Navigating Nigeria’s Debt Maze: A Legal Odyssey

1. Introduction

The term ‘sovereign debt’ is used to describe all credit which a sovereign state has borrowed and is under an obligation to repay to its creditors, irrespective of whether it is held in national or foreign currency. It refers both to debt issued and guaranteed by the government of a sovereign state. ¹For Nigeria, the rising level of sovereign debt has become a critical concern, sparking debates on the sustainability of the country’s financial commitments and the broader impact on the economy. According to a report by the International Monetary Fund (IMF), Nigeria’s public debt stock has increased from $10.3 billion in 2010 to over $91.46 billion USD (or N121.67 trillion) in 2023. ²The country’s debt-to-GDP ratio has also risen to 33.3%, surpassing the 30% threshold set by the African Development Bank. ³Nigeria may have a robust private sector but escalating public debt burdens severely threatens the country’s financial stability, and surrounding countries’ economies are in danger of being contaminated.

2. Nigeria’s Sovereign Debt Landscape

Nigeria’s debt profile has seen an unprecedented increase over the last decade, culminating in a ₦121.67 trillion debt in 2024⁴. The debt surged from ₦97.34 trillion in late 2023, primarily due to continuous borrowing and the rapid depreciation of the Naira⁵. A significant portion of this debt is denominated in foreign currency, which has been particularly problematic because of the sharp fall of the Naira, which dropped from ₦899.39/$1 to ₦1,330.26/$1 within the first quarter of 2024⁶.

The external debt, while remaining stable in dollar terms, has ballooned when converted into Naira, adding a ₦16.62 trillion burden to the overall debt figure. The government’s reliance on foreign loans, combined with fluctuating oil prices and reduced revenue, has pushed Nigeria’s fiscal health to a critical point.

The external debt, while remaining stable in dollar terms, has ballooned when converted into Naira, adding a ₦16.62 trillion burden to the overall debt figure.

The government’s reliance on foreign loans, combined with fluctuating oil prices and reduced revenue, has pushed Nigeria’s fiscal health to a critical point⁷.

Recent Trends in Debt Accumulation

Nigeria’s debt accumulation surged post-2015, driven by a sharp drop in global oil prices, a primary revenue source. In response, the government ramped up borrowing to cover revenue shortfalls. The COVID-19 pandemic exacerbated these challenges, prompting further borrowing from multilateral institutions like the International Monetary Fund (IMF) and issuing Eurobonds⁸. Recent figures show that the Debt Management Office (DMO) has been increasingly reliant on the international financial market, raising concerns over the sustainability of these debts⁹.

3. The Rising Cost of Debt Servicing

One of the most pressing issues is the rising cost of debt servicing. Currently, the debt service-to-revenue ratio hovers around 96%, meaning almost all of the federal government’s earnings are directed toward repaying loans. For instance, Nigeria spent approximately ₦3.34 trillion on debt servicing in the first half of 2023¹⁰. This has severely constrained the government’s ability to finance critical infrastructure, health, and education, leading to increased borrowing just to meet basic fiscal responsibilities¹¹.

4. Key Drivers of Nigeria’s Debt Crisis

(i) Oil Price Volatility

Nigeria’s economy remains heavily dependent on oil exports, with oil revenues making up more than 50% of government earnings and 90% of foreign exchange inflows¹². The oil market has been volatile, affecting Nigeria’s economy in recent years, with falling prices and disruptions in production due to pipeline vandalism and theft. Government revenues have plummeted due to these factros, forcing the country to borrow money to fund its budget deficits.

(ii) Naira Depreciation

The depreciation of the Naira has been another major contributor to Nigeria’s debt woes. The currency has plummeted in value, leaving the economy reeling, and has made external debt repayments more expensive in Naira, further straining government finances¹³. The volatility in the exchange rate has also complicated economic planning and raised the cost of servicing external debt, which is denominated in foreign currencies.

(iii) Fiscal Mismanagement and Corruption

Years of fiscal mismanagement and endemic corruption have played a significant role in Nigeria’s growing debt. Poor budgeting, leakages in revenue collection, and the misappropriation of public funds have left the country with limited resources to address its financial obligations. This has worsened Nigeria’s reliance on debt to cover its shortfalls, creating a cycle of borrowing and repayment that has become unsustainable¹⁴.

(iv) Overreliance on Commercial Borrowing

While concessional loans from multilateral institutions typically offer favorable terms, Nigeria has increasingly turned to commercial borrowing with higher interest rates. The issuance of Eurobonds and other market-driven instruments has significantly raised the cost of borrowing. For example, Eurobond yields typically exceed 7%, much higher than concessional rates from bodies like the World Bank or IMF¹⁵.

5. Consequences of Default

(a) International Isolation

Should Nigeria default on its debt obligations, the country could face international isolation, as it was in the 1980s when the country struggled with debt servicing. A default would likely lead to a loss of access to international capital markets, severely limiting future borrowing options¹⁶.

(b) Seizure of National Assets

In extreme circumstances, Nigeria could face the seizure of state assets held abroad by creditors seeking to recover their investments. This was seen in the legal battles following the $9.6 billion arbitration judgment against Nigeria in the P&ID case in 2019¹⁷.

(c) Economic Crisis and Austerity Measures

A default or near-default scenario would require strict austerity measures, significantly cutting public spending and reducing subsidies. This would have a

severe impact on the poor, worsening unemployment, inflation, and poverty levels¹⁸.

(d) Increased Borrowing Costs

A default would cause a credit rating downgrade, increasing the cost of borrowing as investors demand higher yields to compensate for the increased risk. This would further escalate the debt burden, creating a vicious cycle of borrowing to meet debt obligations¹⁹.

6. Liabilities Beyond Debt

Nigeria’s sovereign debt includes significant contingent liabilities, such as guarantees for state-owned enterprises (SOEs) and state governments. These liabilities, if realized, could severely impact the country’s already fragile fiscal position. Additionally, obligations under public-private partnerships (PPPs) and other forms of off-balance-sheet financing would further strain the debt profile if poorly managed²⁰.

7. Recommendations for Reducing Nigeria’s Debt Burden

Nigeria must diversify its revenue base beyond oil to reduce its vulnerability to global market shocks. Expanding the agricultural sector, promoting technology and innovation, and integrating the informal economy could create new revenue streams²¹. Strengthening the tax base could generate significant additional revenue without borrowing, although it comes with its own hardship which the larger populace is at the receiving end of.

Debt Restructuring and Relief

Debt restructuring initiatives, similar to those taken by countries like Argentina and Greece, could provide some relief. Negotiating better terms on commercial loans and seeking extended grace periods or reduced interest rates would ease the immediate pressure to repay²².

Prioritizing Concessional Loans

To reduce the cost of borrowing, Nigeria should prioritize concessional loans from multilateral institutions such as the IMF, World Bank, and African Development

Bank (AfDB). These loans often come with lower interest rates and longer repayment periods, reducing the financial strain²³.

Strengthening Monetary and Fiscal Policy

Improving fiscal responsibility and monetary policy coordination between the Ministry of Finance and the Central Bank of Nigeria (CBN) is crucial. More prudent budgeting and better management of public funds will be key in avoiding waste and ensuring that borrowed funds are used effectively²⁴.

Transparency and Accountability

Ensuring transparency and accountability in the management of debt will boost investor confidence and reduce the cost of borrowing. Ngozi Okonjo-Iweala, former Minister of Finance and current Director-General of the World Trade Organization (WTO), emphasizes the importance of transparency and accountability in managing Nigeria’s loans. She states, “Without proper oversight, Nigeria risks falling into a perpetual debt cycle where the social benefits of borrowing are eroded by inefficiencies and corruption”²⁵. The Debt Management Office must regularly publish debt sustainability analyses, and legislative oversight should be strengthened to scrutinize new borrowing proposals.

8. Conclusion

Nigeria’s sovereign debt crisis presents significant challenges to its economic stability and growth. The escalating debt levels, driven by factors such as oil price volatility, Naira depreciation, fiscal mismanagement, and overreliance on commercial borrowing, have constrained the government’s ability to invest in essential services and infrastructure. Additionally, contingent liabilities from international arbitration cases exacerbate the fiscal strain.

However, by implementing sound fiscal policies, diversifying its revenue streams, and restructuring its debt, Nigeria can regain control of its financial future. Recommendations such as revenue diversification, engaging in debt restructuring with bilateral creditors, prioritizing concessional loans, strengthening monetary and fiscal policy, and ensuring transparency and accountability in borrowing provide a comprehensive roadmap for reducing the country’s debt burden.

¹Das, M. Papaioannou & C. Trebech, ‘Sovereign Debt Restructurings 1950-2010: Literature Survey, Data, and Stylized Facts.’ IMF Working Paper 12/03 (2012). Available at https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Sovereign-Debt-Restructurings-1950-2010-Literature-Survey-Data-and-Stylized-Facts-26190 last accessed on 12 September 2024.

²Debt Management Office (DMO) Nigeria (2023). Nigeria’s Total Public Debt Stock as at March 31, 2024. Available at https://www.dmo.gov.ng/debt-profile/total-public-debt/4731-nigeria-s-total-public-debt-stock-as-at-march-31-2024/file last accessed on 12 September 2024.

³IMF (2022). International Monetary Fund. Nigeria: Staff Report for the 2022 Article IV Consultation. Retrieved from https://www.imf.org/en/Publications/CR/2022/IMF-Staff-Report-for-the-2022-Article-IV-Consultation-Nigeria.

⁴Africa Development Bank (AfDB) (2022). African Development Bank Group. African Economic Performance and Outlook 2023. Available at https://www.afdb.org/en/documents/african-economic-outlook-2022 last accessed on 12 September 2024.

⁵Central Bank of Nigeria. (2024). Quarterly Statistical Bulletin, Q1 2024.

⁶Ibid

⁷Ibid

⁸Nairametrics. (2024). Nigeria’s Debt Service Report: How Debt Service Consumed 74% of Government Revenue in Q1 2024.

⁹International Monetary Fund, Nigeria: 2023 Article IV Consultation, IMF Country Report. Nigeria: Staff Report for the 2022 Article IV Consultation. Retrieved from https://www.imf.org/en/Publications/CR/2022/IMF-Staff-Report-for-the-2022-Article-IV-Consultation-Nigeria last accessed on 12 September 2024.

¹⁰Debt Management Office (DMO) Nigeria (2023). Nigeria’s Total Public Debt Stock as at March 31, 2024. Available at https://www.dmo.gov.ng/debt-profile/total-public-debt/4731-nigeria-s-total-public-debt-stock-as-at-march-31-2024/file last accessed on 12 September 2024.

¹¹Central Bank of Nigeria, Annual Economic Report 2023.

¹²International Monetary Fund, Nigeria: 2023 Article IV Consultation.

¹³Heinrich Böll Stiftung. (2023). Debt, Development, and Climate Challenges in Nigeria: Realities and Solutions.

¹⁴Central Bank of Nigeria. (2024). Quarterly Statistical Bulletin, Q1 2024.

¹⁵Heinrich Böll Stiftung. (2023). Debt, Development, and Climate Challenges in Nigeria: Realities and Solutions.

¹⁶World Bank, Nigeria’s Debt and Fiscal Management, World Bank Report.

¹⁷International Monetary Fund, Sovereign Default Risks in Sub-Saharan Africa.

¹⁸Process & Industrial Developments Limited v. Nigeria (2019).

¹⁹World Bank, Fiscal Adjustments and Debt Crises: Global Lessons for Nigeria.

²⁰Moody’s, Nigeria’s Credit Downgrade: Implications.

²¹African Development Bank, Public-Private Partnerships in Africa: Challenges and Solutions.

²²Heinrich Böll Stiftung. (2023). Debt, Development, and Climate Challenges in Nigeria: Realities and Solutions.

²³Debt Management Office, Nigeria Debt Restructuring Options.

²⁴African Development Bank, Concessional Lending and Debt Sustainability.

²⁵International Monetary Fund, Monetary Policy Coordination in Nigeria.