Ballooning debt endangers economic recovery

.           Debt rises to N19 trillion

OKEY ONYENWEAKU

A decade after exiting the Paris and London Clubs of creditors, Nigeria seems determined to return to the inglorious days of debt overhang. With the increasing rate of external borrowings by the government which has tied most of capital expenditure to debt as a result of the weaker revenue base, it is expected that its debt profile both foreign and local will continue to balloon.

Already every Nigerian citizen no matter the age is feared to owe an estimated debt of about N110,000 each today. This becomes clearer with recent hint from the Debt Management Office that Nigeria’s total debt stock has hit N19.16 trillion. Unfortunately, there is increasing anxiety that the debt on the head of Obi, Ayo and Mohammed (Nigerians across the six geo-political zones) could even leap dangerously to a more threatening height especially when the federal Government eventually secures the $29billion she seeks.

In recent times, discerning Nigerians and parents are beginning to worry for the next generation of Nigerians as the country’s debt continues to increase daily. Of course, the debts must be repaid in the future. But how and when the growing debt will be repaid is not yet clear.

A breakdown of the country’s indebtedness to creditors including local rose to N17.36 trillion as at the end of December 2016, representing an increase of N1.8 trillion. The debt has increased by N7.1 trillion in two years from N12.06 trillion in 2015 to N19.16 trillion in 2017.Lasst the Acting President Yemi Osinbajo wrote the National Assembly to approve a $1.5 billion loan for eight state governments.

The DMO also disclosed that Nigerian government’s domestic debt stood at N11.97 trillion, as against N8.51 trillion recorded in 2015, representing borrowing of N3.46 trillion (40.71 per cent) rise. Also, Nigeria’s external debt for the federal and state governments jumped from $9.46 billion to $13.81 billion in two years, representing an increase of $4.35 billion, put at 45.98 per cent.

The DMO noted that the official exchange rate of N306.35 to $1 was deployed in calculating the country’s external debt for March 31, 2017, while the official rate of N197 to $1 was used in determining the foreign debt for March 31, 2015.

Meanwhile, the domestic debt profile of the states stood at N2 .96 trillion as of March 31, 2017, rising from N1.69 trillion at the same time in 2015, representing an increase of N1.27 trillion.

As the nation’s debt continues to rise, the more apprehensive discerning Nigerians become about its sustainability. A serious debate about the sustainability of the tcountry’s debt has, in fact, attracted significant attention of late.   The DMO said government had planned to spend 35 percent of its N3.86trillion forecast revenues in 2016 on debt servicing, up by 26 percent in 2015. But it ended up spending about 80 per cent of its revenues to service debt.

Details reveal that between January and September 2016, the federal government spent N1.094.22trillion on debt servicing.  The breakdown further revealed that N1.044trillion was used for local debt servicing as against the N980.55billion budgeted in the 2016 spending plan, representing an increase of N63.45 billion, while

N50.22billion was spent for external debt servicing indicating an increase of N9.36 billion from the N40.86 budgeted. The development has raised concerns over the future of the economy.

However government has promised to do whatever is possible to reduce her spending on debt servicing to 24 per cent of its revenues. This is still at the stage of projection, many have said. However, there are doubts that it is achievable since the government missed similar target last year. Besides, the budget deficit which is put at N2.63 trillion is another impediment to spending 24 percent of the revenue for debt servicing.

Whereas there is divided opinion whether the nation should continue to accumulate debt, there is a consensus that it’s sustainability may be highly challenging given Nigeria’s battered economy and her antecedents with borrowing and repayment of loans.  Industry experts have become increasingly uncomfortable with the bad trend because of the weak capacity of the nation’s productive activities to generate enough revenue for servicing the debts.

After studying the Nigerian debt status last year, an Islamic Development Bank’s (IDB) representative, Abdallah Mohammed Kiliaki, said Nigeria stood the risk of running into economic stampede if it continued to service her debts with huge sums.

“When talking about unsustainable debt, it means that a country or a borrower is unable to pay. So, we take very serious note of that.  When you look at the debt GDP ratio of Nigeria, it is very low, it is very low. It is 17 per cent compared to Italy and other countries which is about 150 per cent while that of the United States is about 100 per cent’’, said IDB

“But there is a caveat; it is true that debt to GDP ratio is low but when you look at the amount, the revenue, to debt servicing ratio, the amount of money that the government is collecting, the revenue of the government vis-a-vis the ratio to the total debt, I think Nigeria pays about 75 to 80 per cent of its revenue to service debt. So, this is very, very high compared to other countries where they use just 10 per cent’’, IDB added.

In an exclusive interview with BH, former Managing Director of one of the big banks, Dr. Alex Otti shares the view of IDB on the sustainability of the country’s debt.

‘’But if you borrow in foreign currency and use local currency to buy foreign currency to pay back, then, something is wrong with the logic.

I don’t know how they have done their numbers, but it is neither here or there. What concerns me most is the quantum of the debt and the ability and capacity to service those debts,’’ said Otti.

That Nigeria needs huge funds much more than she seeks to borrow to bridge infrastructure gap is not new. A few international organisations like International Monetary Fund and the World Bank have even estimated that the nation requires no less than $140 billion in the next 10 years to be able to achieve that objective.

But those who have followed Nigeria’s path in debt management have argued that there may be serious danger lurking around.  Nigeria’s had slipped into huge debt to the tune of $35 billion early 2004/2005 and asked for debt forgiveness. The country was able to secure debt relief of $18 billion from members of the 19-nation-strong Paris Club.

Part of Nigeria’s case in asking for debt relief has been that most of the money it received was lent to corrupt military dictators, a fact that was well known by foreign banks and governments’’, a commentator had said. Nigerian have become jittery that Nigeria may be accumulating huge debt again, reminding them of the Paris Club incident, especially during a recession.

Prof. Pat Utomi is one of those concerned. He says  there are times that you need to spend your way, literally speaking, out of a challenge of output; recession being one of those. But I think that even at that, you need a certain level of care to make sure that you don’t get into an unsustainable debt scenario.”

“My big worry is that the impact of the borrowing may not be reflected on output, in the sense that if we get into a double whammy where our debt balloons, but we don’t have the necessary stimulation of production, especially when our consumption is very external in its orientation, we need be very careful to watch all of those,” the professor of Political Economy and management expert said.

The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, however, condemned the idea of borrowing to support recurrent expenditure.

“We need to move away from debts for recurrent expenditure to debts for capital expenditure, which is projects-specific. The debt level itself is not dangerous, but the debt service level – the debt burden – is very high. We are using 66 per cent of our independent revenue to pay interest. So, interest rates must come down substantially, or else, we are in trouble,”

The Board Chairman, Nigerian Economic Summit Group, a private sector think tank and policy advocacy group, Mr. Kyari Bukar, said the amount of debt should not be a cause for concern considering the low debt to Gross Domestic Product ratio of the country.

“What one needs to pay attention to is the debt service amount versus the capital expenditure of the budget. The debt servicing and the ability to service the debts are the key areas of concerns that we should pay attention to”.

While Nigeria debt to GDP stood at 24 percent currently and that of the United States of America and the United Kingdom are 106. 71 and 84.86 percent respectively. But the difference, according to experts is the sustainability of the debts.

For instance, the economies of U. S .A and U K are almost sure that they can repay their loan given the maturity of their productive capacity, Nigeria, many fear has got various governance encumbrances in addition to weak economy and other incoherencies  that could halt the chances of achieving debt sustainability.