Slew of Multilateral Debt: Effective or a Drag on Long Term Growth?

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The National Bureau of Statistics (NBS) recent release of the country’s debt stock data for Q4-2020 reported that Nigeria’s public debt stock rose 20.1% y/y to N32.9tn, while the FG’s debt burden rose 23.4% y/y to N26.9tn at the end of 2020.

The economic decline resulting from COVID-19 combined with the global fall in oil prices strained the Nigerian economy and fueled the surge in total debt.

Nigeria’s public debt continues to rise
Total Public Debt (N’tn)

Slew of Multilateral Debt: Effective or a Drag on Long Term Growth?
Sources: NBS, United Capital Research

Notably, Nigeria relied on a slew of multilateral borrowings to reflate the economy, in 2020 Nigeria accessed borrowings from the IMF ($3.5bn), World Bank ($1.4bn) and the AfDB ($0.3bn) which drove debt levels higher.

Considering the snail pace recovery, the economy is witnessing, rising external debts could curtail the pace of growth in the long run, considering that the bulk of these borrowings were channelled into covid-19 intervention efforts rather than long term capital investments.

The long-term cost of external debt can be viewed in several ways: First, servicing external debt requires a foreign currency which depletes the external reserves, limiting the firepower of the central bank. Yet, the dollar crisis in Nigeria remains a huge concern.

Recently, Fitch downgraded Nigeria’s credit rating deeper into “junk” territory, rating it a “B” citing weaker valuation of the naira.

Meanwhile, the increase in Nigeria’s debt stock also reflects the impact of the devaluation of the Naira (from N306.0/$ to N379.0/$ at the official window).

Finally, while Nigeria’s debt-GDP ratio settled at 21.6% as of 2020 (from 18.8% in 2019), debt servicing accounted for 83% of total revenue in 2020.

Clearly, this means that the government will be left with little or nothing in terms of its financial capability to prop up the economy without further borrowing thus clogging the pace of growth in the long run.