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Bismarck Rewane: Nigeria Shifting From Debt Sustainability to Debt Trap

Published by Tope Fakinlede on July 13th, 2024.

Bismarck Rewane: Nigeria Shifting From Debt Sustainability to Debt Trap

Bismarck Rewane, CEO of Financial Derivatives Limited, has asserted that “Nigeria is moving from a debt sustainability path to a debt trap.” As of Q1 2024, Nigeria’s total public debt stands at N121.67 trillion, comprising N65.65 trillion in domestic borrowing and N56.02 trillion in external borrowing. This includes N111.52 trillion owed by the federal government and N10.15 trillion by sub-national governments.

In his July 2024 presentation at the LBS Breakfast titled “Death or Debt Trap? 21st Century Road to Economic Salvation,” Rewane emphasized that while debt accumulation is not inherently negative, its impact depends on how it is utilized. Effective use of debt can lead to improved infrastructure and public services like healthcare and education. However, debt becomes problematic when used for consumption, corruption, and mismanagement.

Rewane highlighted the risks associated with increasing bilateral and multilateral debt, noting that rising financial commitments for development projects and budgetary support could lead to future financial pressure if not matched by economic growth and revenue generation. He expressed concern over the high external debt-service-to-revenue ratio, stressing the need for Nigeria to significantly boost its revenue generation capacity.

He argued that efforts in economic diversification, export enhancement, and fiscal discipline are crucial for maintaining and improving Nigeria’s debt sustainability. Rewane pointed out the adverse outcomes of having higher public debt than total factor productivity, such as higher interest rates, reduced investment, higher debt servicing costs, fiscal sustainability issues, limited policy flexibility, and slower long-term economic growth.

Rewane also noted that debt servicing costs have been crowding out infrastructure expenditure. In 2022, Nigeria spent N5.7 trillion on debt servicing, which was twice the amount spent on capital expenditure and nine times the total health spending. Additionally, debt servicing costs were seven times the total education expenditure and six times higher than defense spending in 2022. He highlighted the significant opportunity cost of debt servicing, stating that the N8 trillion spent on debt servicing in 2023 could have been used to construct 5,000 km of dual carriage roads, 1,600 schools, 80,000 primary healthcare facilities, or 5,000 MW of solar power.

Rewane attributed Nigeria’s large and growing fiscal deficits to subsidy payments, weak oil earnings, debt servicing costs, corruption, and lack of fiscal discipline. He projected the fiscal deficit to widen to N19.32 trillion in 2028 from N14.77 trillion in 2024.

Exploring the link between debt and the cost-of-living crisis, Rewane explained that economic mismanagement can lead to excessive debt, contributing to a cost-of-living crisis through inflation, currency depreciation, and austerity measures. He noted that high debt levels can lead to instability and that African countries with high debt burdens face significant challenges. He emphasized that Nigeria’s current total debt percentage of GDP is 52 percent and cautioned that countries with high debt-to-GDP ratios are at greater risk of falling into a debt trap. Rewane warned that high levels of debt denominated in foreign currencies pose risks due to exchange rate fluctuations, and that stagnating or declining economic growth rates make it harder to generate the revenue needed to service debt. High debt-service ratios indicate financial strain, posing significant challenges for Nigeria and other African countries.