… let’s say that the crowding out effect harms the economy
With around 2.02 trillion naira committed by the federal government to service the debt in six months (January to June) of which 612.712 billion naira went to service the domestic debt between January and March, financial experts and economists have expressed concerns about the foreclosure effects it could have on the economy and the job losses it entails.
Recent debt data from the Debt Management Office (DMO) puts Nigeria’s total public debt stock at N35.5 trillion as of June 30, 2021.
Of the sum, the domestic debt component is 20,636 billion naira (62.33%) while the external debt is 12,470,000 billion naira (37.67%).
The Federation Budget Office (BOF) confirmed last month that the federal government had committed to paying 2.02 trillion naira to service the debt in six months (January’s booming public debt stock). to June with specific reference to the amount committed for the service of domestic and foreign components, unanimously agreed that a situation in which a large share of resources is devoted to debt service was unhealthy for economic development.
They postulated that beyond its unsustainability, investors are denied access to loanable funds in commercial banks, as people prefer to place their funds in government bonds, treasury bills and d ‘other instruments that earn substantial interest compared to keeping money in banks, which attract little interest. on savings.
Bearing in mind the New Telegraph on the implicit cost of the country’s debt profile and devoting a large part of the resources to debt servicing, a capital market professor and former Imo State finance commissioner Professor Uche Uwaleke said Nigeria’s outstanding debt and the amount spent on service was unsustainable. “The reality is that the country’s debt profile is becoming unsustainable.
The real debt burden is not visible in the debt-to-GDP ratio, which is still within the international threshold, but manifests itself in the debt service-to-revenue ratio.
“A situation in which the country devotes over 90% of its income solely to servicing loans does not bode well for economic development. The huge sums of money that are spent on debt servicing each year could have been spent on improving the education and health sectors.
“So the opportunity cost for the country is quite high. This precarious budgetary situation is due to the fact that, over the years, the loan proceeds have not been correctly applied, in particular in the execution of reverse charge projects, ”he said.
Asked about the way forward, Uwaleke said: “The way forward is to set borrowing limits using the debt service ratio rather than the debt to GDP ratio as the DMO currently does and s’ ensure that new loans meet defined criteria, including the ability to be repaid from the income generated. such projects.
“The government should involve the private sector more in the financing of infrastructure in order to reduce the current burden it carries and the tendency to always borrow for investment projects. “
“In addition, since a lot of waste and leaks are still associated with the public sector, the government should aggressively implement cost-cutting measures and fill the gaps in order to free up funds for development projects.
This also applies to state governments, many of which face huge debts, ”he suggested. For his part, an economist, Paul Alaje, said that the government’s unlimited domestic borrowing was crowding out the economy, noting that loanable funds that should have been made available to investors to borrow from banks and investing, resulting in job creation have been invested in federal government bonds, TBs and other high yield government instruments.
“It’s a function of compromise. Anytime they borrow locally and in a country that has a higher domestic lending, they’re going to have what we call a trade-off effect. “
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