Thoughts on MTEF. 2 of Many: Debt Issues and the folly of the debt to GDP ratio

One from December 2015 but still relevant in light of the finance ministers recent exposé on debt sustainability.

I understand the rationale of the FGs plan to spend it way out of a downturn. Convention policy suggests you spend during downturns and save during boom times. And by implication; increase debt during downturns and pay down debt during boom times. The so-called countercyclical fiscal policy.

Of course things in Nigeria always have k-leg. As we now know, the FG didn’t save during the $100 per barrel oil boom times. The excess crude account is on its last leg and the SWF is miniscule. The FG also increased debt massively during the $100 oil boom times, contrary to what you would expect (or maybe not).

The rationale for increasing debt during the boom times was the low debt to GDP ratio. Officially Nigeria’s debt to GDP ratio was about 11.8% of GDP in 2006 falling to 1.7% of GDP in 2014, mostly due to the GDP rebasing exercise. The absolute values of debt actually increased during the period.

The thing is, the debt-to-GDP ratio is a meaningless statistic for most countries. What really counts for debt sustainability is the debt to revenue ratio, and the debt serving costs. For advanced economies, the debt to GDP ratio makes sense because tax revenue is strongly linked to GDP. If GDP grows, tax revenues grow as well. But for Nigeria tax revenue is not even remotely linked to GDP. First the federal government only collects about 1% of GDP in taxes. Of that 1% a huge chunk is simply oil revenues.

What does Nigeria’s current debt to revenue ratio look like in comparison to other countries? Based on actual 2014 FG revenue of about N3.287tn and a FG debt stock at the end of 2014 of about N8.8tn, then debt was about 270% of revenue. Note: this was before the oil price and government revenues really collapsed. To get some perspective; Greece had a debt to revenue ratio of about 580%, Italy about 312%, Portugal about 345% and Spain about 251%. Recall these were the so-called PIGS countries with debt issues that caused the EU headaches. So although the debt-to-GDP level is low, the debt to revenue levels suggest Nigeria is at the cusp of debt problems.

The silver lining is that there is a lot of room to grow taxes and by implication increase the space for increasing debt levels. Tax revenue is still just about 1% of GDP and so growing that should reduce the debt burden on the budget. Growing that is difficult though. Before the FG goes on a borrowing and spending spree it needs to think really hard about how to raise taxes, of course without really harming the economy.

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