Debt Accumulation: A Risk for the Future?

In the face of tight financial and monetary constraints, governments resort to various fundraising measures from development organisations and developed countries with the aim of stimulating economic growth. However, the redemption and interest repayments have not always taken place on schedule as a result of endogenous problems. Research reveals that advanced economies are at risk of significant and prolonged reductions in economic growth when public debt reaches levels of 90% of Gross Domestic Product (GDP). High public debt drives interest rates up, crowd out private investment and engenders inflation.

Global Perspective
Public debt has increased substantially in advanced economy since the global financial crisis of 2008-2009. GDP ratio has exceeded the 60% threshold laid down in the Treaty on the Functioning of the European Union. Greece, Ireland, Portugal and Cyprus have turned to the International Monetary Fund (IMF) and other European governments for financial assistance in order to avoid defaulting on their loans. There are also concerns about the sustainability of public debt in Japan and United States. With public debt standing above 90% of GDP, it is argued that US debt crises could result in significant reduction in economic growth for a long period of time. This may invariably result into inflation, high interest rate and moderation of private investments.

Nigeria Debt Financing
Nigeria like other developing countries faces financial constraint from time to time. This constraint has made external debt an essential complement of domestic resources for promoting sustainable economic growth. The burden of debt however, has resulted in channelling funds to debt servicing, which in the recent past stalled maximum allocation of resources to crucial developmental projects.

A great proportion of the budget or annual national income is devoted to servicing of these debts. Moreover, attempt to service debts is an indirect increase of the budget deficit which in turn creates the need for more borrowing. This tends to have long-run adverse effects, as the outcome would reduce the social expenditure of today and decrease the allocation of social sector in the future. This creates disequilibrium in the economy.  

Nigeria’s External and Domestic Borrowing
Nigeria’s external indebtedness dates back to pre-independence period when the government of African countries on attainment of independence, approached western institutions for loans for development. The quantum of the debt was small until 1978. The debt incurred before 1978 were mainly long term loans from multilateral and official sources such as the World Bank and the country’s major trading partners. The debt was not much of a burden on the economy because the country had generated abundant revenue from agriculture in 1960s and oil during the oil boom of 1973 to 1976.

Following the oil price shocks of 1978 which exerted considerable amount of pressure on the ability of the Nigerian government to spend, it became highly inevitable to acquire loan for enhancement of the balance of payment (BOP) and its capital expenditures.

The management of domestic debt is conducted by Central Bank of Nigeria (CBN) through the issuance of government debt instruments, which consist of treasury bills, treasury certificates, federal government development stocks as well as the treasury bonds.
According to the CBN annual report (2012), the international threshold for total debt to GDP and external debt to GDP is 30% while domestic debt to GDP is between 40% and 60%. Based on this classification, Nigeria’s debt profile could be described as being with, the internationally accepted threshold.

BRICS and Nigeria Gross Debt
Nigeria debt to GDP is 28.73 on average between 2002 and 2012, which is not high or low when compared with the BRICS (Brazil, Russsia, India, China and South Africa). Russia has the least gross debt to GDP ratio of 15.75 among the BRICS between 2002 and 2011 while India has the highest with 75.01.

There is high debt in advanced economies when compared to emerging economies (BRICS) and Nigeria in particular. Nigeria’s current debt level may not have negative effect on the economy since it is not above the international threshold. Increasing national or public debt can be expected from a capital deficient nation to aid economic growth in the short and long run. Of ultimate importance is the impact of these debts in the short or long term.

The concern about reducing investment, and thus jeopardising future living standards, does not justify across-the-board reductions in government spending. Instead, it calls for increase in spending on programmes that offer significant long-term payoffs. This is indeed the global best practice.  Nigeria’s debt is gradually trending upward after a remarkable debt relief agreement between the Paris Club and Nigeria in 2005.

It is startling that inspite of these huge fund, the country is completely enveloped with dearth of infrastructural facilities. It is therefore not out of context to question where these funds are going into? Who expended the money? And which projects are they used to finance? These are questions begging for answers. If government continues acquiring debts without  accounting for it through visible economic growth and development, the country may not be far from the experience of countries like Spain, Portugal, Greece and now Cyprus. Unfortunately, Nigeria currently cannot boast of the types of infrastructure in these countries.