Ngozi Okonjo-Iweala, the director-general of the World Trade Organisation, WTO, and ex-Minister of Finance; President of the African Development Bank, AfDB, Akinwunmi Adesina; Governor of the Central Bank of Egypt, CBE, Tarek Amer, and other regional economic stakeholders, on Wednesday, June 23, 2021, expressed concern about rising national debts, warning that majority of countries in the continent to face a high risk of falling into a debt trap.
They expressed their concerns during the ongoing African Development Bank Group’s 2021 Annual Meetings, warning African political leaders to explore other funding options and scale up debt management transparency. The experts observed that majority of the countries are grappling with sustainability just as debt servicing has become a major burden on the regional economy.
Okonjo-Iweala observed that the current debt burden pre-dated COVID-19 but was worsened by the pandemic. Noting that “prevention is better than crisis management”, she warned that Africa could not afford to fall into a debt trap again.
According to her, many African countries’ debt to gross domestic product, GDP, ratio ballooned during COVID-19 and the oil market crisis. For instance, she said, Nigeria’s debt to GDP moved up from 29 percent to 35 percent during the recent lull in the international crude market.
Recent data shows that the Federal Government spent a sum of N1.02 trillion on domestic and foreign debt service in the first quarter of 2021, representing a 35.7 percent year-on-year increase compared to N753.7 billion spent in the corresponding period of 2020.
A cursory look at the data released by the Debt Management Office, DMO, reveals that N612.71 billion was spent on domestic debt service, while N410.1 billion was expended on servicing of external debt.
The WTO DG described Africa as an embodiment of the global trickery growth, noting that the continent lags while the advanced economies and China “are growing at a faster rate”. She noted that the growth prospect was further compromised by the debt burden and uneven COVID-19 vaccination, which could exclude African countries from the travelling space.
Adding that higher debt carriage capacity meant a higher risk of distress, she observed that most African governments considered it convenient to ignore the debt sustainability threshold when “things are good” only to expose themselves to systemic risks when the economy is on a downtrend.
The ex-Finance Minister called for the adoption of innovation in public finance and debt management, adding that increasing demand for bonds and enforcing open border initiatives as represented by the African Continental Free Trade Agreement, AfCFTA, could help to unlock economic potential and increase debt sustainability.
“Innovation in debt financing is key,” the trade expert said while noting rising debt to revenue translated to fewer resources for the much-needed developmental projects across the continents.
Citing continent-wide research, Adesina said only one out of 38 African countries with sustainability reports was free from sustainability challenges. The rest, he said, had challenges ranging from moderate to high risks.
According to him, to increase sustainability, African countries would need to agree on the convergence of macroeconomic reforms, increase the fight against corruption and deepen domestic resource mobilisation to reduce the risk of a debt crisis.
“There should be full transparency on debt, especially those owed by state enterprises,” he stated, adding that debt relief might not lead to economic growth. He stressed that financial stability was also key to averting the looming debt crisis.
In his opening remarks, Adesina said the meeting offered the stakeholders an opportunity to share ideas on how to position African and AfDB for growth. Regretting that Africa produced only one percent of the global COVID-19 vaccine, the AfDB
President said the continent must brace up for the challenge of vaccination as “I would not continue to beg for vaccines”. He said the bank would continue to support the continent to overcome the challenge.
He said sub-Saharan Africa would require $425 billion just as low-income sub-Saharan Africa would need over half of the figure by 2030 to fully recover from the effects of COVID-19, adding that another 30 million Africans would fall into poverty by the end of the year.
“The effects of the pandemic on the continent’s economy have been massive. Africa’s cumulative GDP losses are estimated between $145 billion and $190 billion. Africa will need a lot of resources to support its recovery,” he said.
Acknowledging the role of public debt in escalating poverty, he promised: “We will support countries to tackle debt and embark on bolder economic governance reforms to forestall a debt crisis.
“We now have a real opportunity to tackle Africa’s debt challenges, more decisively, with the recent decision by the IMF to issue $650 billion special drawing rights (SDRs). As agreed by African heads of state and global leaders at the Summit on Financing of African Economies, called by President Emmanuel Macron of France, $100 billion of these SDRs should be provided to support Africa,” he said.
Amer, who called on macroeconomic managers to expand the tax net to increase public revenues, challenged Africa’s finance ministers to take responsibility for the economic development and their accounting responsibility, warning that “quick fixes” would not usher in sustainable growth. He charged leaders of the continent to pay special attention to unemployment and inflation as the continent seeks economic rebirth.
The central banker also called on governments to work towards achieving autonomous monetary authorities, saying independent central banks would produce the right policies to ensure the stability of key prices.
It would be recalled that Nigeria’s total debt portfolio rose to N33.1 trillion as of March 2021 from N32.9 trillion recorded as of the end of 2020, representing an increase of 0.58 percent. The debt expense for the period already represents 30.7 percent of the total N3.32 trillion budgeted for debt service for the entire year.
This implies that every Nigerian currently owes about N157,906.30 in terms of debt per capita as with the country’s total public debt at N33.1 trillion. Debt per capita is calculated as the total public debt of a country divided by the country’s population and Nigeria’s population is estimated to be 209 million, according to the World Poverty Clock.
Nigeria’s dwindling revenue is still a major factor militating against the expected development of the economy. The situation has continually led the Federal Government to borrow to funds its fiscal budget. Nigeria spent the equivalent of 83 percent of its revenue in 2020. The total revenue earned by the government during the year stood at N3.93 trillion, while the amount spent on debt service stood at N3.26 trillion.
In the same vein, Nigeria also recorded a 99 percent debt service to revenue ratio in the first quarter of 2020, having recorded a retained revenue of N950.56 billion and incurred a sum of N943.12 billion in debt service. However, the government projects a debt service ratio of 46.9 percent for 2021, with its revenue projected to stand at N6.6 trillion, depending on the crude oil benchmark of $40 per barrel.
According to the 2021 budget, N7.99 trillion was projected as the amount available for the year, indicating a budget deficit of N5.6 trillion, which is expected to be funded by borrowing. The Minister of Finance, Budget, and National Planning, Zainab Ahmed, explained that the deficit will be financed by borrowings from domestic and foreign sources. She also stated that N205.15 billion will come from privatisation proceeds.