he Nigerian government has proposed a Debt-For-Climate (DFC) Swap deal, as an easy option out for its mounting public debt which peaked at N41.6 trillion in the first quarter of 2022.
The DFC swap is believed to have the potential of becoming a useful instrument to expand the fiscal space for underfunded climate investments. This instrument represents an exchange of the existing debt contract with a new one, where the previous contract is normally discounted.
Typically, the creditor country or institution agrees to forgive part of a debt, if the debtor country would pay the avoided debt service payment in a local currency into an escrow or any other transparent fund and the funds must then be used for agreed climate projects in the debtor country.”
Delivering a lecture last Thursday at the Center for Global Development in Washington D.C, the U.S., Nigeria’s Vice President Yemi Osinbajo, said that if accepted, the swap will help solve many of the debt burden challenges in the country.
“The proposed Debt-for-Climate swaps would be a very useful intervention and helpful as it will reduce debt burdens,” while advancing the Climate Change objectives of the international community,” Osinbajo said.
Nigeria’s bloated debt portfolio is the outcome of decades-long economic mismanagement and the International Monetary Fund (IMF), has projected that “the Nigerian government may spend nearly 100 percent of its revenue on debt servicing by 2026.
The Minister of Finance, Budget, and National Planning Zainab Ahmed, recently disclosed that, at N1.94 trillion, the cost of debt servicing had surpassed the government’s retained revenue of N1.63 trillion and the World Bank warned that the country’s debt, while seemingly sustainable, was “vulnerable and costly”.
According to Ahmed, the federal government is yet planning to borrow over N11 trillion and sell national assets to finance the budget deficit in 2023. This amount is about the sum of N5.2 trillion and N6.258trillion which represents the budget deficit for 2021 and 2022.
“We have been running a deficit budget for many years…Until the issues of personnel, overhead, and capital expenditure are properly addressed in the budget, borrowing would not stop,” Director-General of the Debt Management Office (DMO) Patience Oniha, told lawmakers last week.
A performance report released by the government in July showed that despite higher oil prices, oil revenue underperformed due to significant oil production shortfalls such as shut-ins resulting from pipeline vandalism and crude oil theft as well as high petrol subsidy cost due to higher landing costs of imported products.
In the last few years, the nation has relied heavily on the CBN’s deficit financing through its Ways and Means provision that allows the government to borrow for short-term or emergency finance. According to data from the Central Bank of Nigeria, the Ways and Means balance at the end of 2021 was N17.4 trillion but has now risen to approximately N20 trillion as of June 2022.
Chief Executive of Economics Associates Ayo Teriba, said it would be extremely difficult to achieve a balanced budget under the fiscal condition and believes the recourse to debt funding is a matter of policy choice and not a necessity.
“I think we would have to take it as the legacy of the administration; that it was an administration that handed over more or less 100 per cent deficit. The next regime would have to pay the debts accumulated by the regime and find the revenue to cover its expenditure,” Teriba said.