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The Effect Of The Too Much Debts On Nigeria Economy So Far
It is no longer a news that Nigeria has been borrowing money from top countries. Over the years 2019 to 2020, the rate at which Nigeria Borrowed money has been of increase. There has been a series of questions left unanswered. Such as,
1. What happens if Nigeria has too much debt as it is now?
2. Why is too much debt bad for Nigeria?
3. What will happen if Nigeria is unable to pay her debts?
4. How does Nigeria national debt affect me?
Let me critically answer these questions as an Economist.
Question 1: What happens if Nigeria has too much debt as it is now?
Currently Nigeria is owning China $3.1 billion Click here to see
Money borrowed from World bank N31 trillion Click here to see and other many more countries. So far so bad, world bank has default Nigeria government from borrowing. Before we can answer the question, let know when debt is too much for a country. When a country Debt is more than what she's offer we can say such a country is into too much debt. Now to the question, if a country or government accumulates debt beyond what it is able to service, a debt crisis can erupt with potentially large economic and social costs. Over the time and currently now there have been a large economic and social costs in Nigeria and this was as a result of the too much debt Nigeria government has accumulated. Examples of social costs include; fuel,oil,maintenance,insurance,depreciation, etc.
Question 2: Why Is Too Much Debt Bad For Nigeria?
As borrowing increases, the Nigeria have to pay more interest rate payments on those who hold bonds. This can lead to a greater percentage of tax revenue going to debt interest payments. Higher interest rates.
Higher interest costs has crowd out important public investments in Nigeria that can fuel economic growth — priority areas like education, R&D, and infrastructure. As Nigeria saddled with debt she will have less to invest in its own future. Rising debt means lower incomes, fewer economic opportunities
The most immediate impact is that borrowing cost rises for the nation in the international bond market. As Nigeria government is borrowing at a higher rate, then the corporates also have to borrow at increased rates. As a result, interest rates rise and the price of bonds that were issued earlier collapse even further. Trade and commerce is negatively affected since banks are skeptical of lending money at high rates to borrowers.
International investors become wary that Nigeria will continue to print money till it reaches hyperinflation. As a result, they want to exit Nigeria. As a result, the exchange rates in the international market plummet as everyone tries to sell their local currency holdings and buy a more stable foreign currency. As Nigeria is too dependent on international investment, then the effect of exchange rate may not be marginal.
Just like investors want to move their money out of Nigeria, local people want to move their money out of the banks. They are fearful that the government will forcibly take possession of their bank deposits to repay the international debt. Since everybody tries to withdraw money at the same time, bank runs become the norm. Many people are not able to recover their deposits and as a result the crisis becomes even more severe and more bank runs follow.
Needless to say, the above-mentioned factors negatively affect the economy. As a result of the stock market also takes a beating. Once again the cycle of negativity feeds off itself. The stock market crash perpetuates itself. It is not uncommon for stock markets to have 40% to 50% of their market capitalization wiped off during a sovereign debt default.
Foreign creditors are often influential in their home country. Hence after Nigeria default, they convince their countries to impose trade embargos on Nigeria. These embargos block the inflow and outflow of essential commodities into Nigeria thereby choking its economy. Since most countries import oil to meet their energy needs, such trade embargos can be disastrous.
Private firms and the government both feel the negative effects of the Nigeria economic climate. Nigeria government is not able to borrow and tax revenues are also at all-time lows. Hence, they are not able to pay salaries to the workers on time. Also, since there is a negative sentiment in the Nigeria economy, people stop consuming products. As a result, the GDP comes down and accentuates the unemployment cycle.
Questions 3: What will happen if Nigeria is unable to pay her debts?
Nigeria Government has poor rating and she is already in high debt. What is happening now is that, foreign countries has charge higher interest rate on the borrowed loan. Nigeria, as it is now has been declared bankruptcy and has been considerd defaulted. What these implies is that, Nigeria is not an easy place to do business. 77% of the oil money received by Nigeria will go straight into the financial sector (banks, financial institutions, etc.) Instead of investments in education, health care, and infrastructure.
To curry favour in international markets, defaulting country like Nigeria tend to restructure their debt rather than simply refusing to pay anything at all. When the original value of a bond is reduced, can be more painful for the holders of government bonds than a simple clip of the scissors.
Question 4: How Does Nigeria National Debt Affected you?
This reduces the amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt. ... Over time, this will cause people to pay more for goods and services, resulting in inflation which is currently happening now.
As it is now, the debts has exceeded the tipping point and our standard of living has slowly deteriorate. It's like driving with emergency brake on. Nigerian hardly feed.
Having been borrowed too much loan, It has put downward on our currency. It's value now is 470 naira to $1. As the currency's decline, foreign holders' repayments worthless and also, decreases demand and drives up interest rates. As our currency declines, imports products has become more expensive ( Rice, beans, etc.) That contributes to inflation
Buhari Presidency task force claimed that, "the inflation currently on now is as a result of the pandemic" this is a big lie. The worse conditions of the country now was as a result of too much debt and they are still borrowing. How is the debt affecting you? Comment below!
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