Nigeria spent 50% of dollar outflows to service foreign debts in 2023

In 2023, Nigeria faced a serious challenge in managing its external debt obligations. According to the Central Bank of Nigeria (CBN), the country spent $9.8 billion, or 50% of its total dollar outflows, to service its foreign debts in that year. This was a significant increase from the $6.5 billion, or 35%, spent in 2022.

The main factors that contributed to this situation were the depreciation of the naira, the rise in global interest rates, and the impact of the COVID-19 pandemic on the economy. The naira lost about 20% of its value against the dollar in 2023, making it more expensive to repay foreign loans.

The global interest rates also increased as major economies recovered from the pandemic and tightened their monetary policies. This raised the cost of borrowing for Nigeria, which had to refinance some of its maturing debts at higher rates. The COVID-19 pandemic also affected the country’s revenue generation and economic growth, reducing its ability to service its debts.

The high debt service burden posed a serious threat to Nigeria’s macroeconomic stability and development prospects. It reduced the amount of foreign exchange available for other productive uses, such as imports of capital goods, raw materials, and intermediate inputs.

It also increased the risk of debt distress and default, which could damage the country’s credit rating and reputation in the international financial markets. It also constrained the fiscal space for public spending on social services, infrastructure, and human capital development.

To address this challenge, Nigeria needs to adopt a comprehensive and sustainable debt management strategy that balances its financing needs with its repayment capacity. This strategy should include:

Reducing the reliance on external borrowing and increasing domestic resource mobilization through tax reforms, improved revenue administration, and enhanced transparency and accountability.

Diversifying the sources and terms of external financing to reduce exposure to currency and interest rate risks. This could involve seeking more concessional loans from multilateral and bilateral partners, issuing longer-term bonds in local currency or other stable currencies, and exploring alternative financing options such as diaspora bonds, green bonds, and sukuk.

Negotiating with creditors for debt relief or restructuring where necessary to ease the debt service burden and create fiscal space for development spending. This could involve seeking moratoriums, grace periods, interest rate reductions, maturity extensions, or principal write-offs.

Strengthening the institutional and legal framework for debt management to ensure coordination, efficiency, and accountability. This could involve establishing a dedicated debt management office, enhancing the capacity of debt managers and analysts, developing a medium-term debt management strategy, and improving the quality and timeliness of debt data and reporting.