Since the change in government on May 29th 2015 following the general election, Nigerians have suddenly awakened to the huge internal debt profile hanging over the nation. At the last count, federal government debt is put at N7 trillion, while the 36 states owe about N660 billion made up of unpaid salaries and contracts already executed.
The situation of the state governments is so precarious to necessitate calls for bail out. A few days ago President Buhari ordered the sharing of about N320 billion to ameliorate the dire situation of the state governments. This may provide a temporary relief but it does not resolve the problem nor prevent a recurrence of this ugly development.
In economic terms, debt is not necessarily bad; it may be imperative to acquire certain level of debt to augment available internal resources in order to stimulate growth and development. Naturally, no nation or individual has all the resources it needs to meet its development requirements. The international threshold for debt to GDP ratio is about 40 percent for developed economies. China is reported to be geared to about 150 percent debt to GDP. For developing economies, the bench mark is usually below 30 percent.
With Nigeria’s ratio of debt to GDP at about 12 percent after the rebasing, the economy seems under-borrowed and healthy. But there are two caveats on the issue of the size of debt to GDP. The first is what and how the debt is used; and secondly, the capacity of the economy to repay the debt. There are serious challenges on both counts on Nigeria’s debt ratio.
Most of the country’s debts were either stolen by corrupt public officials or used for recurrent rather than capital or productive expenditure. Also, the economy is dependent on oil and lacks the productive capacity to generate enough income to repay the debts. Over the years Nigeria has not made any considerable progress in diversification of the economy which makes it vulnerable to oil price volatility.
This newspaper recalls that it was a similar situation in 1984 that led to what later became a debt overhang that almost strangulated the economy before the debt relief in 2003. Another situation like that must be avoided because of its long term debilitating effects. This is the time to ensure that state governments should implement the Fiscal Responsibility Act to guide them in the deployment of borrowed funds. Unfortunately, most debts are accumulated without specific purpose and therefore are often wasted on grandiose and prestige projects.
Hallmark believes that the practice of borrowing money to finance recurrent expenditure is unhealthy and tragic because it amounts to spending the future today as the debt does not add to economic growth. A fundamental requirement of debt provision is that it should be able to repay itself. When debt is squandered on unproductive ventures, then its purpose is defeated.
State government should cooperate in the execution of some projects by pooling resources to ensure judicious use and avoid taking on some projects that may be eventually abandoned. Also, the Central Bank of Nigeria, CBN, should impress it on banks to only lend to state governments for well specified projects rather the current practice of advancing them overdraft facilities for recurrent and cash flow problems.
There is also the need for both federal and state governments to reduce their recurrent expenditure to guard against the present situation where they are always under pressure to meet recurrent costs. No country can develop with over 70 percent of its annual budget expended on recurrent costs. It is a recipe for disaster and what is happening now should not be surprising. In this regard, the role of the Houses of Assembly is very critical.
This newspaper is saddened that the constitutional purpose for the existence of the legislatures at the different levels of government is being defeated. At the state level in particular, the Assemblies have virtually lost relevance and can no longer provide any check to executive recklessness. It is the duty of the legislature to ensure that public resources are not frittered away by mindless governors. Because no governor can contract a loan without legislative approval such approval should also go with oversight and review of the utilization of the funds.
So, it is important that the second arm of government wakes up to their responsibility and justify their existence.