Is debt really bad for Nigeria?
A jenga with blocks swapped out for currency notes

Ghana is in a debt crisis. Nigeria is still debating whether it is in one, too.
 

Key takeaways:

  1. Borrowing is second nature to sovereigns across the world. But African countries like Nigeria and Ghana shy away from the conditions in which it is wise to borrow.

  2. Governments should borrow for important things. But even when debt is used for productive purposes such as infrastructure or education, it may not always be a wise decision.

  3. All debt comes at an additional cost and must eventually be repaid. So, sovereigns should borrow when their financing alternatives are more expensive than their debt and when they are confident of higher earning potential in the future.

 

Enduring concerns about Nigeria’s debt has polarised debt conversations and fueled an anti-debt narrative. This is misplaced. Sovereigns like Nigeria need debt.

Debt accumulation is as close as we get to magic in economics. You have a sovereign whose budget is constrained by its existing population, economy, and tax collection institutions. When it borrows, that sovereign expands its borrowing constraints by taking money from a future self that is less constrained by these factors.

This simple truth—debt expands a country’s intergenerational budget constraint and allows it to develop quicker—has played out over the past 5,000 years of human existence.

No surprise that countries like Nigeria want a piece of the action.

Despite the valid concerns about a growing anti-debt rhetoric on the continent, the truth is that few countries need to be encouraged to take on debt; for good or ill, borrowing is second nature to most sovereigns. In this context, it is more useful to highlight why they ought to be wary of borrowing and the conditions under which it is wise to do so.

Debt sustainability is a key part of public finance and millions of words have been written

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Michael Famoroti

Michael Famoroti

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