The Debt Management Office (DMO) recently reported that the country spent N3.57 trillion on debt servicing in the third quarter of 2024. This figure, a slight increase from the previous quarter, underscores the financial strain on Nigeria’s economy due to its burgeoning debt portfolio.
Rising Debt Service Costs
The DMO’s data reveals that external debt servicing alone consumed $1.34 billion for external debt servicing, which was equivalent to N2.14 trillion when converted using the September exchange rate of N1,601.03 per dollar. This represents a 29.70% increase in naira terms compared to Q2’s N1.65 trillion.
The primary reason for this spike is the ongoing depreciation of the naira against the dollar, which amplifies the cost of repaying foreign-denominated debts. This situation is exacerbated by global economic conditions, where interest rates have risen, increasing the cost of servicing variable-rate debts.
Domestic vs. External Debt Servicing
On the domestic front, while there was a decrease in bond interest payments from N1.68 trillion in Q2 to N1.25 trillion in Q3, the interest on Nigerian Treasury Bills (NTBs) jumped from N107.48 billion to N168.53 billion. This shift indicates a strategic pivot towards more short-term debt instruments, possibly to manage liquidity issues, but at the expense of higher short-term interest costs. Domestic debt, particularly bonds, still forms the bulk of the debt service payments, highlighting Nigeria’s heavy reliance on internal borrowing.
Economic Policy and Debt Management
The surge in debt servicing costs is also a reflection of Nigeria’s fiscal policy decisions. The Central Bank of Nigeria’s (CBN) approach to combat inflation through interest rate hikes has made domestic borrowing more expensive. Moreover, the securitization of N7.3 trillion Ways and Means Advances has ballooned domestic debt, with significant implications for interest payments. The government’s strategy to borrow domestically to avoid further foreign debt has its trade-offs, as domestic interest rates are often higher.
Impact on National Finances
With debt service costs accounting for 162% of the federal government’s retained revenue in the first half of 2024, the scenario paints a dire picture of fiscal space for other critical expenditures like infrastructure, education, and healthcare. This high debt-to-revenue ratio suggests that Nigeria is at risk of entering a debt trap, where debt servicing consumes all available revenue, leaving little for development or emergency funds.
Future Outlook and Strategic Responses
The Nigerian government is under pressure to devise effective strategies to manage its debt load. Broadening the tax base, improving tax collection efficiency, and possibly introducing new taxes or increasing existing ones could generate more revenue. The Nigerian Customs Service and Federal Inland Revenue Service have shown significant improvements in revenue collection in 2024, suggesting that further reforms could yield more benefits.
Negotiating with creditors for longer maturities or lower interest rates could alleviate some of the immediate pressures of debt servicing and stabilizing the naira through increased foreign reserves, possibly through foreign direct investments or remittances, could decrease the cost of external debt in local currency terms.
Moving away from oil dependency to diversify revenue sources is crucial. The government’s focus on agriculture, technology, and other sectors could help in this regard. Reducing non-essential expenditures and ensuring that borrowed funds are used for high-impact projects that can generate returns or improve economic productivity.
Nigeria’s debt servicing costs reaching N3.57 trillion in Q3 2024 signal a critical juncture for the nation’s economic policy. The government’s ability to navigate these challenges will determine its fiscal health in the coming years. The path forward involves not just managing debt but also fostering an environment conducive to economic growth, revenue enhancement, and sustainable development.
