Debt, Development and Climate Challenges in Nigeria: Realities and Solutions

 

Nigeria’s ballooning debt burden is one of the key challenges the new government is facing. In July 2023, prominent civil society organizations came together to deliberate on this looming debt crisis in the context of the country’s social and climate challenges, and to explore potential remedies.

 

Nigeria’s ballooning debt burden is one of the key challenges the new government under the leadership of President Bola Tinubu is facing. In September 2022, the country’s debt reached a historic high of 44 trillion Naira. If the Ways-and-Means advances from the Central Bank are included, this figure jumps to 77 trillion Naira. While the debt-to-GDP ratio remains below the self-imposed 40% mark, debt servicing costs have reached worrisome levels. In 2022, Nigeria at the federal level spent more than 80% of its revenue on service debt.

 

Not least due to the significant debt burden, Nigeria lacks the fiscal ability to fulfill its commitments to achieve the Sustainable Development Goals (SDG) and contribute to the attainment of the climate goals of the Paris Agreement. Instead of making accelerated progress, the country, like many others on the continent, is regressing during what the United Nations has termed a “Decade of Action”.

 

The investment required for Nigeria’s development and climate commitments appears more daunting than ever before. The estimated financing gap for Nigeria to achieve the SDGs by 2030 is 125 trillion Naira, while the estimated cost of implementing the country’s Nationally Determined Contribution is 74 trillion Naira, which would lower Nigeria’s emissions by up to 47% by 2030.

 

Against this backdrop, the undersigned organisations met from 19-20 July 2023 at a conference to unpack Nigeria’s debt situation in the context of the deepening debt, social and climate crisis on the African continent and to discuss proposals and processes that offer possible solutions to the debt situation, taking into account development imperatives and climate challenges.

 

Key Observations

 

Nigeria’s public debt has sharply increased over the last decade. Debt as a share of GDP has more than doubled from 17.7% in 2012 to 37.3% in 2022. Deficit financing has risen by about 370% from 2.41 trillion Naira in 2016 to 11.34 trillion Naira in 2023. This puts serious limitations on the public finances of the country at a time of increasing social hardship (driven by inflation) and accelerating climate change impacts.

The external to domestic public debt ratio remains favourable at about 40:60, but the structure of Nigeria’s external debt has fundamentally changed, with multilateral and commercial debt making up a significant proportion (about 90%) compared to the early 2000s. Bilateral debt is largely owed to China rather than the countries of the Paris Club.

Interest payments as share of public revenue has skyrocketed (peaking at more than 90% in 2022), leaving little to key sectors like health, education, agriculture or infrastructure. Private creditors’ loans currently constitute 40% of the external debt stock, and due to the high-interest rate, 70% of external debt servicing goes to commercial creditors.

Adhering to relevant legal and institutional fiscal frameworks is important in the context of high and rising debt levels. Although the country has a comprehensive legal framework that specifies processes and obligations of government entities to manage debt, these are not always complied with. For example, annual borrowing plans are not made available to the public and borrowing occurs without being attached to any particular projects, contributing to a lack of transparency and accountability.

The high debt levels are also a function of poor revenue mobilisation through taxes and other means. General government revenue in Nigeria was 7.3% of GDP for 2021 – less than half of the average in countries belonging to the Economic Community of West African States (ECOWAS).

Nigeria’s economy, already in poor shape then, was severely hit by the Covid-19 pandemic in 2020. Although the economy has grown modestly at just over 3% per annum since then, price shocks caused by the war in Ukraine, historic floods, and poor government policy decisions have exacerbated the situation. As a result, an additional 5 million people have fallen into poverty in 2022, increasing the total to approximately 95 million Nigerians. Nigerian women bear the brunt of this concerning poverty trend.

The medium to long-term economic outlook for Nigeria is concerning. The physical (i.e., natural disasters) and transition (i.e., global energy transition) impacts of climate change threaten public finances. It has been estimated that fossil fuel-reliant countries like Nigeria could see up to a 51% drop in government oil and gas revenues in a shift to a low-carbon world over the next two decades. This comes on top of the physical risks inherent to a rapidly changing climate, as exemplified by the massive damage caused by the 2012 floods that caused damage of about 2.6 trillion Naira (with flooding of similar devastation occurring again in 2022).

Nigeria’s deepening debt crisis does not occur in isolation. High fiscal deficits (expected to narrow to -4.8% in 2023) in African countries have made it difficult to build resilience and tackle the multiple shocks (i.e., Covid-19 pandemic, natural disasters). In 2022, eight African countries were in debt distress and thirteen were at high risk of debt distress. 144 million non-poor were at high risk of falling into poverty, implying that 10% of Africa’s total population was vulnerable to falling into poverty.

The global financial architecture that has been in existence since the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI) processes profits from debt. There has been very little movement in furthering the reform of the debt architecture and its actors such as the credit market behaviour, credit rating agencies, arbitration and mediation mechanisms for restructuring, and safeguarding clauses in debt contracts. This system has allowed the systematic indebtedness of vulnerable countries on the African continent to borrow at wanton levels with little accountability.

Power imbalances remain in the debt architecture, resulting in relief measures developed at appeasing primarily the interests of lenders. The G20’s Common Framework for Debt Treatment, the international response to the deepening debt crisis in the Global South, has been criticized for not going far enough, leaving middle-income countries like Nigeria out of relief, among other issues. The Common Framework is an example of how debt relief is designed to protect creditors and not citizens who carry the burden of debt. It also lacks incentives and mechanisms to bring debtor governments and private creditors together.

This situation has led to calls for substantive international debt relief initiatives and reforms of the multilateral financial architecture from, among others, the Vulnerable Twenty (V20) Group of Ministers of Finance of the Climate Vulnerable Forum, the Bridgetown Initiative and the United Nations (see below for details).

The National Assembly should review the existing legal and institutional frameworks relevant to debt management with the view of closing existing loopholes and strengthening transparency and enforcement. For example, the Fiscal Responsibility Commission and Debt Management Office should be empowered to sanction breaches of existing laws and regulations. Lawmakers should carry out loan approvals with proper scrutiny and approvals be subject to public hearings and input. Public disclosure of, for example, the terms and conditions of loans, and borrowing plans are critical steps to increase transparency and accountability in Nigeria.

The Ministry of Finance, Budget and National Planning and its Agencies need to boost revenue generation. This should include improving tax compliance by reinforcing the revenue administration and by reviewing tax incentives given to the private sector. There is also potential for harvesting revenue from carbon and other pollution taxes. The plans by the National Council of Climate Change (NCCC) to unveil a carbon tax policy are a welcome development in this regard. Any changes to the tax system should be guided by progressive taxation principles that protect low-income earners and the poor.

The Nigerian government and its decision-makers should reduce its reliance on borrowings from the international capital market and commercial loans. There is a need to more strictly adhere to the provision of the law on maintaining concessional loans.

Nigeria is a leading economy and political power on the African continent. President Bola Tinubu was recently chosen as chair of the Economic Community of West African States (ECOWAS). Given the country’s physical climate and transition risks, the Nigerian government should use its position and influence to help champion initiatives that seek to reform the international financial architecture in a way that will help to make it fairer and fit for the climate. Specifically, Nigeria should join the Emergency Coalition for Debt Sustainability and Climate Prosperity led by the V20, rally behind the Bridgetown Initiative and actively engage in the reform package on the international financial architecture suggested by the UN Secretary-General.

We support the key demands of these initiatives, which include among others:

An enhanced Debt Sustainability Analysis that integrate climate and other sustainability risks, and climate resilience benefits, as well as estimates of a country’s financing needs for climate change adaptation, mitigation, and achieving the broader goals set out in the 2030 Agenda for the SDGs;

Access to debt restructuring for all debt-distressed, climate-vulnerable low and middle-income countries, and a speeding up of debt relief talks;

A debt restructuring framework that incorporates adequate incentives to ensure private creditors participate and bear a fair share of the burden;

A departure from regressive conditions attached to debt restructuring frameworks (i.e. cutbacks on social spending), giving room to countries to develop their own plans to advance development and climate resilience (guided by SDG commitments and NDCs);

The inclusion of disaster clauses in lending deals with public and private creditors to allow countries to divert debt payments to disaster relief;

The possible establishment of a new Global Debt Authority, designed to operate in an inclusive manner, independent of creditors or debtors, and the development of an international legal framework for sovereign insolvency.

China as Nigeria’s largest bilateral lender should be engaged in discussions on debt restructuring alongside the above initiatives.

Any proceeds from potential debt relief to Nigeria should be ring-fenced in a “Green and Inclusive Recovery Fund” managed under the oversight of the National Council of Climate Change (NCCC) and Debt Management Office (DMO). In order to ensure the impact of releases from the fund, a stringent monitoring and accountability framework should be put in place. Such should allow for citizens’ voice and participation, easy tracking of projects by interested stakeholders and ensure value for money.

Some of Nigeria’s existing commitments that would lend themselves as priority measures to be financed by such a fund include: generating renewable electricity both on and off-grid (minimum of 30% of on-grid electricity from renewables); elimination of diesel and gasoline generators for electricity generation by 2030; plant 300 million trees (this decade) and promote agro-forestry, reforestation and afforestation, including community-based forest management and recovery; end (associated) gas flaring by 2030; and reduce biomass cooking from the current 72% of the population to 20% of the population by 2030 (introducing clean cooking into 30 million households).

The summit for a New Global Financing Pact that took place in Paris at the end of June provided some important momentum to the discussion on reforming the international financial architecture in a changing climate. However, the summit was unable to agree on a deceive debt relief plan debt. Urgent action is necessary to provide increased levels of climate finance. This financing should have a greater emphasis on grants and concessional loans to avoid a deepening of the debt crisis.