Economy
2022 budget deficit financing to deepen Nigeria’s debt crisis
BY EMEKA EJERE
Despite sustainability concerns being raised by economic experts, Nigeria’s debt obligation will grow further next year following plans by the federal government to borrow more in order to finance the deficit in the proposed 2022 budget.
President Muhammadu Buhari had revealed that the federal government would borrow N6.45 trillion to finance the 2022 budget deficit while targeting GDP growth rate of 4.2 percent. The Federal Executive Council (FEC) had approved N16.39 trillion for the 2022 Appropriation Bill.
Buhari, who stated this in Abuja on Thursday while presenting the 2022 budget estimates and performance report on the implementation of the 2021 Appropriation Act, to the joint session of the National Assembly said “we plan to finance the deficit mainly by new borrowing totaling N5.01 trillion, N90.73 billion from privatization proceeds and N1.16 trillion drawdowns on loans secured for specific development projects.
“Some have expressed concern over our resort to borrowing to finance our fiscal gaps. They are right to be concerned. However, we believe that the debt level of the federal government is still within sustainable limit. Borrowings are to specific strategic projects and can be verified publicly”, he said.
On 2022 revenue estimates, the president said, “Based on these fiscal assumptions and parameters, total federally-collectible revenue is estimated at N17.70 trillion in 2022.
“Total federally distributable revenue is estimated at N12.72 trillion in 2022 while total revenue available to fund the 2022 federal budget is estimated at N10.13 trillion. This includes grants and aids of N63.38 billion, as well as the revenues of 63 government-owned enterprises.”
Before now, Nigeria’s debt profile was expected to be in the neighborhood of N50 trillion if the current attempt by the federal government to obtain more loans turns out to be successful.
Buhari had in a letter dated August 24, 2021, sought the approval of the National Assembly to borrow $4,054,476,863 billion and €710 million on the grounds of “emerging needs.”
In the letter titled Addendum to Request For Senate’s Concurrent Approval Of Multilateral Fund Projects Under the 2018-2021 Federal Government External Borrowing (Rolling) Plan, Buhari explained that owing to “emerging needs”, there is a need to raise more funds for some “critical projects”.
“The projects listed in the addendum to the 2018-2021 Federal Government External Borrowing Plan, are to be financed through sovereign loans from the World Bank, French Development Agency (AFD), China-Exim Bank, International Fund For Agriculture Development (IFAD), Credit Suisse Group and Standard Chartered/China Export and Credit (SINOSURE) in the total sum of USD4,054,476,863.00 plus Euro 710, 000,000.00 grant component of USD 125,000,000.00”.
The Upper Legislative Chamber had in July approved a $6.1 billion (N2.3 trillion) loan request by the federal government to fund the 2021 Appropriations Act. The Red Chamber had said the loan would be financed through multilateral and bilateral firms, adding that the Senate approved the borrowing of the sum of N4.6 trillion in the 2021 Appropriation Act and that the new borrowing of N2.3 trillion would part-finance the deficit in the 2021 budget.
Nigeria took her first foreign loan in 1964 for about $13 million to finance the construction of the Kainji dam. Today, the nation is locked in a debt crisis, spending 97 per cent of her revenues in 2020 on debt servicing.
Only recently, chairman of President Muhammadu Buhari’s Economic Advisory Council (EAC), Dr. Doyin Salami, revealed that the nation’s debt service-to-revenue ratio stood at 97.7 per cent (January to May 2021).
Findings revealed that in 2020, the federal government collected N3.42 trillion as revenues and spent N3.34 trillion to service her obligations. In effect, every other expenditure of the FG was done via borrowings.
PwC Nigeria said in a recent report that the increasing cost of servicing debt continued to weigh on the federal government’s revenue profile.
It said, “Actual debt servicing cost in 2020 stood at N3.27tn and represented about 10 per cent over the budgeted amount of N2.95tn. This puts the debt-to-revenue ratio at approximately 83 per cent, nearly double the 46 per cent that was budgeted.
“This implies that about N83 out of every N100 the federal government earned was used to settle interest payments for outstanding domestic and foreign debts within the reference period.”
It added that in 2021, the FG planned to spend N3.32tn to service its outstanding debt. This is higher than the N2.95tn budgeted in 2020.
Two weeks ago, the Debt Management Office (DMO) disclosed that Nigeria’s total public debt, comprising states and federal government debt obligations, grew by 7.75 per cent, from N32.916 trillion in December 2020 to N35.465 trillion as of June this year.
Latest data from the DMO showed that Nigeria spent N445.4bn on debt servicing payments in the second quarter of this year. From April to June 2021, Nigeria spent N322.7bn on domestic debt servicing, while $299m (N122.7bn) was spent on external debt servicing.
The exchange rate of the Central Bank of Nigeria ($1 is N410.3) as of September 30 was used for the external debt servicing. For domestic debt, Nigeria spent N258bn in April, N42.4bn in May, and N22.3bn in June.
A breakdown of the statistics shows that the federal government spent a total of N322.7bn on the payment of interest, with N50.3bn expended on the redemption of matured Nigeria Treasury Bills between April and June 2021.
For external debt servicing, commercial loans had 53 per cent with a cost of $157,012.17, multilaterals had 35 per cent with a cost of $103,732.70, and bilateral had 13 per cent with a cost of $38,220.88.
The total external debt stock rose from N12.47tn as of March 31 to N13.71tn as of June 30, indicating an increase of N1.24tn or 9.94 per cent. The total domestic debt stock rose from N20.64tn as of March 31 to N21.75tn as of June 30, indicating an increase of N1.11tn or 5.38 per cent. At the end of Q2 2021, external debt stock made up 38.66 per cent while domestic debt stock made up 61.34 per cent of the total public debt stock. The debt to Gross Domestic Product ratio rose from 21.13 per cent to 21.92 per cent within the second quarter.
At the end of the second quarter, a breakdown of external debt stock showed that multilateral debt (from World Bank Group and African Development Group) led the list of Nigeria’s creditors with a share of 54.88 per cent. The second highest was commercial debt (from Eurobonds and Diaspora Bonds) with a share of 31.88 per cent. It was followed by bilateral debts (from China, France, Japan, India and Germany) with a share of 12.70 per cent. Promissory Notes had a share of 0.54 per cent.
Experts react
Reacting to the budget proposal a political economist, Dr. Austin Nweze, noted that borrowing to finance is a deficit in itself, saying it is anybody’s guess why the federal government always chooses the easiest way out rather than face reality.
“The reality of the day is that the federal government is practically running on empty. Our economy is being run on budget deficits and borrowings when attempts should be made to address the parlous state of the economy”, Nweze, a lecturer at Lagos Business School, said.
“The economic managers lack clear strategy to address the current economic logjam. Like King Hezekiah in the legends told in the Bible who was supposed to do certain things to wade off evil for his people but the moment he was told that he won’t be affected, he failed to do the needful. That’s exactly what the current government is doing by the wanton borrowings for the generations yet unborn. The earlier the government realises this, the better.”
Similarly, the Fiscal Policy Partner and Africa Tax Leader at PwC, TaiwoOyedele, described as unwarranted and unrealistic the continuous borrowings of the federal government, which he regretted is already at over 70 per cent and therefore not sustainable.
Oyedele, who spoke at a monitored TV magazine programme in Lagos, said it is unfortunate to note that the country’s recurrent and capital expenditures cannot be met due to deficit finance.
However, Prof. Uche Uwalake of the Nasarawa State University, sounds a bit hopeful. He said, “First, let me commend the president for presenting the 2022 appropriation bill in relatively good time. It is expected that the National Assembly will conclude work on it before the end of the year to enable implementation to commence in January following the president’s assent.
“Indeed, the mending of the hitherto broken budget year is a major achievement by this administration.
“I think the budget benchmarks are largely realistic with respect to crude oil price of $57, exchange rate of circa N410 and real GDP growth rate of 4.2 percent.
“However, inflation rate of 13 percent does not appear realistic considering the implementation of the PIA requiring the complete removal of fuel subsidy.
“As the president admitted, the concern about increasing deficit financing through borrowing is justified.
“The consolation, however, is that all new borrowings are tied to critical projects. It’s equally noteworthy that the government has made provision for use of Green bonds as well as PPP arrangements in financing infrastructure”.
Meanwhile, the federal government has explained that the total money borrowed as at July 22 was 23 per cent of the GDP.
“As at July 2021, the total borrowing is 23% of GDP. When you compare our borrowing to other countries, we’re the lowest within the region, lowest compared to Egypt, South Africa, Brazil, Mexico, the very lowest, and Angola”, Minister of Finance, Budget and National Planning, Zainab Ahmed had told State House correspondents on after the FEC meeting on Wednesday.
