AACS Fortnightly
(Mondays)
16th January 2023

From the Chairman’s Desk,

NIGERIA – Debt to Revenue Ratio, NOT Debt to GDP

The debt-to-GDP ratio is used to evaluate a country’s ability to pay off its debts, a higher ratio means a country is less likely to be able to pay off its debts easily. The total public debt in Nigeria (₦67.6trn) is estimated to represent only 35.2% of the GDP, and way lower than comparative emerging markets, and The World bank recommends debt to GDP ratio not exceeding 77%, the point at which payment may become an issue. This is the premise upon which a lot of government officials and commentators have used in advancing the argument that the nation still possesses a lot of leverage to borrow. The fallacy of this argument, even though correct in principle, is profoundly weak in a country where the revenue to service the debt has continually been weak. Japan and the US have one of the highest debt-to-GDP ratios of 266% and 128% respectively, however, these countries generated approximately $510bn and $4.9trn respectively, in 2022. Also, Japan’s debt is largely to its central bank, and rates are very low. The dollar is the reserve global currency, so the Americans run little risk.

The more appropriate ratio is debt-to-revenue, which scrutinises the ability to generate income to service debt. A presentation by the Nigerian Minister of Finance on the 2023 national budget shows that the debt-to-revenue ratio is close to 81%, meaning that for every $100 earned, Nigeria uses $81 to service debt. This ratio has been on the rise, and fell below the service ratio in Q3 of 2022, as the country continued to struggle in meeting its revenue targets. A recent KPMG report highlights that while the nation’s expenditure has increased by 20%, its corresponding revenue rose by only 5% in the same period. Based on the continuous rise of the country’s debt from increased borrowings, using the debt-to-GDP ratio, rather than revenue for our peculiar circumstance, puts it at risk of default, inability to meet its expense, and may be playing the ostrich.

AACS believes that the key metric for the nation must be the debt-to-revenue ratio, and the country must work purposefully on improving revenue generation before pushing more borrowings. If this isn’t managed properly, the nation runs the risk of defaulting and requesting for rescheduling with the attendant consequences. This position does not gloss over the benefit of borrowing, especially in building infrastructure that would enhance production and economic activities, but the balancing act is crucial, and at the moment it is not right.

The country needs to moderate its new borrowings, reduce its expenditure, improve its revenue streams, and take time to evaluate the Finance Bill appropriately to drive revenue up, without stifling productive activities. The earlier this mindset is adopted, the better for our economic well being.

Falil Ayo Abina

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