Managing High Cost Of Debt Servicing

The World Bank’s recent expression of concern about Nigeria’s increasing debt servicing cost in relation to dwindling revenue echoes the worries of most government officials and revenue generating agencies.
In its recent Global Economic Prospects Report, the international financial body noted with dismay that the current optimism over Nigeria’s economic recovery is tempered by huge debt servicing and foreign exchange controls.
Specifically, the bank observed that the cost of servicing Nigeria’s debts on both the domestic and external fronts has risen tremendously, in contrast to the revenue earned by government. The major concern, the bank further stressed, is the possible unsustainability of such debt servicing, adding that why the debt servicing cost in other economies remains sustainable, that of Nigeria is being dragged down by forex depreciation and increased recourse in non-concessional borrowing for infrastructure development.
Available statistics seem to validate the Word Bank’s concern about Nigeria’s debt servicing cost. For example, the Federal Government’s interest to revenue ratio rose from 33 percent in 2015 to 59 percent in 2016. While government’s income for last year was under N6 billion, it spent a hefty N1.475 trillion on debt servicing between January and December, 2016. Out of this amount, N1.004 trillion was used to service local debts, while N86 billion was cleared as interest on capitalized loans. No doubt, the cost of servicing debts remains progressively high, while collectible revenue continues to depreciate.
Out of the present N7.44 trillion federal budgets, N2.2 trillion, or 23 percent of aggregate spending, is voted for debt servicing. In 2014 and 2015, it was N71.2 billion and N94.3 billion, respectively, out of a budget of N4.91 trillion. Consequently, the World Bank has advised that if the Nigerian economy which went into recession last year must recover, government must take appropriate measures on public debt management in order to roll over risks that in turn could hamper economic recovery.
Data from the Debt Management Office (DMO) are also in line with the World Bank’s warning. According to the DMO, the Federal Government has in four years (2012-2016), cleared interest amounting to N4.8 trillion to banks and other investors. This is interest of loans to government from the domestic market; vides Federal Government of Nigeria Bonds and Treasury Bills issued by the Central Bank of Nigeria (CBN).
The crucial question is: How can Nigeria stop its debt servicing costs from spirally out of control? First, government should be more cautious in borrowing. The Minister of Finance, Mrs. Kemi Adeosun, who had recently said Nigeria would no longer borrow to fund the budget, recanted before the month of July ran out. She, afterward, said the country would continue to borrow to fund the projected N2.56 trillion fiscal deficits in the 2017 Budget.
Earlier, government had planned to borrow $2 billion from International Lenders such as the World Bank and the Africa Development Bank (AfDB). The loans had been stalled following government’s refusal to impose key fiscal reforms such as allowing the foreign exchange rate to float freely.
Reducing borrowing is a better way to reduce the cost of debt servicing. Caution should, indeed, be the watchword because the cost of servicing the nation’s debt has become alarming.
Efforts should equally be geared towards improving revenue generation as it is the most realistic way to reduce the debt service and revenue ratio. In this regard, a clearer and more coherent approach is expedient. The Economic Recovery Growth Plan (ERGP) articulates this choice, and this is the time to rev up the non-oil revenue drive.
Above all, the debt service ratio will start to reduce through a package of spending that will stimulate private consumption and investment by business. Capital expenditure, which takes 30 percent of the 2017 budget, needs to be sustained throughout the four year duration of the ERGP (2016-2020). Indeed, improving the national revenue base are keys to avoiding reliance on borrowing to fund capital intensive projects.
I, therefore, urge the Federal Government to leverage on the modest progress already being made by non-oil revenue collecting agencies such as the Federal Inland Revenue Service (FIRS) and the Customs Service. On-going efforts to expand our Gross Domestic Product (GDP) ratio are also welcome.
Nigeria’s tax to GDP ratio, which currently stands at six percent, is one of the lowest in the world. At least, 15 percent of tax to GDP ratio is required in the effort to revert from the current recession and jumpstart growth.

Bethel Sam Toby