Ms Patience Oniha, DG Debt Management Office(DMO)

By Ike Brannon

As Nigerian President Muhammadu Buhari announces his new Cabinet, his post-election pronouncements have made it clear that a core priority of his new government will be to pep up the Nigerian economy. Unfortunately, the President’s proposals during his campaign and since have amounted to little more than tinkering at the edges. The reality is that the country needs fundamental and far-reaching reforms in order to address deep-seated structural problems with the economy. The story of Nigeria’s coming economic crisis has not yet gained global attention, but attention must be paid to it.

President Buhari’s policy missteps stem first and foremost from a mistaken diagnosis of the problem, and there does not appear to be any political acceptance in Abuja of the degree of severity. The data highlighting the structural weaknesses of the Nigerian economy are depressingly familiar – despite decades of attempts to diversify, Nigeria remains dependent on oil for 90% of its export earnings, which owes partly to the fact that almost two-thirds of the economy remains in the informal sector. The large informal sector also causes the country’s tax to be remarkably small–tax revenue last year was less than ten percent of GDP. What’s more, economic growth has remained sluggish despite a rapidly growing population.

Nigeria’s biggest economic problem, though – and the issue that requires real political acceptance from Buhari’s new government – is the country’s growing public debt. Since assuming office in 2015 President Buhari’s governments have added considerably to the nation’s debt, which now exceeds $85 billion. In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a program coordinated by the Paris Club, IMF, World Bank and AFDB. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing.

The country’s Central Bank recognises the country’s economic morass and has taken steps to boost domestic lending, but its financial institutions are wary of increasing their loan portfolios –a history of non-performing loans serves as a cautionary tale. Instead, banks are increasingly buying Nigerian bonds instead, which starves domestic businesses of capital. The other problem is that having a plethora of Nigerian banks holding substantial portions of Nigerian sovereign debt represents a systemic risk, especially given the increasing debt distress in the country. The Central Bank has now begun to restrict the purchases of these securities by banks, a sensible move that should be accelerated further.

Nigeria’s biggest economic problem, though – and the issue that requires real political acceptance from Buhari’s new government – is the country’s growing public debt. Since assuming office in 2015 President Buhari’s governments have added considerably to the nation’s debt, which now exceeds $85 billion. In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a program coordinated by the Paris Club, IMF, World Bank and AFDB. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing.

The other problem is that having a plethora of Nigerian banks holding substantial portions of Nigerian sovereign debt represents a systemic risk, especially given the increasing debt distress in the country. The Central Bank has now begun to restrict the purchases of these securities by banks, a sensible move that should be accelerated further.

Paris-based sovereign debt expert Andrew Roche has pointed out that while the debt as a proportion to GDP is at a reasonable twenty percent, debt servicing costs make up fully two-thirds of retained government revenue, a startlingly high figure and a datum its government goes some lengths to de-emphasize. Without an honest and frank government acceptance of the situation, Nigeria’s chances of escaping its self-inflicted debt trap are vanishingly small.

Another problem facing the country is that while most developing countries take advantage of concessionary financing from the World Bank or other international institutions, Nigeria’s debt profile is now increasingly made up of commercial debt. Its recent Eurobond issuances in London, for example, came at a relatively high yield, which makes its economy especially vulnerable to external shocks, such as a sustained drop in oil prices.

*Brannon who writes about fiscal and regulatory policy, contributed this from Washington D.C. The article was first published in Forbes.com

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