A forth night ago, the first part of this article was published, but the second installment was interrupted by the events in Zabarmari. In between, the World Bank issued a report on the economy, which largely confirmed the premise of this article and indeed, as well agreed with the conclusion, namely that the debt we have accumulated would not do us any good however and whatever the manner of its deployment.
According to the World Bank, the economy is about to enter a three year recession that may be worse than ever before, unless needed reforms are introduced and implemented.”In the next three years, an average Nigerian could see a reversal of decades of economic growth and the country could enter its deepest recession since the 1980s”, the Bank said in Nigeria Development Update, released on Thursday.
Entitled, “Rising to the Challenge: Nigeria’s Covid responses”, the report said that this path could be avoided if progress in the current reforms is sustained… Nigeria is at a critical historical juncture, with a choice to make”, said Shubham Chaudhuri. “Recovery in 2021 is simply uncertain, while food scarcity or insecurity will increase; as about 15-20 million people will join the extreme poor in the country”.
Why is this so; why is the country going into such a severe recession, when other countries also affected by the Covid 19 pandemic are already exiting recession and moving toward recovery? There are two straight answers to the question:
The first is the increasing shortfall in revenue exacerbated by the equally increasing rate of debt service as a result of the increasing borrowing by the government; and secondly, the lack of definite reforms, which the World Bank alluded to, by the government to reverse the import dependency nature of the economy and the pressure it imposes on the value of the naira.
Both are related and reinforcing: The increasing rate of borrowing and fiscal deficit are the direct cause of the pressure on the naira because we are printing money without production; consequently, the currency will continue to come under pressure as more and more naira continue to chase fewer and fewer dollar.
Since April, the supply of dollar to the forex windows has dropped by over 50 percent, from about48 percent in April to between 12-23 percent currently, with almost $3 billion of unmet requests waiting repatriation. As bad as this may seem, the greater challenge is the rising level of debt service, which will always mitigate revenue earning capacity to fund the forex demands.
In the first part of this article we argued that debt does not produce development, at least, at macroeconomic level; its major role is current account stabilization or cash flow problems to meet current account payments. Debt cannot be used for economic development because it ties the country’s future to present spending.
Debt ultimately is bad because the bible says so, that “he who goes a-borrowing goes a-sorrowing”. But debt has become fashionable and attractive because of the dominant theoretical idea of consumerism or demand economics. At micro level, debt has a catalytic effect if well managed, but our recent history in banking shows this as a tall order; however, public debt lacks this fundamental precondition, and is even incapable of this requirement; and Nigeria is not alone on this.
Thus we concluded: “In the final analysis, government debts are never well invested and managed. And no country has actually developed through external borrowing; it is a theoretical leap from the micro level that has little semblance in history and reality.
“Any country that had gone into debt over a period of time usually came worse off. Zambia, Sri Lanka, Argentina, Mexico, Brazil, Greece, Spain, Portugal, Italy etc are all current example. Foreign debt is not an investment option; rather it should be a cash flow management stop gap. Any one relying on debt for investment will go a-sorrowing”.
The second theoretical underpinning for debt is the illusion that sovereigns don’t go bankrupt. In theory and perhaps, international law, this may be so, but the reality is different. It is a fantasy driven by consumerism which has left the global economy in a cycle of crises. It is a legalistic and strictly narrow interpretation of the word – bankruptcy.
In simple English, bankruptcy is a situation where an individual or company is unable to meet its current liabilities. Therefore, countries can also be bankrupt; the only difference is that while the individual or company is put out of business or existence, a country as a sovereign exists in perpetuity.
Most of the global financial crises of the past 30 years have their origin in state bankruptcy. Argentina defaulted in 1991 and 2002, creating a fire storm in Europe; there was also the Mexican Tequila crisis in 1994; the Greece debt crisis of 2010, the Asian financial crisis – all requiring massive debt bail-out by the World Bank, IMF, and the EU economies.
So it is not true that sovereigns do go bust financially; the only consolation is that they cannot be liquidated like a company. But when a country depends perpetually on debt to meet its current liabilities as we have done in the past five years, the country is basically bankrupt, because a default could trigger a major global financial disruption that would require international bailout.
Therefore, time has come for Nigeria to properly reappraise its fascination with debt and borrowing because it is an ill wind that will do us no good ultimately. Nigeria is walking into a big trap with its eyes open.