Nigeria’s Debt Service Outstrips Spending Amid Low Foreign Direct Investment

Nigeria’s fiscal landscape is facing unprecedented challenges as debt repayments now exceed both recurrent and capital expenditures.

Tilewa Adebajo, CEO of The CFG Advisory, stated these pressing issues during his presentation on “Nigeria’s Fiscal Environment in an Era of Monetary Policy Tightening” at the Finance Correspondents Association of Nigeria (FICAN) bi-monthly forum in Lagos.

According to Adebajo, Nigeria’s debt burden has surged to $130 billion, with 95% of the country’s revenue now allocated to debt servicing.

This development raises concerns about the sustainability of the nation’s fiscal policies and the potential for a debt default akin to those seen in Ghana, Zambia, and Ethiopia.

The National Bureau of Statistics (NBS) reported that Nigeria’s public debt stock soared from N97.34 trillion in December 2023 to N121.67 trillion in March 2024.

Despite allocating N8.7 trillion for capital expenditure in the 2024 budget, only N1.32 trillion is directed towards infrastructure development, highlighting the severe underfunding of critical sectors.

“The current debt levels are unsustainable,” Adebajo warned. “With an additional $10 billion from the 2024 budget deficit, we must commence discussions on restructuring both domestic and external debt to avoid severe economic repercussions.”

Nigeria’s economic indicators paint a grim picture. The country remains in stagflation, grappling with high inflation and stagnant growth.

The introduction of the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the removal of fuel subsidies have boosted the Federation Account Allocation Committee (FAAC) revenues by 130% from May to November 2023, yet these measures have not sufficed to stabilize the economy.

Foreign Direct Investment has plummeted to under $1 billion, the lowest in history. Power transmission and distribution infrastructure remains poor, stifling industrial growth and economic productivity.

The macroeconomic situation has deteriorated over the last seven years, with GDP shrinking by an estimated $180-200 billion, now standing at $390 billion.

Adebajo emphasized the dire need for structural reforms. “Nigeria requires a GDP growth rate of 8-10% to sustain its population of 200 million. Current growth at 3% is insufficient, with 135 million Nigerians trapped in poverty and 40% unemployment,” he noted.

“Dwindling reserves and increasing credit default swap premiums have led to a Caa1 junk bond rating status.”

Despite these challenges, Adebajo expressed cautious optimism. “The fundamentals of the Nigerian economy remain sound. However, poor economic leadership has stifled growth. With a new, highly rated economic management team in place, there is hope for significant improvement if reform policies are implemented sincerely and effectively.”

Adebajo proposed several solutions to address the economic crisis:

1. Debt Restructuring: Engage creditors to restructure and extend debt maturities, allowing for manageable repayments and reduced interest rates.
2. Fiscal Discipline: Reduce non-essential government spending, eliminate wasteful subsidies, and enhance public service efficiency.
3. Revenue Expansion: Broaden the tax base, improve collection, and introduce new revenue streams such as value-added tax (VAT) and property taxes.
4. Transparency: Increase transparency and accountability in government spending to build public trust and attract foreign investment.
5. Monetary Policy: Maintain tight monetary policies to combat inflation and attract foreign investment.
6. Competitive Exchange Rate: Stimulate exports and reduce import reliance by maintaining a competitive exchange rate.
7. International Collaboration: Leverage regional and international partnerships for financial assistance, expertise, and market opportunities.
8. Public Engagement: Engage with the public, businesses, and civil society to garner support for economic reforms.

Adebajo concluded with a call for action, stressing the importance of commitment from the new economic management team to drive the necessary reforms and steer Nigeria out of its current economic quagmire.

“The success or failure of our economy hinges on their ability to deliver on reform policies and achieve sustainable GDP growth targets,” he asserted.