Fears over debt sustainability mounts, jeopardizing CBN’s policy

Amidst fresh upsurge in public debt, financial and public affairs analysts have expressed fears that Nigeria’s debt service ratio may become unmanageable, while more borrowing is beginning to crowd out private sector funding.

Nigeria’s total public debt stock rose by 10.73 per cent, quarter-on-quarter (QoQ), to N97.34 trillion in the fourth quarter of 2023 (Q4’23) from N87.91 trillion in the third quarter of 2023 (Q3’23), the National Bureau of Statistics (NBS) reported yesterday.

The figure also shows a year-on-year (YoY) increase of 10.46 per cent over the N46.25 trillion recorded in the corresponding period of 2022 (Q4’22).

Reacting to this latest development, David Adonri, Analyst/Executive Vice Chairman at Highcap Securities Limited, said, “Against expert's advice, public borrowing continues with undiminished intensity. Increasing public borrowing makes fiscal policy expansionary which is in the opposite direction to the contractionary monetary policy that the Central Bank of Nigeria, CBN, is running to rein in inflation.

“Without a commensurate rise in public revenue, Nigeria is heading for a situation where the debt service ratio may exceed 100%. Excessive public borrowing, added to tight monetary policy is already escalating the cost of credit and crowding funds away from production.

“External borrowing is a more dangerous proposition than domestic debt which can be extinguished by sovereign authority of government. Any sovereign default on external debt is visited with dire consequences.

“Due to Nigeria’s high sovereign risk, external debts are priced high with an excessive risk premium. Instead of adopting the lazy man’s strategy of import dependence by boosting FX supply through borrowing, Nigerians should roll up their sleeves to utilize domestic resources to make the economy self-reliant.

“Survival of a populous economy predicated on FX is not a sustainable strategy.”

Also speaking against this backdrop, Clifford Egbomeade, Communications /Economic analyst, said: “The increase in Nigeria’s public debt stock to N97.34 trillion in the fourth quarter of 2023, as reported by the Nigeria Bureau of Statistics (NBS), carries significant economic implications for the country. Firstly, such a substantial rise in public debt may heighten concerns about debt sustainability, particularly if the borrowed funds are not effectively utilized to stimulate economic growth and development. With a higher debt burden, there could be increased pressure on government finances, potentially leading to reduced spending on critical sectors such as infrastructure, healthcare, and education.

“Furthermore, the composition of the debt, with a significant portion being domestic, raises concerns about its impact on interest rates and inflation. Increased government borrowing from domestic sources can crowd out private sector investment, leading to higher interest rates and reduced access to credit for businesses. This could stifle economic growth and hinder efforts to diversify the economy and create jobs.

“Regarding the question of whether further external borrowing is advisable compared to internal borrowing to boost foreign exchange reserves, several factors need consideration. External borrowing may provide immediate access to foreign currency, helping to bolster foreign exchange reserves and stabilize the local currency. However, it also exposes the country to exchange rate risk and potential fluctuations in global financial markets. Additionally, reliance on external borrowing increases the country’s vulnerability to external shocks and may impose conditions from lenders that could affect domestic policy flexibility.

“In light of these considerations, a balanced approach that considers both domestic and external borrowing options, along with prudent debt management practices, is essential. It is crucial to ensure that borrowed funds are invested in productive sectors of the economy to generate returns that can service the debt and contribute to sustainable economic growth. Moreover, efforts should be intensified to improve revenue generation, enhance fiscal discipline, and prioritize investments that promote inclusive economic development and poverty reduction.”