Published On: Tue, Mar 20th, 2018

Debt bomb:Nigeria plays with fire


As far as financial bombs go Nigeria’s N22 trillion public debt is in a class of its own. Indeed the country’s total external and internal debt has exploded to a thundering 21.7 trillion according to data released recently by the Nigerian Debt Management Office (DMO). The agency’s report notes that the country’s external debt currently stands at $18.91 billion (N5.787 trillion) as at the end of December 2017 while the country’s internal debt stands at a staggering N15.936 trillion over the same period.

According to the International Monetary Fund (IMF) in its World Economic and Financial Survey released only last week Nigeria’s debt to output (GDP) ratio rose from 18.6 per cent in 2016 to 23.3 per cent in 2017 and may likely rise to 24.1 per cent in 2018. These figures, according to analysts, are worrisome when compared to the much lower ratio of 12.1 per cent when the Muhammadu Buhari administration came to power in 2015 (see chart).

Apparently the government has been borrowing itself out of a recession that hit in 2016. As revenues tumbled on the back of falling international oil prices (oil prices dropped in international markets from $114 in 2014 to …in 2017), foreign exchange inflows also wobbled leading to a slide in the external value of the Naira and a dip in fiscal revenues of all levels of government. With the private sector struggling to cope with high domestic interest rates and restricted access to local financial markets as a result of high domestic public sector borrowing and steep yields on fixed income public sector instruments, the economy was locked out of major growth prospects. According to Suraj Akinyemi an economist and local manufacturer, ‘we got sucker punched by our own slowness. We failed to respond swiftly to the evolving economic environment and we paid dearly for our tardiness’.

He notes that the government ought to have cut fuel subsidies immediately it came to power on a swell of strong public approval. He further notes that tightening of bank access to cash by way of a Treasury Single Account (STA) was ill-advised heading into a recession, ‘you do not tighten an economy when it is spiraling downwards, you also do not increase taxes and levies at a time incomes are being decapitated, the TSA could have been handled differently with less disruption to the economy. Removing a patient’s head with a sword is not a sensible way of treating his or her migraine’ he insists.

Analysts have generally had a difficult time understanding the goals of government’s macroeconomic policy especially with the domestic jobless rate at 40 per cent (one of the highest in the world) economists have become increasingly perplexed at the government’s insistence on adopting a tight monetary policy while it goes on a borrowing binge.

International oil prices have since the end of the last quarter of 2017 risen from a low of $28 in February 2015 to above $60 per barrel for most of the second half of 2017; therefore, the government has earned over $15 per barrel of oil over its budget expectations. The revenue surplus ought to have driven down the need for additional borrowings but that has not been the case.  Kayode Anibaba of Capstone Capital, a local investment management company, believes that the recent budget deficits are reminiscent of a ‘tax and spend’ era prior to the President Olusegun Obasanjo regime in 1999 but reemerging during the President Umar Musa Yar ‘Adua/Goodluck Jonathan era between 2009 and 2010 , ‘we seem to have come full circle. We have cut back from the Obasanjo era when debt to GDP was just slightly over 7 per cent by the end of the second term of that administration to the staggering debt to GDP ratios we are witnessing today. We amazingly find joy in serial suicide’, he says.

A few economists have insisted that the government’s current debt profile even if within acceptable global standards creates a sense of poor fiscal management and a reluctance to take hard options. For instance, they argue that a lot of the borrowing done (over 70 per cent) is directed at recurrent spending that could readily be reduced if government adopts better house cleaning measures. They point to the high cost of managing government ministries, departments and agencies (MDA’s) and argue that these costs could be knocked down significantly. 

Another stone hung around the governments neck has been the shocking cost of maintaining both the national and state legislatures, according to analysts. Recent revelations by Senator Shehu Umar from Katsina State let slip the huge amounts spent on maintaining a Senator of the Federal Republic. A Senator’s monthly running cost comes to a mindboggling N13.5million excluding a monthly salary of N700, 000 and an additional N200m annually for constituency projects. The consistency projects do not get to the Senator as cash but he can influence the projects and their contractors. In the Nigerian context this leaves ample room for kick backs and other under-the-table dealings.

At the level of the presidency there are several project overlaps and repetitions of budget line items that were supposedly one-off charges at the time they were incurred. For example, annual provisions for cutlery and presidential kitchen equipment are, according to budget analysts, dubious.

Another problem with the budgets at federal and state levels is their opaqueness. The deliberate lack of clarity leaves a yawning gap for corruption. The budget for a state like Lagos with the largest internally generated revenue (IGR) of all states in the federation still lacks a detailed public breakdown. BudgIT, a local private sector budget monitoring and analysis firm, has made several representations to the state government to provide the breakdown of the 2018 N1.046 trillion budget to no avail. 

Nigeria’s debt problem is less one of challenges of revenue than one of economic philosophy. The Buhari administration has clearly shown a desire to increase government’s role in economic management. Nigeria’s public sector has become an ever bigger actor in the job creation market as well as in the market for short to medium term debt. This statist approach to governance is a reversal of the policies of former President Olusegun Obasanjo, who tackled the economy from a broad private sector-led perspective, with the private sector taking lead in job creation and growth stimulation. The result was a steady decline in the country’s budget deficit as a proportion of GDP.

Under the current government, taxes, fees and levies have been on the rise at the same time as oil revenues bounced up. This has meant that fiscal policy has been fundamentally restrictive but tempered by growing oil inflows between 2016 and 2015 as against the collapse of international oil prices between 2014 and 2015. The trouble is that the revenues have been salted off to paying wages, salaries, pensions, debt servicing and other recurrent bills, leaving less than 30 per cent for growth producing capital expenditure.

Realizing the brakes that the government’s regular borrowing from the domestic money market has put on Nigeria’s GDP; the Ministry of Finance (MoF) through the DMO has tried to restructure the country’s debt profile by borrowing from the international market to replace domestic debt obligations. According to the agency in a recent press release, ‘’the key benefits of the restructuring of the portfolio are the reduction of the government ’s debt service costs , lowering of interest rates in the domestic market and improved availability of credit facilities to the private sector .

We repaid ₦198 billion Nigerian treasury bills in December 2017 with the proceeds of Eurobond issuances and we have continued further implementation of the strategy in 2018, with the issuance of the $ 2. 5bn Eurobonds in February 2018, the proceeds of which is being used to repay maturing domestic debt , starting with n 130 billion NTBs repaid on march 1 , 2018.’’

Dr Vincent Nwani, Director, Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI), noted in an exclusive telephone discussion with Business Hallmark that,  “Lagos Chamber of Commerce and Industry has been loudly raising concern over the country’s  rising debt profile. We don’t believe the rising profile is consistent with infrastructural development or the delivery of happiness or prosperity in the country. We are also not sure that the government needs to borrow as much as it has to cushion the effect of falling international oil prices. It is not bad to borrow. What is bad is when you borrow to consume’’.

Nwani further explains that it is only good for the government to borrow money for investments especially on infrastructure to enable future generations obtain the means of settling repayments. ‘’Now, we are borrowing to pay salaries. It is very sad that after the country paid down its external debts during Obasanjo’s administration, we are back to that same crisis. Most of these debts are not project tied. It is a problem,” he notes.

The biggest problem, observes the researcher, is that the country’s debt service to revenue is becoming worrisome. The nation’s debt service to revenue ratio is about 26 per cent. Last year government was only able to stump up about N4 trillion as income, but spent a whopping N1.6 trillion in servicing debt. ‘’The amount we are using to service debts is more than the amount budgeted for capital projects. Our debt burden is becoming unsustainable. In terms of debt management, Nigeria is sitting on a keg of gunpowder.” Nwani insists.

With Nigeria’s debt rising over 20 per cent of GDP, analysts are becoming increasingly worried about the country’s fiscal balance.  However, for those who love the sound of big bangs, this could be one of them.

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