Nigeria, others urged to institute appropriate debt management strategies

African countries, Nigeria inclusive, have been advised to institute effective debt management strategies to boost economic growth and avoid falling into the debt trap.

Speaking at a workshop on debt management strategies for member states, the Economic Commission for Africa (ECA) Director for Macroeconomics and Governance Division, Adam Elhiraika, said debt management was a challenge for African countries, as debt becomes a significant source of funding for their economic growth and development.

Countries often rely on debt to finance growth and development but Nigeria’s debt-to-GDP ratio has been on the rise in the last few years, currently estimated to be at 23 per cent. With the country’s debt profile expected to spiral even more, this present administration led by President Muhammadu Buhari, would leave a N77 trillion debt behind when it leaves power next month.

While debt is not necessarily a bad thing, rising public debt such as Nigeria’s, is crowding out private investments, threatening economic growth through high long-term interest rates and worsening inflation. The extensive use of domestic borrowing is having a severe impact on the economy as debt servicing continues to consume a significant part of government revenue.

Nigeria is currently among Sub-Saharan Africa’s most indebted countries with stunted GDP growth, retarded export growth, a fast-dwindling income per capita and high multidimensional poverty level.

Nigeria’s debt has had a negative and statistically significant impact on public investment, negatively affecting economic growth and development.

Revealing that while this looks bleak, Elhiraika said it provides an opportunity to effectively enact budgetary protection for various events more apparent in the foreseeable future, as efficient and effective debt management will allow debtor countries to take action to avoid the legacy of
‘too little, too late’ sovereign debt management and restructuring.

He added that in the last six decades, every global recession has led to a rise in global government debt and over the past decade, many countries in Africa have increased their public debt levels. Most of the current public debt was accrued during the fiscal years of 2020 and 2021 when countries took on debt to deal with the effects of the Covid-19 pandemic. He noted that during an economic crisis, continued borrowing has led to high debt accumulation, dwindling the government’s capacity to effectively manage public debt.

Debt distress for African countries has been aggravated by huge current account deficits, massive redemption schedules, lack of access to conventional lending markets, higher borrowing costs, reduction in foreign investments, a decline in national credit rating, reduction in productive investments, rising inflation rates and harms growth and investment.

Sharing experiences with debt management, he said Sierra Leone had implemented several debt and risk management strategies such as debt exchanges and debt buy-backs, to manage and reduce government refinancing risks. Sierra Leone was continuing to prioritize mobilisation of grants over loans and ensure that new borrowings meet the concessional threshold of 35 percent grant element. Ethiopia implemented a medium-term debt management strategy from 2016-2020, which helped in assessing the cost and risk of borrowings and ensured debt sustainability.

Programme Officer, Ministry of Finance, Ethiopia, Habtamu Alamayo, said despite challenges such as poor export performance, low FDI inflows and political stability, they were eyeing opportunities in mobilizing additional external resources exclusively from concessional sources and public-private partnerships and other countries, including Nigeria, could take a cue from this.