Debt Management Office Warns Nigerian Government that Taking Further Loan is Unsustainable

The Debt Management Office (DMO) has warned the Federal Government of Nigeria (FGN) not to take further loans, amid revenue shortfalls rocking the nation’s economy.

With a public debt profile of about N 47.73 trillion, Nigeria is facing a potential debt-induced economic crisis. The DMO said 73.5% of this year’s revenue will be used to service debt, creating an unsustainable high Debt Service-to-Revenue ratio.

The preceding government led by former President Muhammadu Buhari, increased Nigeria’s public debt from N12 billion in 2015 to nearly N50 trillion in 2023. That includes about N23 trillion in Ways and Means loans from the central bank.

Thus, the present administration led by Bola Tinubu inherited a debt-servicing burden amid heavy revenue shortfalls that emanated mainly from low oil prices and output.

The DMO analysis

In its analysis, the DMO revealed that the Total Public Debt-to-GDP ratio is projected to increase to 37.1% in 2023, mainly due to new borrowings, FGN Ways and Means at the CBN, and estimated Promissory Notes issuance. While the baseline scenario indicates that the debt stock remains sustainable, the borrowing space has been reduced compared to the self-imposed debt limit of 40%.

The projected FGN Debt Service-to-Revenue ratio of 73.5% for 2023 exceeds the recommended threshold of 50% due to low revenue. This highlights the urgent need to significantly increase government revenue. The DMO emphasized the importance of adhering to existing legislation on government borrowing, such as the Fiscal Responsibility Act 2007 and the Central Bank of Nigeria Act 2007, to moderate the growth rate of public debt.

Furthermore, the DMO called for a focus on revenue mobilization initiatives and reforms to increase the country’s tax revenue to GDP ratio. It also suggested encouraging private sector involvement in funding infrastructure projects through Public-Private Partnerships (PPP) and reducing borrowing by privatization or sale of government assets.

Results of 2022 MAC-DSA show that the Total Public Debt-to GDP ratio is projected to increase to 37.1 percent in 2023 relative to 23.4 percent as at September 2022, due to the inclusion of the N8.80 trillion (New Borrowings) for the year 2023, the FGN Ways and Means at the CBN of over N23 trillion and estimated Promissory Notes issuance of N2.87 trillion in the Debt stock under the Baseline Scenario.

The Country’s Debt stock remains sustainable under these criteria, but the borrowing space has been reduced when compared to Nigeria’s self-imposed debt limit of 40 percent set in the MTDS, 2020-2023. On the other hand, the FGN Debt Service-to-Revenue ratio at 73.5 percent in 2023 which exceeds the recommended threshold of 50 percent due to low revenue, means that there is a need to significantly increase Government revenue.

Under the Alternative Scenario, the Total Public Debt-to-GDP ratio at 45.4 percent in 2023 exceeds Nigeria’s self-imposed debt limit of 40 percent, while the FGN Debt Service-to-Revenue also exceeds the recommended threshold of 50 percent.

Recommendations

The DMO recommended that the FG focus on increasing revenue generation to achieve a sustainable Debt Service-to-Revenue ratio. It suggested raising the projected FGN revenue from N10.49 trillion to about N15.5 trillion. These recommendations were made after analyzing the nation’s debt profile in 2022.

The DMO made further six recommendations:

1. Although the Baseline analysis projects the Total Public Debt-to-GDP ratio at 37.1 percent for 2023 indicating a borrowing space of 2.9 percent (equivalent of about N14.66 trillion) when compared to the self-imposed limit of 40 percent, it is recommended that this should not be used as a basis for a higher level of borrowing as was the case in the 2023 Budget.

This is because the outcome of the Shock Scenario, which is more realistic in the circumstances, exceeded the self-imposed limit.

1. The projected FGN Debt Service-to-Revenue ratio at 73.5 percent for 2023 is high and a threat to debt sustainability. It means that the revenue profile cannot support higher levels of borrowing. Attaining a sustainable FGN Debt Service-to-Revenue ratio would require an increase of FGN Revenue from N10.49 trillion projected in the 2023 Budget to about N15.5 trillion.

2. With respect to expansion in fiscal deficit, there is a need to strictly adhere to the provision of extant legislations on Government borrowing, especially the Fiscal Responsibility Act 2007 and Central Bank of Nigeria Act, 2007 as it relates to Ways and Means Advances, in order to moderate the growth rate of public debt.

3. There is an urgent need to pay more attention to revenue generation by implementing far-reaching revenue mobilization initiatives and reforms including the Strategic Revenue Growth Initiatives and all its pillars with a view to raising the country’s tax revenue to GDP ratio from about 7 percent (one of the lowest in the world) to that of its peer.

4. Government should encourage the private sector to fund infrastructure projects through the Public-Private Partnership schemes and take out capital projects in the Budget that are being funded from borrowing, thereby reducing the budget deficit and borrowing.

5. Government can reduce borrowing through privatization and/or sale of Government assets.