Africa’s Hidden Government Debt Burden

Nigeria’s accumulated government debt is just 18.6 per cent of its annual economic output, one of the lowest levels in the world, implying that its debt burden is more than manageable. But is this a fair reflection of reality?

Using a different metric, the Nigerian government’s gross debt is 320 per cent of its annual revenues, according to figures from Fitch Ratings, one of the highest figures in the world and comfortably above the median of 196 per cent for countries in Africa and the Middle East that are rated by Fitch.

The striking disparity stems from the fact that the Nigerian federal government’s annual revenues are a pitifully low 5.3 per cent of gross domestic product, well below an average of 44.5 per cent in the developed world and even the 25.8 per cent seen across Africa and the Middle East, according to Fitch’s data. Bangladesh has the next lowest ratio of the 115 countries rated by Fitch, at 10.4 per cent.

This in turn is related to the gargantuan size of Nigeria’s unregulated and untaxed informal economy.

An IMF working paper released this month* estimates that, between 2010 and 2014, Nigeria’s informal economy accounted for 65.1 per cent of the country’s GDP, by far the highest level in sub-Saharan Africa, as the first chart shows.

Divide Nigeria’s government debt burden by the remaining 34.9 per cent of its economy, the only part it is able to tax, and its debt/GDP ratio jumps to a far less comfortable 53.5 per cent.

“Nigeria looks exceptionally positive if you look at its debt/GDP ratio, compared to the median [50.6 per cent for Fitch-rated African and Middle Eastern countries], but it’s debt/revenue ratio is significantly higher, and that’s because it has a very large informal economy,” says Jan Friederich, a senior director in the sovereigns and supranationals group at Fitch.

“It’s always striking to see the level of government revenue in Nigeria in relation to GDP, which is very small.” While Nigeria is an outlier, John Ashbourne, Africa economist at Capital Economics, a consultancy, fears the large role the informal sector plays in many African economies means the standard debt/GDP measures paint a “flattering picture”. “The small size of formal economies has significant implications for sub-Saharan Africa’s debt outlook,” he says.

“The region’s public debts are small compared with notional total output, but are much more worrying relative to the size of the formal economy that governments could more easily call upon to meet their financial commitments.

“Firms and workers in the informal sector do not generally pay direct taxes, though they still consume government services. For the foreseeable future, the size of the formal sector is probably a better gauge of government’s available fiscal resources than the larger, but mostly inaccessible, total GDP.”

Read the full report on Financial Times