Fiscal irresponsibility: FG to pay 153% interest on external debt

The Federal Government’s inability to service Nigeria’s external debt has increased interest on principal by 152.29 percent, according to the Debt Management Office (DMO).

Data from the DMO show that by the end of 2022, total external debt stood at $2.29 billion, of which $902.24 million was the principal and $1.38 billion the interest accrued on the principal. This implies that the interest is 152.8 percent (approx. 153 percent) of the principal by the end of 2022.

In essence, the opening and closing balance of the principal remained the same by the end of 2022 because the amount paid as debt service covered only the interest that had accrued over the years.

The DMO indicated that the principal was $906.24 million. Interest accrued on principal stood at $1.38 billion. By the end of 2022, $98.75 million was spent servicing the interest incurred. This puts external debt servicing at 7.13 percent of the interest. 

While the country plans annually to commit resources to service its debt, it has been unable to offset them, leading to a continuous growth of interest on the principal.

The budget implementation report from the Budget Office of the Federation shows that the FG spent slightly above its budget servicing external debt. This was the case in each year reviewed, aside 2020 and 2022 (with figures for 2022 from January to June only).

Thus, while data support the FG’s diligence in servicing its external debt annually, interest on these debts has continued to grow, surpassing the principal. One of the factors contributing to this is the exchange rate of the naira to the dollar, according to economists.

The weakening of the naira to the dollar affects external debt repayment as it increases the amount to be spent servicing the debt annually. For instance, the loan received in 2015 was at an exchange rate of N192.6. A three-year grace period meant servicing of the debt began in 2018. Thus, the FG will now have to service the debt at N305.6, the exchange rate at 2018, rather than N192.6, the rate at which it was borrowed.

Naira has weakened from less than N200/$ to over N460/$ in the last eight years.

A development economist and lecturer, Dr Princewill Okwoche, said this kind of situation would occur when a loan was collected at an lower exchange rate and paid later at a higher exchange rate.

“The government can find itself in a situation where it pays more as the exchange rate increases. Though there might be other contexts to this, it’s not possible for the government to have an obligation to repay its loan at a fixed or predetermined rate,” he said.

Dr Okwoche noted that this had increased the burden of external debt servicing as the value of the naira had weakened to the dollar.

To address this, he said the Federal Government must tailor its budget for debt servicing to the current exchange rate in line with existing realities.

A fiscal policy expert, Mr Samuel Atiku, said that this was a big issue as the country’s budget was being prepared in naira.

He explained that if the government was unable to generate projected revenue, it would eventually borrow the balance to augment its revenue. This, he said, also was bound to increase the debt.

He, however, said that the loan arrangement always fixed when the principal would be paid.

“Like bonds and other securities, you only pay the principal at the bond’s expiration, as the interest is what is serviced annually. In some cases, the FG buys off the bond at expiration in the open market. That’s why the sinking fund concept is put in place to manage this kind of security, but its poor implementation is the reason why we have this situation,” he explained.

Mr Atiku said some conditions attached to multilateral and bilateral loans raised questions about their transparency, noting that the FG’s information about its debt was not comprehensive and transparent enough, thereby generating many controversies.