ebt has been a part of our lives for as long as civilization has existed on our planet. It has been hypothesized that the failure to balance the governmental finances contributed to the fall of the Roman Empire. The empire had overstretched itself, and the process of imperial overstretch had a severe influence on the public finances, leading to Rome’s collapse.
Money is necessary for empires and nations to function. Taxes and land resources have provided a significant portion of these funds. In medieval Europe, nations that were fortunate enough to discover enormous quantities of silver or gold became extremely wealthy.
Another option is to take out a loan. Subsequent generations of English kings borrowed money from banks, wealthy individuals, and financial institutions to fund wars and other national initiatives. The Bank of England began as a private enterprise that raised funds for the monarchy’s military and other ventures.
Debt and foolishness have wrecked many countries. “Such was the beginning of that debt, which has since become the greatest marvel that ever confused the sagacity and confounded the pride of statesmen and philosophers,” wrote Thomas Babington Macaulay, a Scottish historian. He continued, “the nation has raised the same cry of sorrow and despair at every level of the debt’s ascent. At every stage of the debt’s accumulation, knowledgeable men warned that bankruptcy and ruin were only around the corner. Even, nevertheless, the debt continued to mount, and bankruptcy and disaster seemed as far away as ever.”
Loans are taken out by countries for a variety of reasons. They borrow to cover deficits and shortages in their annual budgets. During national emergencies and difficult times, they borrow. In times of war, nations borrow as well. There are also significant projects that may require additional funds that the ordinary annual budget cannot offer.
For instance, the construction of a large dam, railway networks, or a hydroelectric power project, it is reasonable enough for loans to be used for such a purpose since it is a huge capital-intensive project. Countries borrow to expand their financial and capital markets. Governments can issue bonds to help improve the yield curve and make the capital markets more vibrant.
In today’s world, because of imperialism and the coercive power of informal empire, states can borrow. Nigeria, for example, gave in to foreign pressure in 1979 and accepted a $1 billion loan. We did not need the loan and were actually in a position to provide it to ourselves. Despite this, our military government accepted the loan.
Nobody knows what the loan was used for to this day. During the height of structural adjustment conditionality-based lending in the 1980s, the IMF/World Bank pushed a variety of loans down African and other developing countries’ throats. Those countries were enslaved by debt, which took decades to untangle.
There are both positive and negative motivations for governments to take on debt. Prudence demands that governments only take loans for legitimate causes. In reality, taking out a loan for a successful project is beneficial to any country. A “national debt, if it is not enormous, will be to us a national blessing,” according to the great American statesman Alexander Hamilton.
In terms of interest rates, there are usually three types of loans. We have loans with straightforward commercial terms, which means that interest is variable and levied at market rates based on the London Interbank Offered Rate, or LIBOR. Soft loans with low interest rates fall under the second type.
The International Development Association (IDA), a World Bank subsidiary, charges 1% over 30 years. The third type of loan is what I call “blend loans,” which fall halfway between commercial and concessionary rates. These loans are often provided by bilateral agencies, with the majority of recipients falling into the low- and middle-income nations.
Interest rates in major industrial economies have been at historically low levels since the subprime crisis of 2008-2010. Commercial loans with interest rates of more than 5% are uncommon. Countries with a high structure of domestic interest rates, such as Nigeria, have found this particularly appealing.
In Nigeria, commercial banks are allowed to charge interest rates of up to 20%. Borrowing from low-interest banking regimes thus appears to be appealing. On the negative, dollar-denominated loans are similarly vulnerable to exchange rate fluctuations. Interest rates will continue to rise as advanced industrial countries recover from a decade of low growth, and repayment terms for countries that borrowed from the Eurodollar markets will also rise.
By international standards, Nigeria’s national debt of N33.107 trillion (US$87.239 billion) is little. The United States ($28.3 trillion), Japan ($9 trillion), Italy ($2.48 trillion), and Spain ($1.24 trillion) are the four countries with the highest debt levels in the world.
In comparison to our peer countries, South Africa’s debt outlay is $259.5 billion, or 77.1 percent of GDP. Sudan owes $56 billion in debt or around 201 percent of its GDP. The national debt of oil-rich Angola is almost $47 billion, with $22 billion due just to China. The debt-to-GDP ratio in Angola is projected to be staggeringly high at 110.71 percent.
We may not be among the world’s most indebted nations, but at our current rate of loan path-dependence, we are rapidly joining that miserable group. More than 90% of our foreign earnings come from crude oil exports. Oil, on the other hand, is a finite resource. As the globe begins to decarbonize in response to the threat of global warming and climate change, demand for oil will continue to fall, and its price on international markets will follow suit. The stakes are really high. Either we diversify our economy or we will have no economic future.
With a national debt of $28.3 trillion, the United States is by far the most indebted country on the planet. This equates to almost 127 percent of the US GDP. Because the dollar is the world’s reserve currency, Americans are unconcerned with the national debt. They are not exposed to the risk of exchange rate fluctuations. In this regard, the American position may be more secure than Nigeria’s. The reason is straightforward.
The US dollar serves as the world’s reserve currency. In theory, the Federal Reserve could simply turn on its printing press and produce money to pay off its debts. Theoretically, this could be done. However, it is unlikely to occur. Because a printing spree could lead to hyperinflation and a drop in the dollar’s value. Committing such stupidity would not be in the best interests of the United States.
The naira, on the other hand, is not one of the world’s international trading currencies. We must earn enough dollars to repay our loans if we borrow in dollars. And if the naira depreciates, we will have to earn even more naira to cover the same amount of debt. We have a monocultural economy that is reliant on imports.
However, one issue that cannot be overlooked is the fact that China and other Asian countries own trillions of dollars in US Treasury bonds. The American economy would suffer significantly if they made a decision on those assets right away. Games theory and probability statistics imply that the Chinese are unlikely to do so, owing to the fact that the value of their American bond investments will be affected by the dollar’s decline. As a result, acting with caution and moderation is in everyone’s best interest.
The 19th century French novelist and philosopher, Victor Hugo’s caution resonates loud and is still valid today: “A creditor is worse than a slave-owner; because the master owns just your person, but a creditor owns your dignity and can command it.”