Will Nigeria's Liquidity Shortage Morph into a Solvency Crisis?

In November of 2020, Zambia became the first African country to renege on its debt service obligations since the COVID-19 pandemic began. Since then, official and private lenders as well as governments have become apprehensive about a looming solvency crisis in Africa. This heightened perception of risk is underpinned by the fact that like Zambia, most countries on the continent are commodity dependent and have borrowed considerably from lenders that are reluctant in providing debt service suspension. Worse still, they are also experiencing a reduction in external financing from foreign direct investment, remittances, and development aid. The debt sustainability analysis by the IMF and World Bank put forward in October of 2020 shows that 16 countries in the region are already in debt distress or facing high risks. However, for some countries like Nigeria, debt as a share of GDP is relatively low - estimated at 35% in 2020 - leading to optimism in debt servicing expectations. But debt expectations can change rapidly. The expectation that these countries will continue to service their debt, amid worsening economic fundamentals, may not be met. A sudden event such as a second wave of lockdowns due to African countries being left behind in accessing vaccines can very easily cause interest rates to increase unexpectedly and worsen future debt outcomes. Moreover, acknowledging the possibilities of a debt distress early on and planning for restructuring can reduce the duration of a debt crisis and output losses. Undoubtedly, there is an imminent debt-servicing problem not only for African countries but globally. Although the dimensions of the problem continue to evolve and, in some cases, could be unforeseen, this article examines the evolution of key economic indicators and policy responses in order to assess the likelihood of a brewing debt crisis and the possibility of debt restructuring in Nigeria.