There have been excitable utterances in recent times over the nation’s debt burden with statements being made by elites and the layman alike about how the country is going back to the so called ‘debt trap’.
The latest trigger for the public anxiety was a request from the presidency to the parliament for approval to borrow $4.05 billion and €710 million in external loans.
Infrastructure, health, education, agriculture, human capital development and COVID-19 response projects, were some of the projects to be undertaken with the loans.
While the country has grown its public debt profile in the past 7-years under the current administration by some N18 trillion we beg to differ with the general consensus that debt is a major threat to the country.
On the contrary we believe and will show that Nigeria is significantly under-levered and the country could use domestic borrowings or internal liquidity to improve its appalling stock of infrastructure, provided that such projects are well structured.
In a vote of confidence, when Nigeria raised $4 billion through Eurobonds last week the Order Book peaked at $12.2 billion, allowing the Federal Government to raise $1 billion more than the $3 billion it initially intended to issue.
Bids for the Eurobonds were received from investors in Europe, America and Asia as well as robust participation by domestic investors/funds. The yields on the Eurobonds ranged from 6.125% to 8.25% for tenors ranging from 7 years to 30 years.
Those are hardly numbers thrown up by a distressed borrower or one who is assessed as overburdened by debt by the market.
Nigeria’s total public debt portfolio (Federal Government and States) stood at N33.107 trillion or $87.23 billion as at March 2021.
The domestic debt burden stood at N20.63 trillion while the external debt (FGN +States & FCT) was at $32.859 billion.
At the end of 2020, Nigeria, which has the largest economy in Africa, had a nominal GDP equivalent to N152.3 trillion or over $400 billion. It is therefore clear that the Debt to GDP ratios are well under 25% of GDP for Nigeria.
For comparison with peer countries, South Africa had a Debt-to-GDP ratio of 77%, Egypt 90%, and Kenya 69% at the end of 2020.
Inflation, “Original sin” and domestic debt
About 62 percent of Nigeria’s total debt stock is owed to domestic creditors or those who will be paid back in the local currency the Naira.
With inflation averaging double digits over the past 10 years, it is actually a very good position to be in for the Federal Government (FG).
When the government borrows money, the cash it receives now will be paid back with cash it earns later. A basic rule of inflation is that it causes the value of a currency to decline over time. In other words, cash now is worth more than cash in the future.
Thus, inflation lets debtors (like the FG) pay lenders back with money that is worth less than it was when they originally borrowed it.
The development of large and liquid domestic capital markets (see our lead story) also means that Nigeria is able to raise more money in its own domestic currency, and not engage in so-called “original sin.”
Original sin is how economists Barry Eichengreen and Ricardo Hausmann described the dilemma for emerging market (EM) economies that are forced to borrow abroad in dollars and not in their own currencies.
Nigeria’s large and liquid bond market enables it to fund its fiscal deficits regardless of exchange rate moves between the U.S. dollar and Naira.
Stimulating local bond markets have helped start a robust domestic savings and investment industry in Nigeria and also helped to reduce the reliance on commodities exports – a major source of the dollar income needed for debt repayments.
But the biggest advantage to borrowing in one’s own currency is the fact that it is impossible for a sovereign to default on loans issued in its own currency. So while analysts may wring their fingers about the Debt-Service to revenues numbers, the harsh reality is that the FG could choose to monetize its domestic debts anytime it wants.
Some 37.67 percent of the nation’s sovereign debts are external, equivalent to $32.85 billion. With a GDP North of $400 billion and huge dollar earnings from crude oil and gas exports, the external debts are not a problem for now. For context Kenya with an economy 4 times smaller than Nigeria had total external debts of $34.7 billion as at April 2021.
Nigeria also has lucrative oil and gas assets it could in theory sell to pay off the debts as well as over $36 billion in foreign reserves.
The conversation around public debt in Nigeria has of late become more hysterical than logical. Having laid out the facts, our major advice to the Federal Government would be to ensure that all major new borrowings are channeled into productive infrastructure spending to unlock Nigeria’s long term growth potential.