Nigeria’s debt to GDP is not as bad as people think

Nigeria is oil-rich but deeply poor. Since the oil glut of the ’70s, this country by its actions has plied borrowing as a part of its revenue sources to finance its budget year after year. Since the government almost always spends more than it takes via taxation and other income, the national debt is consequently on a steady rise. It presently (as of December 2020) stands at an estimated N32,915.51 billion.

Public debt and the notion of having to borrow at all is commonly seen as bad, but on the flip side, it could be good. It simply depends on intent, agreement, execution, and the period under consideration. Sometimes, nations have fewer choices than to succumb to borrowing for multifarious reasons. This includes a desire to accelerate capital spending and the hunt for economic stability among others.

However, there are some unique countries like Botswana and Congo in Africa that have stood their ground and refused to undertake significant levels of borrowing. Botswana has a debt to GDP ratio of 12.84%; amongst the lowest in the world, whilst Congo DRC isn’t so far off with 13.31%. Why do you think these countries frown so fiercely at borrowing?

Extensive use of borrowing has severe implications on the economy. It can negatively affect capital stock accumulation and hinder economic growth via heightened long term interest rates whilst having unpleasant ramifications for the strength of the currency in trade.

Nigeria, in contrast, is adept and all too familiar with borrowing, showing little restraints and reaching a dismal stage where the nation is now borrowing to service debts.

2020 was one of Nigeria’s worse years yet, being that it raised concerns as to the effect of statutory debts on the country’s GDP.

The relationship between debt and GDP is akin to comparing what a country owes with what it produces. The debt-to-GDP ratio reliably indicates the country’s ability to pay back its debts. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets.

Nigeria’s debt to equity ratio in 2018 was 27.7%, in 2019 it increased to 29.1% and for 2020, 35%. Let’s analytically consider this for a second. How bad or not so bad is this?

When you compare Nigeria’s ratio to Congo’s 15.5% and 15.2% for 2019 and 2020 respectively or with Botswana at 17.8% and 18.2% for the same period. There is the feeling that Nigeria could do much better. This country has dimensions and more importantly, capacity to exhibit self-sufficiency to astounding proportions. So yes, it is bad.

Additionally, High debt-to-GDP ratios are considered a concern for investors, as they can have a negative effect on the stock market and reduce productive investment and employment in the long run.

On the flip side is 35% really that bad? A study by the World Bank found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period of time, it slows economic growth. Below this, is considered reasonable so long as the country can continue paying interest on its debt–without refinancing, and without hampering economic growth. Nigeria is not even up to 40%, so why the hassle?

Remember that public debts can be positive when kept at a controlled level and if utilized properly. Countries renowned for tremendous level of infrastructural investments and growth such as Japan and the United States have debt to GDP ratio of over a hundred percent. They are not shy to borrow (albeit most of these are local indebtedness and/or backed by their currency) nonetheless, it purges the notion that stigmatizes borrowing.

Nigeria’s debt to GDP ratio shouldn’t raise any eyebrows so long as it is kept back below or around the 30% mark. Nigeria’s debt to GDP ratio is estimated at about 32%, one of the lowest in the world and much below what is obtainable in most emerging markets. With Nigeria’s total public debt below 35% of GDP, the country’s debt burden (strictly according to this debt-GDP metrics) appears to be relatively light compared with many other countries.

Moreover, Debt-to-GDP is broadly not regarded as the best indicator of debt sustainability, especially in a country like Nigeria. A better gauge of debt sustainability is the debt service-to-revenue ratio, a metric that reveals whether the government is generating enough revenues to pay down its debts as they mature. The concern now is that the debt service to revenue ratio in Nigeria has in recent years risen to worrying levels, leading analysts to ask whether the country is bankrupt or heading towards bankruptcy.

A throwback to the original question- is Nigeria’s debt to GDP ratio as bad as people think it is? No, not really, but as far as Nigeria’s statutory debt is concerned, Debt-to-GDP is not the parameter we should be most worried about. But we should definitely be very worried about Nigeria’s public debts.