The disruption in supply chain and sky rocketing energy prices due to Ukraine-Russia conflict along with rising debt service to China are accentuating the problems of Nigerian economy, which is struggling for recovery after falling into recession in 2019 and 2020. Despite Nigerian economy showing signs of recovery in the first quarter of 2022 with 3.6% growth in GDP due to a broad based recovery in the services and agriculture sector among others, its lead sector, i.e., oil is still depressed. Nigeria is heavily dependent on crude oil exports for the bulk of government revenues and foreign exchange reserves.
However, the nascent economic recovery of Nigeria is facing several challenges that could disrupt the stability and growth of the country. According to World Bank’s Economic Outlook June 2022, inflation in Nigeria reached 17.7% in the May 2022 led by a renewed surge in food prices exacerbated by the war in Ukraine. The World Bank has also cautioned that despite significant reduction in the current account deficit in 2021 due to import compression and higher net oil balance and continued improvement in trade balance in 2022, the foreign exchange position in the country remains precarious.
The country’s foreign exchange reserve fell to USD 39 billion in April 2022 and the FDI (Foreign Direct Investment) declined remarkably by 49% to about USD 77 million. Its currency Naira lost value to about N.600/dollar from about N.350/dollar in 2019. Nigeria is now ‘High Risk Business Environment’ category which has dampened foreign capital inflow considerably.
Added to Nigerian woes is the massive debt servicing to the Exim Bank of China. It is estimated that the Nigerian government has paid about USD 210 million to Exim Bank of China in 2021 as repayment of loans for different projects which included Airport Terminals, communication systems, water & electricity distribution, railways, etc. It still owes about USD 3.67 billon to China. As per some research reports, Nigeria would require another 25 – 30 years to pay off billions of loans that it owes to China, provided Abuja does not seek further loans from Beijing.
The Chinese loans which came handy for Nigeria due to willingness of the former in the back drop of inadequate loans flowing from the World Bank or African Development Bank. But Chinese loans have many disadvantages. Majority of these loans have a duration of 5 – 20 years with the interest rates ranging from 2.5% – 3% which is considered to be very high for funding of long gestation period development projects. China exploited Nigeria’s fund requirement for infrastructure development on hard commercial terms.
Nigeria is lagging behind in financial management and is required to close the infrastructure gap estimated at USD 150 billion annually over the next 30 years. Due to recession-led crunch of capital, Nigeria took loans from China to invest in infra projects, transport sectors, energy, agriculture, ICT, water projects, etc., but when it comes to debt servicing, it is putting extra financial burden on the country which is already facing a depletion in its foreign exchange reserves and fall in revenue. The country still faces scarcity of capital for bridging infrastructure gap and so Abuja recently sought approval of Parliament for USD 16 billion loan out of which about 78%, USD 12 billion, would be sourced from China.
Economists have warned Nigeria of over borrowing from China and its increased reliance for external loans which could adversely affect the country’s political and economic sovereignty. In 2020, National Assembly also raised alarm over sovereignty clause in Chinese loan agreement. There were also disturbing allegations about China having interest in sponsoring a candidate for the office of President of Nigeria covertly.
However, overtime Nigeria’s dependence on China has increased. Of about USD 19.23 billion bilateral trade, China share is more than 86% which is highly unfavourable to Nigeria. Besides, the Chinese companies are said to be exploiting the Nigerian workers with low pay & allowances and without involving in policy making/decisions or transfer of technology. Besides, there are complaints on and off against Chinese companies over the rise of fake and poor quality products being shipped into Nigerian markets.
In May 2022, the Pan-African Credit rating agency, “Augusto & Co.”, in its research report revealed that Nigeria’s total debt has increased by 226% in the last seven years and the country faces challenges for managing fiscal consolidation and debt sustainability in the face of financial constraints. It is not only Nigeria but many African countries are also facing the mounting debt servicing on Chinese loans. They have continuously raised fear over clauses in the loans that called for ceding sovereignty of assets in case of failure to service the debt. A lot of African countries are also likely to default on the loans mainly due to financial mismanagement, recession and corruption.
Experts have warned that the Nigerian government to immediately seek a debt moratorium and reduce funds expended on debt servicing. In 2021, Nigeria spent USD 598.5 million on servicing the debts owned by the World Bank and Exim Bank of China. The International Monetary Fund has cautioned Nigeria to rationalize its loan portfolio as the nation is spending 85.5% of its revenue on servicing debt.