Since civilization has existed on our planet, debt has been a reality. It has been suggested that the great Roman Empire collapsed in part because of the failure to balance public finances. The empire had grown too far and the process of imperial expansion ultimately had a negative impact on public finances and Rome eventually sank. Empires and nations need money to perform their functions. A large part of these resources come from taxes and land resources. In medieval Europe, the nations that were fortunate enough to stumble upon vast deposits of silver or gold became very wealthy.
Taking loans is another way. Successive generations of English monarchs borrowed from banks and wealthy individuals and financiers to carry out wars and other national projects. Bank England began life as a private institution in the service of the monarchy, raising capital for military and other adventures.
Many nations have been ruined by debt and madness. To quote Scottish historian Thomas Babington Macaulay: “Such was the origin of this debt which has since become the greatest wonder that has ever puzzled sagacity and confused the pride of statesmen and philosophers. At each stage of the increase in this debt, the nation has uttered the same cry of anguish and despair. At every stage of the growth of this debt, wise men have seriously asserted that bankruptcy and ruin are at hand. Yet the debt continued to grow; and bankruptcy and ruin were still so remote.
Nations borrow for a variety of reasons. They borrow to finance shortfalls and deficits in their annual budgets. They borrow during national emergencies and difficult times. Nations also borrow in times of war. There are also large projects which may require additional funding over the regular annual budget; for example, the construction of a large dam or rail networks or hydroelectric projects. Nations also borrow in order to deepen financial and capital markets. Governments can issue bonds in order to develop the yield curve and improve the dynamism of capital markets.
Nowadays, nations can borrow because of imperialism and the coercive power of the informal empire. In 1979, for example, Nigeria bowed under pressure from outside forces to take out a $ 1 billion loan. It was a loan that we did not need and that we were in fact able to provide to ourselves. And yet our military government accepted the loan. To date, no one knows what this loan was used for. In the 1980s, at the height of condition-based structural adjustment lending, the IMF / World Bank forced all kinds of loans on African and other developing countries. These countries have been plunged into debt that has taken decades to repair.
There are good and bad reasons why countries take out loans. Prudence demands that governments ensure that they only borrow for good reasons. Indeed, a loan taken out for a good project is an advantage for any country. Old American statesman Alexander Hamilton noted that “a national debt, if not excessive, will be a national blessing to us.”
There are normally three categories of loans judging by the interest charges. We have loans based on simple business terms i.e. interest is variable and charged at prevailing market rates based on the London Interbank Offered Rate (LIBOR). The second category consists of subsidized loans at preferential rates. An example is the IDA, a subsidiary of the World Bank that changes a percent payable over 30 years. The third category is what I would call “blended loans,” which are halfway between commercial and concessional rates. Bilateral agencies tend to provide this type of loan, and most recipients fall into the low- and middle-income category.
Since the 2008-2010 subprime crisis, interest rates in advanced industrial economies have been at historically low levels. There are hardly any business loans that exceed five percent. This has proven to be particularly attractive for countries such as Nigeria with a high structure of domestic interest rates. Commercial banks in Nigeria can charge up to 20% interest rate. It therefore seems attractive to borrow from low-interest financial schemes. The downside is that dollar denominated loans are also subject to currency risk. As advanced industrialized countries recover from a decade of weak growth, interest rates will continue to rise, as will the repayment terms of countries that have borrowed in the Eurodollar markets.
Nigeria’s national debt of 33 107 trillion naira (87 239 billion US dollars) is relatively modest by global standards. The most indebted countries in the world in terms of volume are: the United States ($ 28.3 trillion); Japan ($ 9 trillion); Italy ($ 2.48 trillion); and Spain ($ 1.24 trillion).
In terms of our comparators, South Africa has a debt of $ 259.5 billion, or 77.1% of GDP. Sudan has a debt stock of $ 56 billion, which is around 201% of its GDP. In the case of oil-rich Angola, the national debt stands at over $ 47 billion, of which $ 22 billion is owed to China alone. Remarkably, the Angolan debt to GDP ratio is estimated at 110.71 percent.
We may not be among the most indebted countries, but given the current reliance on the trail, we are walking quickly towards this unhappy crowd. We depend on the export of crude oil for more than 90% of our external revenues. And oil is a running out asset. As the world begins to decarbonize in response to the challenge of global warming and climate change, demand for oil will continue to decline, as will its price in international markets. The implications are dire. We either need to diversify our economy or we won’t have a proper economic future.
The United States is by far the most indebted country in the world, with $ 28.3 trillion in national debt. This represents about 127% of US GDP. Americans take the national debt in stride because the dollar is the world’s reserve currency. They do not suffer from the challenge of currency risk. In this sense, the American position is perhaps less precarious than that of Nigeria. The reason is simple. The US dollar is the world’s reserve currency. Technically, the Federal Reserve could just put its printing press into overdrive, printing dollars to pay off debts. It is theoretically possible. But that is unlikely to happen as a printing frenzy could fuel hyperinflation while pushing the value of the dollar down. It would not be in the American national interest to commit such madness.
In contrast, the naira is not one of the world’s international trade currencies. If we borrow in dollars, we must earn enough dollars to pay off our loans. And if the naira goes down, we should earn more and more naira just to pay off the same level of debt. We are a monocultural economy dependent on imports.
But one factor, however, that cannot be ignored, is that China and some Asian countries hold billions of dollars in US Treasuries. If they called on these assets from the outset, the US economy would be seriously affected. Game theory and probability statistics would show that the Chinese are unlikely to do such a thing, precisely because the falling dollar will also affect the value of their US bond assets. It is therefore in everyone’s interest to act with restraint and moderation.
The warnings of the 19th French novelist and sage Victor Hugo are still relevant today: “A creditor is worse than a slave owner; for the master only possesses your person, but a creditor possesses your dignity and can command it.
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