The Causes of the Nigeria Debt Crisis: What You Need to Know
The Nigeria debt crisis is an incredibly complex issue that has the potential to impact everyone in Nigeria. It's important to understand why it happened and what can be done about it. In this blog post, we'll give you a brief overview of the causes of the crisis, how bad it could get if nothing changes, and what options are available for fixing the problem. We're not financial experts or economists by any means but we've researched this topic extensively so that we can provide accurate information on a complicated subject matter. Please feel free to share your thoughts in the comments section below!
Section 1: What is the Nigeria Debt Crisis?
Who is Buhari, and why is he so confident in his ability to deal with Nigeria's debt crisis?
Many people in Nigeria are surprised to find out that Buhari is not new to Nigerian politics. This is why there was such a fierce backlash from Nigeria's financial sector after Buhari took office in 2015. Buhari served as the Minister of Petroleum in the late 1990s. This time around, he became an investor in the nation's oil industry and President of Nigeria as a whole.
He won the presidency partly due to Nigeria's international oil reserves. In fact, the Federal Government of Nigeria has the sixth largest reserves of any nation in the world. While the reserves are an asset for the nation, they're also the single largest debtor in Nigeria.
A Brief History of the Nigerian Economy
Once upon a time, Nigeria was a prosperous country. Between the years of 1910 and 1950, it enjoyed a thriving economy which was driven by oil, agriculture, and tourism. Due to the development of the industrial revolution, this trend started to change towards the end of the 20th century. Most of Nigeria's economic activity shifted from agriculture to industry, with the oil industry emerging as the dominant economic sector in the country.
But just like many other countries in the world, Nigeria faced a recession in the early 2000s. The oil prices collapsed in the late 1990s and the economy was hit hard. Production levels in the country started declining and the government adopted a number of measures to address the issues faced by the government.
The 1991 Oil Price Shock
In the 1980s and 1990s, the oil-rich nation of Nigeria was on the cusp of joining the developed world. A period of economic growth led to widespread poverty and poverty alleviation programs like the "Church Plan" and Npower started. By the late 1980s, Nigeria was the 11th largest economy in the world and had become a net exporter of refined petroleum products. There was a growing belief that Nigeria could become a "Middle Income Country" (or an advanced economy) by the year 2000.
However, the price of crude oil began to drop in the early 2000s. Suddenly, Nigeria didn't have as much money to pay for goods from its oil-producing neighbors.
The Economic Reform Programme of 1999
Following the end of Nigeria's "civil war" in the late nineties, the country had a very difficult time getting back on its feet financially. A small group of wealthy and powerful Nigerians had very generous and highly-visible budgets, but the majority of Nigerians had no such luxury. During Nigeria's early recovery years, many Nigerians used their meager incomes to help the less fortunate. This led to some unpleasant side-effects: massive inflation, banks defaulting on their loans, and the need to invest in foreign currency, as most small businesses and farms weren't interested in building their businesses with scarce local currency.
The 2007-2008 Oil Price Shock
The Niger Delta is a swampland located in the southeast of Nigeria that produces 80% of Nigeria's oil. It contains some of the richest natural resources in Africa. A deep, oil-bearing well was discovered there in 1956 and by the 1980s, many wells were operational. The oil industry provided billions of dollars to the country and helped fund development projects.
The Niger Delta is, however, a very dangerous place. It is prone to environmental degradation and violent conflicts between its indigenous peoples (called the Ijaw) and oil companies. In 2007, militant groups within the Niger Delta began attacking oil facilities, causing the price of oil to drop. At that time, oil revenue accounted for about 80% of Nigeria's annual budget.
Why the crisis is worse now
The Nigeria debt crisis is a result of about 200 years of mismanagement. Prior to independence, Nigeria's colonial masters borrowed heavily from London and the US, just like almost all African nations at the time. These loans were taken out based on promises of future earnings, with little or no regard to the needs of the colony.
When Nigeria gained independence in 1960, she had a debt of 5 billion pounds. By the end of 1980, Nigeria's debt had risen to 1.9 billion pounds. By 1986, Nigeria's debt had grown to 3.5 billion pounds. By 1997, Nigeria's debt was 7.5 billion pounds. By 2010, Nigeria's debt had grown to 38.6 billion pounds, with a deficit of 10.5 billion pounds (in purchasing power parity, or PPP).
This trend continued with devastating effects on the country.
The Impact on Individuals
"Good debt" (good for you)
The first cause of the Nigeria debt crisis is the over-reliance on domestic debt to fund the government's spending. The government makes up 30% of Nigeria's GDP and spends a lot of money every year on things like healthcare, roads, education, and social welfare. Although Nigeria was a very wealthy country before the civil war, it had no capital markets. The government relied heavily on domestic borrowing to fund its budget. In 2000, the government issued a national currency called the Naira that has since been the most widely used currency in Nigeria.
Unfortunately, government and domestic debt take a very long time to pay off and the interest rates charged are high.
How will it affect your personal finances?
With so many people in Nigeria and Nigerians living across the world, this will have a massive impact on millions of people. Those of us living in Nigeria and Nigerians living abroad are all at risk of a massive interest rate hike which will further impact our already-poor money supply situation. And as this becomes more and more prevalent, we'll all be feeling the effects.
While Nigerians living abroad are usually happy with the current economic situation and earn high salaries and bonuses, we should keep in mind that we're not on the same level as our counterparts back home and are at risk of taking the kind of big hit we'd expect them to.
What are the economic implications for you?
Unbridled borrowing from foreign banks and debt forgiveness
The lack of structural economic reforms
The mismanagement of oil revenue
The diminishing ability to grow the non-oil economy
The high level of corruption in the Nigerian government
Suspension of payments to the IMF and World Bank
You should care about Nigeria because the debt crisis is a huge problem for the people of Nigeria. Let's start with the most important point: The Nigeria debt crisis has a negative impact on virtually everyone in Nigeria. The Nigerian government can't be sure of receiving revenue from oil exports every month. The lack of income could easily force the government to default on its debt payments, which could have catastrophic implications for the economy and the daily lives of Nigerians.
The Impact on Businesses
Let's start with the basics. Why are Nigeria's debts so high? The answer to this question, of course, is that Nigeria's oil wealth was spent almost entirely on items that can be purchased with borrowed money, including military weapons, infrastructure projects, and luxury items like private jets. The consequence of this spending was a rapid economic boom in Nigeria which was accompanied by a massive consumption boom.
Unfortunately, this spending also led to the "debt overhang" that is the root cause of Nigeria's current debt crisis. As oil prices rose over the past 15 years, Nigeria borrowed more and more money to fund the purchase of new military equipment, to build new highways, to import luxury goods, and to fund new infrastructure projects.
How will it affect your business finances?
The Nigerian debt crisis is a very serious problem for the nation's ability to grow and develop its economy. A large percentage of the debt is owed to international lenders, including the IMF, World Bank, and Eurobond investors. If these creditors ever decide to pull out of their loans, that would be a devastating blow to Nigeria's financial health.
How much debt does Nigeria have?
According to the latest report from The Debt Management Office (DMO), Nigeria's total debt stands at $75 billion (or N28.4 trillion) at the end of August 2018.
When it comes to managing money, it is always better to be informed. Therefore, we recommend that you do some independent research and verify some of the information presented below. However, some of the information below comes from reputable sources like the IMF, the World Bank, the Ministry of Finance of the Federal Republic of Nigeria, the Debt Management Office of the Federal Government of Nigeria, and the Office of the Head of the Civil Service of the Federation of Nigeria. Please note that this blog post is not financial or investment advice; it is merely a review of available data.
What is the Nigerian Debt Crisis?
It is important to note that the Nigerian debt crisis is not a problem with the Nigerian government. All the debt is owed by the private sector.