New Telegraph

Experts bemoan rising cost of debt servicing

…say crowd out effect hurting economy

 

With about N2.02 trillion committed by the Fderal Government to service debt in six months (January to June) out of which N612.712 billion went into domestic debt servicing between January and March, finance experts and economists have expressed concerns over the crowding out effects it could have on the economy and the attendant job losses it poses.

 

A recent debt data from the Debt Management Office (DMO) put Nigeria’s total public debt stock at N35.5 trillion as at June 30, 2021.

 

Of the sum, domestic debt component is N20.636 trillion (62.33%) while external debt is N12.470 trillion (37.67%).

 

The Budget Office of the Federation ( BOF) last month confirmed that the Federal Government committed N2.02 trillion to service debt in six months (January to June burgeoning public debt stock with specific reference to amount being committed to service both the domestic and foreign components, unanimously agreed that a situation where substantial chuck of resources goes into debt servicing was unhealthy for economy development.

 

They posited that beyond its unsustainability, investors are denied access to loanable funds at commercial banks, as people prefer to put their funds into government bonds, treasury bills and other instruments that yield substantial interest compared to keeping the money in banks, which attract little interest on savings.

 

Bearing his mind to New Telegraph on implicit cost of country’s debt profile and devoting large chunk of resources to service debt, a professor of capital market and a former Commissioner of Finance in Imo State, Prof. Uche Uwaleke, said Nigeria’s debt stock and the sum devoted to service were unsustainable. “‘The reality is that the country’s debt profile is becoming unsustainable.

 

The actual debt burden is not seen in the debt to GDP ratio, which is still within international threshold, but is manifested in the debt service to revenue ratio.”

 

“A situation in which the country spends over 90 per cent of its revenue just to service loans does not augur well for economic development. The huge sums of money, which go into debt servicing each year could have been spent on improving education and the health sectors.

 

“So, the opportunity cost to the country is quite high. This precarious fiscal position has arisen because, over the years, loan proceeds have not been rightly applied, especially in executing selfliquidating projects,” he said.

 

Asked the way forward, Uwaleke said: “The way forward is to set borrowing limits using debt service ratio rather than debt to GDP ratio as currently done by the DMO and to ensure that new loans meet set criteria including capacity to be repaid from revenue generated from such projects.

 

“The government should involve the private sector more in infrastructure financing to reduce the present burden it is carrying and the tendency to always borrow for capital projects.”

 

“Also, given that a lot of wastes and leakages are still associated with the public sector, the government should aggressively implement cost cutting measures and plug loopholes in order to free up funds for development projects.

 

This equally applies to state governments many of which are challenged by huge debts,” he suggested. On his part, an economist, Paul Alaje, said the unrestrained domestic borrowing by government was having a crowd out effect on the economy, stressing that loanable funds that should have been available to investors to borrow from the banks and invest leading to job creation have been invested in Federal Government’s bonds, TBs and other high yielding instruments of government.

 

“It is a function of trade off. Each time they borrow locally, and a country that has higher domestic loan, they are going to have what we call trade off effect.”

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