President Tinubu has requested the Senate's approval for approximately $21.5 billion as part of the 2025-2026

The federal government's latest borrowing plan. 

President Tinubu has requested the Senate's approval for approximately $21.5 billion as part of the 2025-2026 borrowing strategy. To delve into this further, I have Mr. Paul Alaj, a chief economist at SPM Professionals, with me. Good morning, Mr. Alaj. Thank you for joining the show.

It seems that debt is becoming a major headache for governments worldwide. For instance, the national debt in the U.S. currently stands at around $36.56 trillion, and Moody's has recently downgraded their credit rating. How do you see all of this unfolding, considering that governments must continue to borrow?

Clearly, the current government has little choice. The budget projections indicated that crude oil would be priced around $75 per barrel. Unfortunately, as of now, it's hovering around $65 per barrel. Additionally, while the government estimated a production of 2 to 2.1 million barrels per day, the latest figures from the Bureau of Statistics show we're averaging only 1.44 million barrels daily. This discrepancy leads to a significant shortfall.

To cover this gap and fulfill the necessary allocations in the 2025 budget, borrowing is inevitable. Alternatively, the government could consider quantitative easing, but we've seen how such measures can negatively affect the economy. One major contributing factor to the current economic situation is the global economic downturn, which is posing significant challenges.

While the U.S. continues to borrow, it's essential to be cautious in seeing their situation as a model. The U.S. has the unique ability to issue dollars, which can help it manage its debts. In contrast, Nigeria's borrowing situation differs due to various factors. The proposed borrowing could push Nigeria’s debt profile to over 180 trillion naira, and projections suggest it could exceed 200 trillion naira by the end of 2026. This raises concerns about debt servicing; as conditions worsen, the cost of servicing these loans may increase, potentially raising our debt service-to-revenue ratio from about 68% to above 70%.

So, is debt inherently bad or good? In economics, debt itself is neither. What truly matters is how the borrowed funds are utilized and how they relate to economic growth. In Nigeria, our debt-to-GDP ratio is above 30%. While this is a necessary consideration, it is not sufficient on its own. Ideally, the debt service-to-revenue ratio should not exceed 33%. Currently, Nigeria's ratio stands at 68%, an improvement from two years ago when it was 98%. This means that a significant portion of our revenue goes toward servicing debt, including payments for public servants and other obligations.

We are borrowing more money primarily due to insufficient revenue. This leaves us with two critical concerns: the need to spend on infrastructure and the importance of being cautious about the interest on these borrowings. 

Given that most countries, especially major economies in Africa and beyond, are grappling with debt, what happens if the global situation doesn’t improve?

If the current scenario continues, we could face a recession. We would also likely see high inflation and currency depreciation. However, countries that effectively invest their debts back into their economies, like the UAE, may not experience as much pressure. Therefore, it's crucial to evaluate how we've utilized the debts we've accrued over the past 10 to 20 years. What tangible benefits have we derived from these borrowings beyond mere debt repayments?