Is nigeria really broke? as debt payment exceeds revenue






Is nigeria really broke? as debt payment exceeds revenue

The topic soon dominated social media, schools, private and public sector circles, beer parlous, etc. as Nigerians pondered how we found ourselves in this situation.




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A headline from one of Nigeria’s online newspapers read “Nigeria broke as debt payment exceeds revenue”.
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But where did this headline come from?

The source is supposedly from the Medium Term Expenditure Framework presented by the Minister of Finance, Zainab Ahmed.
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The report concluded that Nigeria was spending about 118% of its revenue on debt service, meaning it is also borrowing to service debt.

Specifically, the report revealed that Nigeria’s debt service cost surpassed its revenue in the first four months of the year. Notably, debt service gulped a sum of N1.94 trillion between January and April 2022, against a retained revenue of N1.63 trillion.
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According to the Minister, Dr. Zainab Ahmed, the inability to increase crude oil production, as well as subsidy deductions, posed significant challenges to Nigeria’s revenue generation.

“Crude oil production challenges and PMS subsidy deductions by NNPC constitute significant threat to the achievement of our revenue growth targets, as seen in the 2022 Performance up to April,” she said.

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“Revenue generation remains the major fiscal constraint of the Federation. The systemic resource mobilization problem has been compounded by recent economic recessions. Bold, decisive and urgent action is urgently required to address revenue underperformance and expenditure efficiency at national & sub-national levels,”

So does this suggest Nigeria is “broke”?

Technically a country cannot be said to be broke or bankrupt as that will mean everyone in the country including the private sector cannot meet debt obligations to their creditors.
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As far as the data available suggest Nigeria as a country is not close to this. If indeed any section of the country is broke then it is either the government (public sector) or private sector.

Since we are sure the private sector is not broke, is the public sector then broke? The answer is no. The government can also not be said to be technically broke or bankrupt as failure to meet debt repayment to creditors when they fall due does not mean it is broke.
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It just means the country is in default of its external and local loans. Nigeria has been servicing its loans to its creditors both local and foreign and has never defaulted. This remains the same today.

We have seen countries default on their ability to pay the debt when they fall due such as the case of Argentina, Greece, and most recently Sri Lanka. A country’s failure to pay its debt is often due to the government owing too much and not generating enough revenue to repay the debt.
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When this occurs, the country goes into default and the creditors can technically seize the country’s assets abroad. Again, this rarely happens as painful deals are usually cut between the creditors and the government. For example, the government can be forced to raise taxes, impose austerity measures, raise interest rates, devalue its currency, etc.

When the country adopts all of the parts of these measures and it is accepted by the creditors, a deal is said to be struck and the debt is either rescheduled, or parts of it are forgiven or written off and repayments tenor extended to accommodate cash flow compatibility.
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In fact, a company can continue borrowing into perpetuity so long as it pays its debts and its creditors believe the country is rich enough to generate enough money from taxes to service those debts.

This is why some countries like the US are so indebted their debt to GDP ratio (not debt service) is above 100%. Meaning the aggregate total debt they owe is even more than the size of the economy. US debt to GDP ratio is about 137%.

So what is wrong with Nigeria’s Fiscal state? Nairametrics believes Nigeria is in a fiscal crisis which is defined inability of a country to bridge a deficit between its expenditures and its tax revenues.

In other words, the revenue generated by the country is not enough to meet its expenditures which then leads to a budget deficit. It is the budget deficit that is financed by external and local loans.

Nigeria has been in a budget deficit for the last 10 years a situation that has deteriorated since the start of the Goodluck Jonathan administration and gotten worse during the current Buhari administration. Nigeria’s fiscal crisis is what has led to the ballooning of Nigeria’s public debt from about N12 trillion in 2016 to about N41.6 trillion as of the first quarter of 2022.
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At N1.9 trillion for debt service, Nigeria is likely to spend over N5 trillion on services debt alone in 2022. This year’s aggregate expenditure was estimated at N17.32trn, with a prorated spending target of N5.77trn at the end of April.

However, the actual spending as of the end of April was N4.72 trillion out of which N1.94 trillion was for debt service, and N1.26trn was for personnel costs, including pensions. Meanwhile, FGN’s retained revenue was only N1.63trn, 49% of the prorated target of N3.32trn.
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The Minister also provided some insights. According to her, subsidies had overburdened government finances and have pushed the fiscal deficit to as much as N3.09trn between January and April this year. Apart from subsidies and high government expenditures, revenue as also been a major issue.

Why is Nigeria’s government revenue poor A. Nigeria is performing poorly in terms of government revenues because it has struggled to generate significant revenue from oil, one of its mainstays.

This year, the government projected revenues of about N9.96 trillion largely from oil sales based on a benchmark of 1.8 million barrels per day. Unfortunately, oil theft and pipeline vandalization has decimated the country’s oil revenue profile affecting revenues.

B. Nigeria is also performing poorly in the generation of significant tax revenues to augment its oil export revenues and meet its expenditure obligations. How Much does Nigeria Generate from taxes as a percentage of GDP?
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According to data from the Central Bank of Nigeria, Nigeria generated about N9 trillion (gross) from a combination of petroleum taxes, company income tax, customs imports, excise duties, Value Added Tax, Capital Gains Tax, and Stamp Duties in 2021. In 2021, Nigeria’s nominal GDP was about N173 trillion.

Based on tax revenue of N8.9 trillion and a GDP of N173 trillion Nigeria’s tax to GDP ratio in 2021 was just 5.1%. See slide 41 for details of Nigeria’s Q3 budget implementation report.

Finally, Nairamtrics can confirm that Nigeria is not broke or bankrupt, or in default. However, we do face a revenue or fiscal crisis where our revenue is way smaller than the government’s expenditure.

Being broke will mean a country cannot pay for all its budgeted government expenditures either through debt or revenue which is a very rare if not impossible situation.
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