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Excessive borrowing leaves Nigeria on the brink of default

As Nigerian president Muhammadu Buhari prepares to leave office next week, he leaves behind a controversial eight-year tenure that has above all sunken the once mighty prospects of economic development in the sub-Saharan nation. Since Buhari took office in 2015, Nigeria’s unemployment rate has skyrocketed at a staggering rate, from 4.31 % to a projected 41 percent in 2023.

Meanwhile, the country’s GDP has declined since 2015, its standard of living has declined almost 30 % since then, and inflation in Nigeria has grown from 9 % to over 22 percent this March. Like all general economic trends, there may be a number of factors instigating the greater Nigerian downturn, from fluctuating oil prices to pandemic shutdowns to rising global food prices; however, the go-to target for scrutiny will undoubtedly be Buhari himself, and largely for just cause. Among the factors contributing to Nigeria’s economic slump, according to BBC’s Nduka Orjinmo, including policies “such as currency restrictions and closing the land borders to boost local production,” Buhari-era laws that “have contributed towards record inflation that has made millions poorer and depleted a once burgeoning Nigerian middle-class.”

Nigeria's GDP per Capita 2012-2021

Source: The World Bank

Yet even casting Buhari’s existing track record aside, what may prove to be the X factor in the Nigerian head of state’s legacy are the effects of his record government borrowing on the country’s future generations. Over the course of the administration, the government’s external debt increased by over 291% as Buhari looked to foreign sources for deficit spending, no shortage in thanks to declining domestic revenues from his policies that served as a supply shock to the Nigerian economy. By 2021, Chinese investment totaled over $20 billion in Africa’s largest economy while Buhari, just last week, tried to swiftly approve an $800 million loan from the World Bank. While growing government deficits don’t immediately spell out danger, what has largely driven growing Nigerian borrowing is the need to pay back previous borrowers. As Nigerian government revenue-to-GDP continues to shrink relative to the sub-Saharan average, record budget deficits year-after-year in the Buhari Administration have translated to larger shares of government spending going towards paying back previous debts. This, however, enables a vicious cycle. As government revenue continues to shrink, Nigeria must take on new debt in order to pay back previous debts they’ve taken on. Yet this new debt conferred on the government must also be paid back, thus forcing the state to find other sources of debt and so over time commanding a larger and larger share of government revenues towards paying back existing debt.

According to the World Bank, in 2022 Nigeria spent 96.3 % of its government revenue on servicing debt, although the International Monetary Fund warns that that figure may reach 100 % by 2026. As a matter of fact, last month Nigeria’s Minister of Finance, Budget, and National Planning Zainab Ahmed concluded that the government’s cost of debt servicing, valued at 1.94 trillion nairas, had surpassed its retained revenues of 1.63 billion nairas. This all leaves the future of the Nigerian economy with a rather grim outlook. Key sources of long-term economic development such as education, infrastructure, and policing to maintain property rights may no longer be guaranteed the financing required to facilitate robust operation. A larger reliance on foreign debt, meanwhile, may bring with it a larger susceptibility to foreign pressures, whether it be Chinese or Western influence leveraging Nigeria’s dire economic status.

In light of its ravaging economic spiral, however, Nigeria may not be able to find an immediate antidote to its problems rather than a robust prescription for the long-term. Perhaps above all else there is a need to adopt cost-effective policies that could serve as the supply-side expansion needed to boost government revenues and retain spending on key aspects of Nigerian life. Such policies may include greater free trade, stronger property rights, lower taxes, and lower red tape and business regulation. In the meantime, the government may have to be content with defaulting on some of its debt, something that may be a choice as of right now but may soon turn out to be the only option for the upcoming administration. At best, however, Nigeria’s economic stresses and impending shortcomings ought to highlight the problem inherent in heavy government borrowing in the first place, and how it often proves to be a risky venture without the guarantee for strong government revenues to safeguard it.

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23 במאי 2023
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It’s a shame for the previous government. This country has so much potential And should not solely depend on external debt.

Debt is not a bad thing but you need to know how to use it correctly to produce value and impact your population’s life. However, you'll have to keep borrowing to pay for your initial debts. It's an infernal cycle.


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