On Nigeria’s debt


In recent days there’s been a lot of hullaballoo about Nigeria’s debt profile. Government/Public debt is the debt owed by the government of a country. It is a means of financing government operations when revenue targets are inadequate. The chart below shows that total debt amounts to $45.5b (=N=7.1tr) at 30th June 2012 as obtained from the DMO.

Quite a fair amount of energy and worry even a court case over our supposed rising debt profile. However is this really worth the stress? Or is this a case of a mischievous misinterpretation of facts to an unwary populace by cunning politicians. This blog post seeks to examine issues. First a bit of history: the next chart displays Nigeria’s Debt Stock between 1960 and 2010. (Logged for scaling purposes)

It’s a continuously upward sloping graph indicating the existence of a long run trend like GDP. Exactly! So merely reeling off the figures without placing it in a proper context upon which conclusions can be gleaned might be misleading.

Now a little digression – Governments usually borrow by issuing securities treasury bonds and bills to financial markets i.e. a promise to repay the holder the principal plus a fixed (sometimes variable) amount indicated on the security at a certain date called the maturity. When countries lose their credit worthiness usually when a rating agency downgrades their bonds, they are unable to raise money cheaply from the markets. This is as holding such bonds as assets in the balance sheet requires a larger capital cover in case of default so banks and other investors avoid such or charge higher interest rates to cover the risk. Countries in such instances like Greece have to borrow directly from supranational organizations like the Bretton Woods Institutions. However in the light of the gaps in development and the end of the Cold war these organizations are gradually moving away from being “lenders of last resort” to development partners by providing concessionary loans to finance socio-economic infrastructure in third world countries.

Now back our issue, to paint a clearer picture, I draw two graphs both reflecting the growth rates of nominal GDP and our national debt.

From the above, In the beginning there appears to be no correlation between both, the first major spike in external borrowing came in the 1978. According to the DMO, Nigeria’s first loan from the Paris Club of Creditor Nations was a US$13.1 million loan taken from the Italian government in 1964 for the building of the Niger Dam. From that time till the end of the decade, Nigeria’s borrowing from foreign lenders was generally insignificant. However the oil boom of 1971-1981 introduced the era of big borrowing in Nigeria. The borrowing continued well into the civilian era, as the Federal Government embarked on the guaranteeing of many unviable loans i.e tough and un-concessionary taken by private banks, state governments and parastatals. The next subsequent spike came in the early 80s at the start of the oil glut under Shehu Shagari with the more prominent spike of 1986-88 being the ‘SAP’ loan received after the IBB regime began the radical program of re-structuring Nigeria’s economy. Post 1986, there appears to be some correlation between the rate at which we borrowed and the economy’s growth rates. Following the Nigeria’s historic debt repayment of 2005, external debt however no longer appears to track our GDP growth rates.

The picture of Domestic debts/GDP below shows that albeit imperfectly, from 1960 -1981, Nominal GDP seemingly tracks it. This fits into the logic stated in the earlier digression; in times of rude health, the chart appears to suggest a correlation, in bad times like in the 1980s and mid 1990s they diverge. With our return to democracy and some credibility restored, the relationship appears to be back on. However, you might observe that in 1972-74 there was a drop in domestic lending even though this was the oil boom and 1995 as well as in 1996. However it is pertinent to note that prior to 2003, a large portion of Nigeria’s domestic debt was short term. FGN 3-10year bonds were issued again after a 17-year absence from the domestic market.

Ok this is local champion stuff, let’s do some comparisons, our current debt to GDP ratio stands at about 18% down from 52% before the debt write off while among BB- rated countries the median is 42%. The IMF puts this figure at 34.5% in 2011 for emerging markets meaning that Nigeria’s debt really isn’t so much of a problem.

To hit the home stretch of the $6b external debt $2.2b is owed by the states with the remaining $3.8b owed by the Federal Government and Lagos state has the biggest portion amounting to 8.5% of this debt. So next time an Action Congress politician talks about mounting debt, do well to remind him of Lagos state’s mounting $517m debt. Given that, external debt is pretty well under, should domestic debts be huge? well a bit of caution here, government over-borrowing in the domestic market crowds out the ability of private investors to borrow. This is as financial intermediaries obtain a higher less risky return from lending to government so this has bad incentives for business and investors seeking to invest locally. If our banks get addicted to cheap profits from this, they may be less interested in risking their funds to finance economic growth. In that instance, I would say government needs to be more serious in its tax revenue drive which is less susceptible to external shocks in crude oil prices that interrupt cash flow necessitating a journey to the domestic debt market.

*All figures were obtained from the Central Bank of Nigeria 2010 statistical bulletin and the Debt Management Office.





  1. A really insightful piece. Keep it up man!

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