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The word debt has always been cautiously used by administrations as the very thought of owing people or nations is usually enough to get Nigerians riled up. That is not more the case. Now, on almost a monthly basis, the Buhari administration has repeatedly incurred more and more debt as it claims the squalor and carelessness of previous administrations have rendered governing Nigeria financially unfeasible. The situation could get worse and this is why increasing dollar debt by 157% is Nigeria’s best shot.

Nigeria is broke…

Following unprecedented highs in the prices of crude oil between 2012 and 2014 came unprecedented lows in oil prices. For a government who sources 70% of its revenue from crude oil sales, this came as a big blow. To worsen matters, no tangible infrastructural progress or savings were accrued from the oil boon, leaving the government severely stretched financially.

To make things worse, the Buhari-administration came in in 2015 and controversially mishandled the marginalization issues in the Niger-Delta, Nigeria’s oil producing hub. The result was incessant bombings of oil pipelines and facilities as well as frequent kidnappings of oil workers. These 2 events happening simultaneously resulted in record low earnings for the government. The government tightened currency controls and banned the importation of certain items leading to a chronic shortage of forex in the country. An economic recession soon followed, Nigeria’s first in 25 years.

…and so needs to borrow…

If the FG was to achieve any progress in the economy, it realized that it had to provide infrastructural support for businesses while at the same time giving short-term relief measures to already poor Nigerians. All of these need money. No other option was left than to borrow. Already, Nigeria owes as much as $3.5 billion in external debt with several more billions in internal debt through bonds and treasury bills. The initial play was to source two-thirds of the debts internally and the remaining one-third from external sources.

…but dollar debts are far cheaper than Naira debts

Careful analysis is showing however that incurring Naira debt is far too expensive if the country is to be able to sustain economic growth in coming years. On the average, Naira debts incur a 16% cost as compared with just 6% in the case of dollar bonds. This has resulted in the country doubling its debt servicing costs to 66% within just a year. What is more, the relaxation of some of the currency controls and importation ban coupled with the sudden surge of interest in emerging markets, Nigeria is suddenly regaining its position as a destination of choice for foreign investors.

Then, it suddenly makes sense why for the next 3 months, the FG is increasing dollar debt by 157% to $9 billion from its current $3.5 billion. Hopefully, this will change the structuring of the country’s debt plan, with the cheaper dollar debt reducing the need for the more expensive Naira debts. In turn, debt servicing figures are expected to reduce and will free up more state funding as Nigeria seeks to spur growth to 7 percent and create 15 million jobs by 2020. Another possible result of this move is that it could pave the way for a full float of the Naira, something that would make the IMF and World Bank happy.

This is not to say that it is a risk-free move. Another currency devaluation, and Nigeria could be on the verge of financial turmoil as the dollar debts will rise to astronomical Naira equivalents. But that’s a risk the FG is willing to take. Put simply, why should Nigeria buy a N106 item for N116? Thus, increasing dollar debt by 157% really makes sense.


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