Ms. Patience Oniha, DG, DMO

By UCHE CHRIS

Nigeria’s debt stock seems to have reached alarming proportion with the Monetary Policy Committee, MPC, a monetary policy arm of the Central Bank of Nigeria, CBN, recently warning government over the ballooning rate of borrowing. The MPC members who spoke in the personal capacities are concerned that the challenge with the debt issue has to do with the benchmark being applied by government which relates debt to Gross Domestic Product, GDP, thus lowering the risk of borrowing and raising the country’s debt procuring potential.

The MPC took this position for the first time while the finance minister, Mrs. Zainab Ahmed, was in Davos Switzerland, at the World Economic Forum, WEF, defending government’s borrowing bilge by insisting that the problem is not debt but declining revenue which has remained acute and intractable over the past four years.

The GPD of a country is the total sum of goods and services produced in a year while the revenue is the total money earned by the country during the same period and available to government for its operations. GDP includes the incomes of individuals while revenue is only accruals to government.

Since coming to office as finance minister in 2018, she has consistently argued that the country’s debt to GDP is strong at about 18 percent which allows for more debt against the debt to budget or revenue ratio now at over 62 percent. Her predecessor in office, Mrs. Kemi Adeosun had also raised the alarm over unrestrained borrowing at the time and cautioned against the practice.

The concern of the MPC is understandable given the perverse and adverse effect of such unrestrained borrowings have on the economy, which has generally and perennially left the CBN scrambling to fire fight the unintended consequences. Nigeria’s monetary policy management has been quite unconventional and unpredictable with most international agencies complaining of its negative perception on the economy.

Some members of the Monetary Policy Committee voiced their concerns at the last MPC meeting in their personal statements.

“The rising public debt levels in Nigeria when added to a variety of other financial sector specific risks seem to dampen the prospects of growth in the near term,” Dr Robert Asogwa had said.

While noting that the debt-to-Gross Domestic Product ratio in the country remained arguably sustainable, he, however, said the public debt levels continued to rise and “the current levels appear to be the highest since the HIPC initiative of a debt moratorium by the Paris Club in 2004.”

He stated that the stock of total public debt rose from $79.4bn at end of December 2018 to $81.2bn at end of March 2019, adding that the external debt component had moved from $18.9bn in December 2017 to $25.2bn in December 2018 and further to $25.6bn by March 2019.

Asogwa said, “Even though such countries as Brazil, India and China have higher debt-to-GDP ratios as compared to Nigeria, these economies are also several times larger than Nigeria. Moreover, the increasing appetite for internationally private-held debt and a persistent hunt for Eurobonds are worrying.

“Besides the associated high cost of borrowing, the huge debt levels crowd out other development spending, given the portions of government revenue allocated annually to service the debt. A coordinated domestic revenue expansion with simultaneous fiscal prudence will be key to addressing the current weak fiscal position of the economy.”

Another member, Prof. Mike Obadan, described the accumulated public debt as worrisome, considering the monetary policy implications, among others.

He said, “The Federal Government debt poses a serious burden with nearly 30 per cent of the budget devoted to debt servicing. Although the debt-GDP ratio is relatively low, the debt – revenue ratio is very high. And it must be stressed that GDP is not used to service debt; rather is revenue in the case of domestic debt or export earnings in the case of external debt.

“Therefore, caution must be exercised on further borrowing while domestic revenue mobilisation efforts are stepped up. The state governments also need to exercise caution in borrowing from commercial banks.”

According to Obadan, available data indicate that state governments are relying too much on bank loans compared to the other tiers, as they account for 74 per cent of bank credit to the governments.

“And apparently short-term credits are being used by the state governments to finance consumption or long-term projects. This compounds their financial woes as deposit money banks obtain direct debits from their Federation Account Allocations. There is need to ascertain the deployment of bank loans by state governments while they should mobilise more Internally Generated Revenue to finance development,” he added.

The Deputy Governor, Economic Policy Directorate, CBN, Dr Okwu Nnanna, said the fiscal conditions remained disappointing and could further exacerbate the public sector debt and debt service challenges. He said strengthening the institutional capacity to grow buffers, particularly efficiency in revenue collections, would yield significant economic benefits.

Currently Nigeria’s debt stock stands at $84 billion or N26.8 billion according to the January 2020 figure of the Debt Management Office, DMO, from a paltry amount of N11 trillion in 2015 when the government took over. Experts are generally worried that the impact of these borrowings had been felt as they were merely for recurrent or consumption purposes which is a double tragedy for the country, because the debts will be repaid with future income that the source or earning capacity has not been created or developed.

Beyond the current level of indebtedness, the country is also already primed to borrow another $33 billion in the coming months from diverse sources some of which have been approved by the senate and this may take the country’s debt stock to almost $120 billion or N37 trillion.

For instance, the nation will borrow $29.7 billion from the Chinese Exim bank for infrastructure development, $1 billion from the World Bank, and $1.2 billion from Islamic Bank for agricultural investment.

The Deb t Management Office (DMO) released Nigeria total debt stock for 9 months ended 2019 and largely expected is a further increase in country’s debt level year on year by 17 percent to N26.2 trillion ($85.39 billion at an official exchange rate of N307 to $1).

Since September 2015, Nigeria’s total debt stock has accelerated at an annual average rate of 20 percent, a rate much faster than its GDP growth of 2 percent during the same period. Also, our analysis shows that the government appetite to borrow was fuelled in 2019 with a 17 percent increase in total debt stock year on year, halting a decelerating trend in debt increase since 2016.

The Director-General of the DMO, Mrs. Patience Oniha, said despite the marginal increase in the public debt level, the country was still within the acceptable debt sustainability threshold. The 2017 Annual National Debt Sustainability Analysis Report showed Nigeria’s total public debt-to-GDP ratio was still below the 56 per cent threshold. It is 68 percent on debt to revenue ratio.

The debt-to-GDP ratio is the metric comparison of a country’s public debt (what a country owes) to its GDP (aggregate value of goods and services produced in the economy over a particular period).

Declining revenue particularly occasioned by rising recurrent expenditure, debt service and low oil receipts have led to the desperation by government to raise tax revenue which has seen the passage of the Finance Act 2020 giving teeth to the increase in VAT from 5 percent to 7.5 percent from this month; introduction of Tax Identification Number, TIN, which has become compulsory for all bank account holders to support TIN; introduction of Stamp Duty on all banking transactions; and other sundry taxes, as well as the closure of borders since August 2019, which has fueled inflation from 11 percent to 11.82 percent by December.

Already the 2020 budget is facing prospects of underperformance as a result of declining revenue which is instigating the move for more borrowings and the growing concerns over the eventual effects. The dilemma is that with rising debt the nation’s economic and social problems are worsening and thus creating the additional problem of sustainability and repayment challenges..

The 2020 budget size of N9.78 trillion represents a reduction of N360 billion from the 2019 budget of N10.06. Also the critical index or bench mark of oil price was reduced to $55 per barrel from the $60 for 2019. This sounds realistic as non OPEC members are expected to pump extra2 million bpd next year in the market ensuring that oil price may not rise above the present $60 ceiling.

However, oil price spike to $70 though momentarily, early in the year following some military skirmishes in the Middle East between the U.S. and Iran following the assassination of an Iranian general by a U.S. drone strike. Again, the global threat of Corona virus which is spreading like wild fire has also kept oil price above $60.

Capital vote has also been reduced from N3.18 trillion in 2019 to N2.06 trillion, a shortfall of N1.3trillion. A major challenge since this government has been the failure to seriously fund the capital vote as most of it had always been through borrowing which often never crystallized.

Nigeria seems to have dug itself into another debt hole after it got a reprieve from the Paris Club in 2005, and the federal government is desperate for a way of escape which does not appear to be in sight. Rising debt stock and declining revenue have created a fiscal dilemma and mismatch that leaves the country with few options.

However, the real concern for most people is the allocation of N2.45 trillion for debt service for 2020, which raises a dilemma confronting the country whether to continue to borrow and how to service existing debt which is expected to consume 60 percent of annual revenue in debt service next year to avoid default and further complications with the debt management.

To address these issues government decided to call in the budget support fund of N614 billion given to the state government during Buhari’s first term, which deductions began in September against the protestations of the governors who wanted reconciliation before deductions. Also government has approved an increase in Value Added Tax, VAT, from the current 5 percent to 7.5 percent.

Also the FIRS had blocked the accounts of 40000 alleged tax evaders from whom 19 percent had paid the sum of N98 billion in the last few months, raising hope that a 100 percent compliance can easily raise close to a trillion naira extra for the government. But with the new minimum wage and raging war on insurgency government cash needs seem to be escalating.

Mr. Kennedy Iwundu, a chartered accountant and president of Tax Practitioners of Nigeria, Abuja branch, believed that government tax policy is cutting its nose to spite its face.

VAT increase will increase liquidity in the system with consequent effect on inflation, which is going to compound the job of the CBN; and higher inflation will worsen poverty level and erode present purchasing power; it is called cost inflation because producers who are paying the VAT would pass it it on to the consumers through pricing. It does not make economic logic to raise tax in a depressed economy.

Dr. Bonifce Chizea, CEO BIC Consultancy, a financial advisory firm, borrowing may be necessary but repayment is also a problem.

“With the cut in the budget and especially the capital vote, we should not expect poverty reduction next year; the challenge we must confront is to strive for private sector led economy because as it is government has proved abjectly incapable of managing the economy. Just 10 years ago Nigeria was debt free; today we have doubled what we owed then. And with falling revenue, it will get increasingly more difficult to repay.

Ordinarily, given the size of the GDP, $82 billion debt is still acceptable; but as the minister admitted, the revenue crisis is even worse than the debt itself because it is the revenue that is used to pay the debt.

Mr. Eze Onyepkere, Lead Director, Open Society and Social Justice centre, said the country is in fiscal crisis – like one digging in a hole; what is expected in a situation like this is certain innovative idea and not treading the well beaten path. The FIRS was expected to raise N7 trillion in 2019 but only managed N5. 8 trillion; so where is all the money being declared by the agency? Something is not right.

“There should a convergence between fiscal, monetary and industrial policies to produce the right mix of outcomes. As it is today, there is no direction and we are getting deeper into trouble. For instance, why do we still have fuel subsidy when the economy is choking from low revenue? Why is government pouring money into social intervention when it cannot fund capital project which is a more sustainable way to improve the economy? It doesn’t make sense!

Senator Shehu Sani said that Nigeria must avoid falling into another pit especially from China, by taking another loan; China is offering Nigeria another $5 billion loan. Already Nigeria’s debt to China is about $27 billion.