Nigeria's debt pile a cause for concern

Debt service costs consume more than half of country's revenue

Shoppers crowd a market in Nigeria's commercial capital of Lagos. More of the country's revenue is being eaten up by debt repayment. Reuters.

Africa’s largest oil producer could run out of money if it does not boost revenues urgently.

Nigeria’s President Muhammadu Buhari warned that the country could struggle to fund its expenses unless it is able to raise taxes take after querying the revenue chief over poor collections. That could complicate Buhari’s efforts to turn around the economy, a mandate on which he was re-elected in February.

Zainab Ahmed, who was reappointed finance minister, echoed these concerns when she was sworn in last week.

Fiscal revenue in Africa’s most-populous nation has undershot targets by at least 45 per cent a year since 2015, according to the budget office. Expenditure has doubled to more than 7 trillion naira ($19 billion). The government’s income shortfall was 51.9 per cent in May due to lower oil and non-oil inflows, according to the central bank.

There has been an urgent need for accelerated fiscal reform in Nigeria for some time and the fact that it is gaining attention from the country’s leadership is positive, Razia Khan, said chief economist for Africa and the Middle East at Standard Chartered Bank.

Spending has been largely supported by borrowing both from the domestic and international markets. Total debt was at $81.2 billion at the end of March, from about $65bn in 2015. Debt owed to non-Nigerian lenders was $25.2bn.

Total borrowing as a proportion of gross domestic product is about 21 per cent, compared with almost 60 per cent for South Africa, which vies with Nigeria as the continent’s biggest economy. Debt service costs consume more than half of actual revenues, leaving little to build badly needed infrastructure and grow the economy. Nigeria spent 2.2 trillion naira on servicing outstanding loans in 2018, compared to 1.68tn naira on infrastructure, according to the central bank.

Without major revenue reforms, debt could rise to almost 36 per cent of GDP by 2024 and interest payments could make up 74.6 per cent of revenue, according to the International Monetary Fund.

At about 7 per cent of GDP, Nigeria has one of the lowest tax collection ratios in the world. Efforts to boost tax revenues in recent years has not yielded the desired results. An oil price crash, a 2016 contraction and subsequent slow economic growth has reduced tax earnings, Babatunde Fowler, chief executive of the country’s revenue agency, said in answer to a query from the Presidency.

The country’s low tax revenue hampers its ability to invest in infrastructure, social welfare and human capital development, all necessary for robust growth, Amaka Anku, Eurasia Group’s Africa head, said by email.

“Nigeria’s government expenditure is roughly the same as Kenya’s, despite a population that is nearly three times as big,” she said.

Ahmed has plans to increase consumption tax to 7.5 per cent from 5 per cent to boost revenues. Buhari has increased her powers by bringing budget and economic planning under her control. This means that she can aim to raise revenues while controlling spending. A 5 per cent consumption tax on online transactions will also come into effect from January, which would earn the government $3.6 billion every quarter.

The most viable option is for the government to increase taxes, said Oluwasegun Akinwale, a banking analyst at Lagos-based Asset & Resource Management.

“If they can do that in the next few months, that can add some income,” he said. “They also have to diversify the revenue base from oil and add manufacturing. There are no short-term solutions.”