Nigeria’s debt profile is characterized by a billowing growth in external and domestic debt stocks and debt servicing. In Q1’20, external debt stock for Nigeria stood at approximately $27.5 million (mn). By Q4’20, it had jumped to $33mn with a total debt servicing of nearly $287.5mn. In Q1’22, the external debt stock skyrocketed to nearly $40mn while total outstanding debt servicing hit $694mn, driven largely by debt service payments on multilateral loans. The trend in domestic debt shows a similar upswing. The total domestic debt in Q1’21 stood at N16.51trn. It rose to N17.63trn in Q2’21. By Q1’22, the total domestic debt had reached nearly N20.14trn and rose further to 20.95trn in Q2’22. Nigeria’s total public debt stock stood at N42.85trn. 

Data from the Debt Management Office show that Nigeria’s debt-to-GDP ratio increased to 21.15% in Q4’20, from 18.8% in Q2’20. This is a growth of about 2.35%. The debt[1]to-GDP ratio rose further to 22.8% in Q4’21, accentuating the IMF’s view that Nigeria is edging closer to Lebanon’s crisis. Lebanon recorded a high debt-to-GDP ratio of about 173% in 2020, with a defaulted debt of up to $90 billion. Presently, Sri Lanka and Zambia are almost in the same boat. It is worth mentioning that even though the increase in the debt-to-GDP falls under the Debt Management Office’s 40% capacity corridor, Nigeria’s debt is growing rapidly. The recent IMF report on the state of countries’ indebtedness, released in July 2022, shows that Nigeria has moved up to the fourth position among the most indebted countries on the International Development Association (IDA) borrowers list. 

While Nigeria’s indebtedness to the IDA rose to $13billion (bn) from $11.7bn in one year to occupy the fourth position, India, the most indebted country on the IDA borrowers list, reduced its debt from $22bn to $19.7bn within the same period. Nigeria’s elevated debt profile has stoked fears among policymakers about the country’s capacity to contain the debt. Its ability to service and repay the debt – without jeopardizing the economy and given its level of revenue generation – is under serious scrutiny. Nigeria’s debt service-to-revenue in 2020 hit 81.1% and jumped to 96% in 2021, up by 14.9% within one fiscal year. The IMF forecasts that debt servicing will engulf Nigeria’s entire government revenue by 2026 if strategic measures are not taken to improve revenue generation. 

Drivers of Unsustainable debt in Nigeria 

The macroeconomic instability – exchange rate, fiscal policy terms of trade, and interest rate volatility are some of the causes of unsustainable debt in Nigeria. In addition, increased expenditures on foreign consumables compared to investment or capital goods can drag in debt sustainability problem. Inefficient and arbitrarily large size of government equally has a role to play. In all these, however, the fundamental cause rests on the country’s poor institutions which define the fiscal management stance of the government. Countries like Singapore, Indonesia, China, and Thailand can maintain debt sustainability because of their supporting institutions. But Nigeria’s institutions are saddled with massive corruption and public looting, political instability, government ineffectiveness, fiscal misappropriation and poor macroeconomic prudence, insecurity and rent self-seeking practices that plummeted the economy into debt sustainability challenge. 

Risks of Unsustainable Debt for Nigeria 

The literature has it that unsustainable debt stupendously shares many traits with economic woes like infrastructure gaps, fiscal deficits, poverty, and economic contractions. The Nigerian economy cannot be sustained by stockpiling debt and securing loans to service the outstanding debt, without experiencing economic devastation. Though many look to recent debts surging in the advanced economies including China, the US, and South Korea as a sign of hope for Nigeria’s own debt woes, these high-income economies have a superbly high revenue-to-debt ratio (debt sustainability capacity) compared to Nigeria where debt service alone almost engulfed the entire revenue. Nigeria will battle more years of fiscal deficit, forex scarcity, infrastructure shortages, and socioeconomic underdevelopment if it fails to address the debt sustainability problem entrenched in the economy. Consequently, policy mechanisms or viable institutional arrangements that will enhance Nigeria’s debt sustainability capacity is vital. 

Mitigating Policy for Nigeria 

Nigeria must develop a sound institution that will foster high returns on investment-driven debts. China is accumulating more debt than in the past, but the debt is tied to substantial development projects that can generate considerable revenue as an offset. Such a self-sustaining and self[1]financing debt strategy is indispensable to putting Nigeria on a debt sustainability trajectory. The investment that will help create a pro-growth feedback loop is central to maintaining debt sustainability and reducing Nigeria’s borrowing spree. Again, that requires sound institutions. It is worth mentioning here that a local institutional arrangement could be made to secure and defend Nigeria’s revenue base to lift the country out of debt and debt overhang.