FG Urged to Diversify Economy to Avert Debt Crisis

Recession
  • FG Urged to Diversify Economy to Avert Debt Crisis

Analysts at FSDH Merchant Bank Limited have stressed the need for the federal government to urgently implement policies that will grow and diversify the revenue base of the country to avoid imminent debt crisis.

In a report made available, they maintained that Nigeria’s rising debt profile remains higher than revenue growth, adding that Nigeria has the lowest government revenue to Gross Domestic Product (GDP) ratio at six per cent among some selected countries.

The experts added that Nigeria’s over dependency on crude oil revenue, combined with volatility in both the price and production of crude oil are major reasons for sluggish growth in government revenue.

According to them, “Growing non-oil revenue will require that the Nigerian economic environment has inherent structures that can support business growth. Such structures include adequate physical infrastructure, policies, legal and regulatory frameworks that will make the economy business friendly to generate taxable profits.

“Our analysis of the ratio of the interest payment on domestic debt relative to the federal government’s allocation from the Federal Account Allocation Committee (FAAC) shows that the FGN is spending too much of its revenue to pay interest on loans. This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue.”

The analysts added that the current high interest payment relative to revenue may also increase the credit risk of the country.

“Although the government has been able to meet its debt obligations (interest and principal payments) so far, if the current situation is not addressed, the interest rate on government loans may increase because of the perceived elevated risk. This would also lead to higher interest rates for private sector operators.

“It is important to note that the external environment is becoming tighter than before because of the rising interest rate in the United States.

“The Federal Open Market Committee (FOMC) of the US Federal Reserve increased the Federal Funds Rate by 0.25 per cent to a range of 2 per cent to 2.25 per cent on 26 September 2018. FSDH Research predicts the FOMC will still announce another rate increase before the end of the year. This development will increase the borrowing cost on any new Dollar denominated loan.

“Consequently, borrowing in the international market is no longer as attractive as it was before. It is crucial, therefore, to structure the Nigerian economy to enable it to generate revenue and rely less on borrowing to meet its basic needs, “they explained.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

Be the first to comment on "FG Urged to Diversify Economy to Avert Debt Crisis"

Leave a comment

Your email address will not be published.


*