option, Rewane advised Nigeria to go for debt restructuring. This, he explained is not necessarily a separate option from the PSI, but remains feasible because sovereign default is a kiss of death and, thus, not an option.
According to him, sovereign debt restructuring can be a complex and challenging process, as it often involves negotiating with a large number of creditors with different interests and priorities.
“A sovereign debt restructuring can take several forms, depending on the severity of the country’s financial situation and the willingness of its creditors to negotiate. Some possible forms of debt restructuring include debt cancellation, debt restructuring, and debt conversion,” he said.
The third option is fiscal consolidation. Rewane said this option, could be undertaken in addition to the others.
He said fiscal consolidation focuses on reducing a government’s budget deficit and debt levels through a combination of spending cuts such as trimming down the size of the government, removing subsidies; revenue increases such as broadening the tax base and and structural reforms such as privatising state-owned enterprises, deregulating industries, or reforming public sector pensions.
“Fiscal consolidation involves difficult choices that eventually have significant social and economic impacts.
“In the end, doing nothing is not an option. The new administration must make the hard choices to save the economy from collapse. Flagrant violations of the Fiscal Responsibility Act must be discontinued,” he advised.
Rewane disclosed that Nigerian began building up sovereign debt after the debt forgiveness of 2004 to 2005.
He said that in 2015, the national debt rose 22 per cent to N19.4 trillion from N15.8 trillion in 2014.
He disclosed that after raising the debt stock by 419 per cent in 10 years, productivity growth lulled at 0.2 per cent, while infrastructure stock stagnated at 30 per cent of the Gross Domestic Product and the Federal Government’s debt service to revenue ratio exceeded 90 per cent.
He said at least N5 trillion of the borrowed funds in 2022 were spent on recurrent expenditure.
“Notwithstanding that the debt-to-Gross Domestic Product (GDP) ratio is still below the self-imposed benchmark of 45 per cent, the inability to invest borrowed funds in productive projects has weakened the nation’s ability to repay its debt.
