Buhari and Finance Minister

By OKEY ONYENWEAKU

Even as the COVID-19 scourge bites deeper in Nigeria and elsewhere, concern is also mounting over the nation’s humongous debt portfolio, which analysts worry is already crossing over to unsustainable limits.

Related to this is the fact that in the absence of any other quick-win options for financing the national budget, the continuing spate of borrowing by notably, the federal authorities, is assuming a troubling dimension that analysts say, definitely needs to be addressed now.

The nation’s debt profile stood at N27.4 trillion as of December 2019. This year however, a string of factors, including lowered oil prices, reduced demand for the commodity that provides over 90 per cent of the nation’s earnings and the lockdown-induced drop in collectible federation account revenues overall has sent the nation’s economic managers into palpable panic mode.

In the ensuing desperation, they have gone cap in hand, all over the world in search of where to find loans and aids that would help prevent the crashing of the economy and ensure that government can still meet its basic commitments going forward.
According to analysts spoken to by Business Hallmark, this spiral of increased borrowing, mounting interest costs and expanded national debt size surely have broader implications for the economy and society such that they cannot just be ignored.

Indeed, they see this situation as being a critical factor in the mounting pressure on the foreign exchange rate, which some say could even introduce fresh talk about, and calls for the devaluation of the naira.

One of the recent expressions of worry over the dire straits that the nation is currently embroiled in has come from the National Leader of the ruling All Progressives Congress, APC, Asiwaju Bola Ahmed Tinubu. The politician, who had in the past been known to make occasional interventions in the national economic management debate space, had in the course of his latest statement on the crisis rocking the ruling party, alluded to the critical imperative of ensuring that a lot of focus is placed on fixing the deep economic problems of the country.

Even before then, the debt situation in particular had pitched former Vice President and opposition leader, Atiku Abubakar against the incumbent administration, with Information Minister, Lai Mohammed, responding very brusquely to a statement from Atiku which had called attention to the rising spiral of borrowing and its troubling implications.

Said Atiku in his widely publicized statement of caution, with the self-explanatory title, ‘Endless Borrowing Will Lead to Endless Sorrowing:’
‘ Barely two weeks ago, I warned during my Founder’s Day lecture at the American University of Nigeria, Yola, that Nigeria had taken almost as much foreign debt in the last three years, as she had taken in the thirty years before 2015 combined.
‘The fact that Nigeria currently budgets more money for debt servicing (₦2.7 trillion), than we do on capital expenditure (₦2.4 trillion) is already an indicator that we have borrowed more money than we can afford to borrow…

‘And while spending 50% of our current revenue on debt servicing, this administration wants to take further loans of $29.6 billion!

‘As a businessman, one of the very first things I learnt is that you do not take loans except you are expanding your business. Even as an individual, when your income cannot fund your lifestyle, you are challenged to grow your income, not your borrowings.
Even if this administration borrows $1 trillion, it will never be enough because their challenge is one of capacity. They are not using the funds they already have wisely. They do not need more debt. They need more intellectual capacity.

The money the Muhammadu Buhari administration wants to borrow to fund its Medium Term Expenditure Framework (MTEF) could be acquired without sinking the nation into further debt. All it requires is visionary leadership and business acumen,’ the former VP emphasized.

Returning to his pre-election call for the reform of the Nigerian National Petroleum Corporation, NNPC, Atiku contrasted the sagging revenue and profitability fortunes of that corporation with that of the public-private Nigeria Liquefied Natural Gas company a joint venture between the Nigeria government and the private sector that ‘declares very handsome profits, in billions of dollars every year, {while} the NNPC declares loses! This is proof that the NLNG model works, and the NNPC model does not,’ the former customs official surmises.

But he is not done:
‘So, what must Nigeria do now? Rather than profligate borrowing, what Nigeria needs to do is restore investor confidence in our economy. Key to that is respecting the independence of key institutions, such as the Judiciary and the Central Bank of Nigeria….’

Lai Mohammed spots a lie
In his response however, Mr. Mohammed, in a statement said the former VP’s fears were largely misplaced and that he was ‘spreading a false and frightening report on the country’s debt profile.’

Responding to the former vice-president’s claim that ‘the medium term expenditure framework (MTEF) and fiscal strategy paper (FSP), Nigeria’s debt to revenue ratio was 99% in the first quarter of 2020, Mohammed said this was incorrect.
“We are also not able to ascertain the source of the first quarter figures of N943.12 billion for debt servicing and N950.56 billion for retained revenue, which he also quoted,” Mohammed asserted.

Beyond the underlying political brickbats however, there is a point indeed that there is really something to worry about.

When Business Hallmark asked the economist and financial planner, Chima Udeze to respond to ‘this back and forth between Lai Mohammed and Atiku on how bad our borrowing, revenue and repayment interest situation is and what we are expected to believe, he said:
‘A borrowing binge to meet recurrent spending is not the smartest way to run any economy. Finding comfort in a debt to revenue ratio of 99% in Q1 2020 is, to put it mildly, cavalier. Lai Mohammed is paid to spin so the validity of his position on public debt is dubious. Atiku on his part is partisan, thereby weakening the authority of his expressed concerns. But, from the standpoint of a neutral, we need to restructure our fiscal framework. We need to cut the size and cost of government, restructure our tax management framework and improve fiscal discipline and respect for the sanctity of contracts to pull in more private capital in growing local infrastructure. Post COVID-19, the world will be awash with capital looking for superior returns, we need to provide the environment to tap into the emerging opportunity.’

Business Hallmark checks suggest that the source of Atiku’s data may have been a piece published in Nairametrics that ‘suggests almost all the revenue generated was used to meet debt service obligations.’According to the report, the revelation about ‘debt service as a percentage of revenue rising to 99% in the first quarter of 2020’ was gleaned from ‘the Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) report recently released by the Federal Ministry of Finance, Budget, and National Planning.’

‘A cursory review of the data obtained from the MTEF/FSP report shows that in Q1 2020, Nigeria incurred a total sum of N943.12 billion in debt service while the federal government retained revenue was put at N950.56 billion. This implies Nigeria’s debt service to revenue is estimated to be 99% during the period,’ the report had outlined.

Tracing the connections between debt service, recurrent expenditure, and revenue, the report was strong on the point that the nation may indeed be tottering towards a critical point.

This again was to be the focus of a discussion convened by a church group in Lagos at the weekend and which had former CBN Chief, Lamido Sanusi Lamido and incumbent Vice President, Yemi Osinbajo contributing. In the course of the session, the VP who heads the Federal Government’s economic team himself literally admitted that there was indeed grave concern over the nation’s revenue to expenditure mix and that there really would need to be a national debate on the subject going forward.

Arguably, while some of the challenge is traceable to the outbreak of the COVID-19 pandemic, however, analysts who pore through the data day that the evidence suggests that there had indeed been a somewhat significant drop in revenues even before the lockdown-induced economic downturn joined in the fray.

Within the period under consideration, the country earned some N950.5 billion in revenue rather than the expected N1.9 trillion and which registers as a shortfall of 52%. Broken down, oil revenue was N464 million, a shortfall of 30% even as non-oil revenue was N269 billion, a shortfall of 40%.

Over the years, the point of defence for the federal authorities has been that with total public debt still lower than 30% of GDP, the debt burden was yet light in contrast to other scenarios. However, critics of this view insist that given the parlous structure of the economy, a better gauge of debt sustainability would rather be the debt service-to-revenue ratio. It is the further lowering of this vital ratio that has presently become the point of extreme concern.

Analysts concerns are reinforced by the further admission by the Finance Minister that the economy may almost inexorably now be headed onto another spiral of recession. With aggregate government revenues speculated to remain depressed for a while, there is more pressure to take recourse in debt borrowing. Already, the national assembly has approved a further $5.5 billion in debt borrowing for the government, a nod that has also raised the negative bar once more on the already challenged debt service to revenue ratio.

With lower purchasing power in the economy overall, any hope that some relieving rise in crude oil prices would cover the gaps would not be comprehensive given that there is still a glut in the global market as well as the fact that part of the negotiations triggering the current price rise rests on the back of a cut in its crude oil output which translates to earning less oil revenue.

“Crude oil production volume has been revised downwards from the 2.18 million barrels per day (mbpd) in the 2020 Budget to 1.9 mbpd (out of which 400kbpd is condensate). This reflects recent oil output cut by the OPEC and its allies to stabilize the world oil market which put Nigeria’s quota at 1.48mbpd, excluding condensates. Oil production averaged 2.1mbpd in the first two months of the year before the collapse in demand and price as most economies went into lockdown.

Crude oil producers are experiencing great difficulty in selling crude cargoes, resulting in heavy price discounting to attract buyers. Nevertheless, the lower production volume has enabled the NNPC to shut in some very high cost oil wells, and hence lowered the average production cost, from about US$33 to under US$28 per barrel.” The MTEF document reportedly outlined.

The IMF’s position
Against the backdrop of the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries that debt service to revenue threshold should not exceed 23%, the reality very clearly is that Nigeria must really prepare to claw on all fours if it must have a fighting chance of right-sizing its economic bearings.

In announcing its approval of its loan facility to Nigeria recently, the International Monetary Fund had underscored the fact that it was almost exclusively being done on account of the crisis situation that countries like Nigeria had found themselves no thanks to the COVID 19 situation:
‘The IMF approved US$3.4 billion in emergency financial assistance under the Rapid Financing Instrument to support the authorities’ efforts in addressing the severe economic impact of the COVID-19 shock and the sharp fall in oil prices.
The COVID-19 outbreak has magnified existing vulnerabilities, leading to a historic contraction in real GDP growth and to large external and fiscal financing needs.
Once the impact of the COVID-19 shock passes, the authorities’ commitment to medium-term macroeconomic stability remains crucial to support the recovery and ensure debt remains sustainable.’

‘Even before the COVID-19 outbreak, Nigeria’s economy was facing headwinds from rising external vulnerabilities and falling per capita GDP levels. The pandemic—along with the sharp fall in oil prices—has magnified the vulnerabilities, leading to a historic decline in growth and large financing needs.
The IMF financial support will help limit the decline in international reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing and mitigating the economic impact of the pandemic and of the sharp fall in international oil prices.’

Following on this, a further statement by Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, added more contexts to the subject:
‘The COVID-19 outbreak—magnified by the sharp fall in international oil prices and reduced global demand for oil products—is severely impacting economic activity in Nigeria…

“The authorities’ immediate actions to respond to the crisis are welcome. The short-term focus on fiscal accommodation would allow for higher health spending and help alleviate the impact of the crisis on households and businesses. Steps taken toward a more unified and flexible exchange rate is also important and unification of the exchange rate should be expedited.
“Once the COVID-19 crisis passes, the focus should remain on medium-term macroeconomic stability, with revenue-based fiscal consolidation essential to keep Nigeria’s debt sustainable and create fiscal space for priority spending…

“The emergency financing under the RFI will provide much needed liquidity support to respond to the urgent BOP needs. Additional assistance from development partners will be required to support the government’s efforts and close the large financing gap. The implementation of proper governance arrangements—including through the publication and independent audit of crisis-mitigating spending and procurement processes—is crucial to ensure emergency funds are used for their intended purposes.”’
Indeed, debt politics has sadly returned to the centre of the Nigerian economic game once again.

Even the Debt Management Office (DMO) suggested this much half a year ago even as it disclosed that the country’s total debt stock as of December 2019 stood at N27.4trn. Broken down, this debt sum includes N21.7trn owed by the Federal Government and the N5.6trn owed by the different sub-national entities.

Further evaluated, the Federal Government’s share of the debtstock comes to 79.59% of the total debt, while the states and the FCT accountfor the remaining 20.41%.

Of this stock also, foreign debt accounted for 32.93% of the total debt at N9.02trn, with the federal authorities being responsible for N7.53trn and the state governments being indebted to the tune of N1.48trn.

Domestic debts accounted for the balance of 67.07%. Of this, the Federal Government chalked domestic debt of N14.2trn, which translates to 52.09% of the overall debt figure, while states were responsible for N4.1trn or 14.99% of the total debt volume.
And now with Coronavirus having its debilitating effect on both men and goods, all projections are that going forward;the quantum of external and domestic debt will almost inevitably rise further in 2020 and going forward. But at what costs? We wait.