Why Nigeria must stop mortgaging its future for short-term gains
The recent report from the International Monetary Fund (IMF) highlights a troubling reality in Nigeria’s economic situation. Despite rising debt costs, Nigeria continues to borrow heavily, raising concerns about its financial stability. The IMF warns that without significant changes, the country may soon reach a critical tipping point.
During a press conference at the IMF/World Bank meetings in Washington, Tobias Adrian, the IMF’s Financial Counsellor and Director of Monetary and Capital Markets, noted that Nigeria, along with other frontier markets, has remained active in the debt market throughout 2024. This activity occurs amid sharply increased financing costs compared to pre-2021 levels, raising questions about the sustainability of such borrowing practices.
The reliance on debt for financing is a precarious strategy for Nigeria, straining the nation’s fiscal health and limiting the government’s ability to invest in crucial areas like infrastructure, education, and healthcare. As debt levels climb, so do the costs associated with servicing that debt, potentially creating a vicious cycle of borrowing that exacerbates economic instability.
To avert this crisis, the Federal Government must shift away from dependency on borrowing and explore alternative revenue generation avenues. This could include strengthening tax collection mechanisms, promoting local industries, and enhancing the business environment to attract foreign investment. Economic diversification is also essential to reduce vulnerability to external shocks and foster long-term stability.
The IMF has pointed out that while frontier markets, including Nigeria, have remained engaged in the debt market, the loans secured are primarily fueling consumption rather than investment in productive sectors. The IMF supports certain monetary policy measures from the Central Bank of Nigeria, such as interest rate hikes and foreign exchange reforms, but has distanced itself from President Bola Tinubu’s controversial removal of the fuel subsidy, which has worsened economic challenges.
According to the latest World Economic Outlook report, Nigeria’s economy is projected to grow by just 2.9 percent in 2024, mirroring the stagnation of 2023. This raises concerns about the effectiveness of current policies in driving sustainable economic development. The ongoing reliance on borrowing for immediate consumption, rather than long-term investment, perpetuates a cycle of dependency and undermines the country’s economic foundation.
Recent figures from the Debt Management Office reveal that Nigeria’s total public debt surged to N121.67 trillion, a staggering increase of N24.3 trillion (nearly 25 percent) in just three months. As of March 31, 2024, this debt amounted to approximately $91.46 billion, up from N97.34 trillion ($108.23 billion) at the end of 2023. The breakdown shows domestic debt at N65.65 trillion ($46.29 billion) and external debt at N56.02 trillion ($42.12 billion).
This alarming rise in public debt underscores the severe revenue crisis facing Nigeria. With crude oil prices around $80 per barrel, it’s concerning that approximately 55 percent of the nation’s crude oil production has been pledged for loans. This heavy reliance on borrowing not only raises questions about fiscal sustainability but also threatens the country’s economic sovereignty.
To navigate these challenges, Nigeria must urgently reassess its fiscal strategies. Addressing structural issues, diversifying revenue sources, and fostering a more resilient economic framework are crucial steps in mitigating the impact of the debt crisis.
The Federal Government needs to consider privatising state assets to generate revenue, and it should focus on developing the non-oil sector by implementing lower interest rates to reduce borrowing costs. Moreover, Nigeria must avoid taking loans from international institutions for consumption purposes.
The path ahead is fraught with challenges, but with decisive action and a commitment to sustainable development, Nigeria can break free from its current debt predicament. The time has come for the government to implement transformative policies that address immediate fiscal pressures while laying the groundwork for a prosperous and self-sufficient economy. The urgency for action is clear—Nigeria cannot afford to continue down the path of escalating debt without seeking innovative solutions to secure its economic future.
