Nigeria plans to rebase its economy, potentially lowering its debt-to-GDP ratio from 56.23% to around 40%, which may enhance fiscal sustainability. Government revenue stands low at 14% of GDP, necessitating structural reforms for better financial management. A rise in total debt to N142 trillion is reported amid pressures from external obligations and rising debt service, pushing for increased revenue generation and strategic reductions in borrowing.
Nigeria is considering an economic rebase that could reduce its debt-to-GDP ratio from 56.23% in June 2024 to approximately 40%, enhancing fiscal sustainability. Analysts from Renaissance Capital Africa report that such a rebase will offer better debt sustainability buffers, especially given Nigeria’s low government revenue, which stands at 14% of GDP, one of the lowest globally. This restructuring is aimed at improving the country’s economic outlook amidst years of stagnation in GDP figures.
The National Bureau of Statistics announced that upcoming reports regarding the consumer price index and GDP will reflect significant economic shifts after a prolonged period without revisions. This action is expected to result in decreased tax-to-GDP and debt-to-GDP ratios, promoting better fiscal balance. Furthermore, the average per capita income, currently at $877, is anticipated to improve as a result.
According to Renaissance Capital Africa, while Nigeria’s debt appears manageable under International Monetary Fund (IMF) standards, the firm cautioned that traditional metrics may not accurately represent the nation’s debt sustainability. As of Q3 2024, Nigeria’s total debt rose by N8.02 trillion to N142 trillion, marking a 5.97% increase from the previous quarter, primarily influenced by the naira’s depreciation.
The persistent rise in debt can primarily be attributed to slowed revenue from oil and non-oil sources alongside increased government expenditure, which has led to deficit financing. Nigeria faces mounting pressures from external obligations that are impacting its net reserves and pushing debt service to exceed revenues by over 100% as of 2023, continuing into 2024.
Debt servicing costs have escalated, with figures rising by 38%, reaching N3.419 trillion in June 2024, compared to N2.479 trillion in March 2024. Experts argue for a reduction in borrowing, specifically from commercial sources, advocating for heightened revenues and augmented equity participation in infrastructure projects. These recommendations aim to alleviate the current debt burden.
To correct the financial trajectory, increasing revenue and reducing recurrent expenditures will be crucial in minimizing new debt and expediting repayment of high-cost loans. Enhanced revenue generation would reduce reliance on both domestic and international funding markets, but the path towards sustainable financial practices is more of a medium-term focus, with significant immediate pressures on Nigeria’s finances.
The report suggests that alternatives to reduce debt service may involve conventional means such as debt re-profiling, or unconventional measures like financial repression, each carrying different implications for investor interests. Moving forward, Nigeria faces the challenge of financial restructuring amidst worsening economic conditions and growing liabilities.
The economic landscape of Nigeria has faced significant pressures due to rising public debt, compounded by poor revenue collection and high expenditure. The proposed rebasing of the economy aims to offer a clearer picture of the nation’s financial health, potentially allowing for strategic fiscal adjustments. Understanding Nigeria’s debt dynamics and revenue generation capacities is critical for ensuring long-term economic stability and sustainability, particularly in the context of domestic and global pressures affecting fiscal policy.
In summary, Nigeria’s economic rebasing initiative could afford the country an opportunity to improve its debt-to-GDP ratio significantly. While addressing immediate fiscal challenges via revenue enhancement and reduced borrowing remains a priority, the structural changes necessary for sustainable economic management will take time. Ongoing monitoring of debt service pressures and the varying implications of different financial strategies will be crucial to navigating Nigeria’s economic future effectively.
Original Source: businessday.ng