Business
FG seeks lifeline in pension funds
…as revenue, debt crises worsen
By EMEKA EJERE
It is now clear that the federal government is relying on the pension funds as one of the ways to source funds for the financing of the 2020 budget deficit. Last week, the National Economic Council (NEC), announced the resolve of the federal government to borrow N2 trillion from the current N10 trillion pension funds to finance the development of infrastructure.
Kaduna State governor, Nasir el- Rufai, while briefing newsmen at the end of the meeting presided over by Vice President Yemi Osinbajo, said the decision to pull N2 trillion out of the pension funds was reached by a NEC committee that headed by him.
According to the governor, the committee presented an interim report on its assignment to the council and the decision to borrow N2 trillion from the pension fund was consistent with the Pension Reform Act 2004, which empowers the government to borrow 20 per cent of the fund to address national issues.
From poor port infrastructure to dilapidated transport networks; epileptic power supply to huge housing deficit, Nigeria’s infrastructure gap cannot be overemphasized. This has been a recurring discourse as it is widely believed to be one of the biggest challenges to the ease of doing business in the country as well as economic development.
According to the IMF, Nigeria’s infrastructure stock of 25% of GDP remains far below the 70% international benchmark. This implies that the country’s public capital stock per head is lower than the global average, a situation that has continued to hinder growth in GDP and private sector investment.
While the government has relied heavily on a combination of internal and external borrowing to fund capital projects, the overall impact on the operating environment remains negligible as manufacturers and SMEs continue to grapple with bottlenecks which ultimately make their goods more expensive and less competitive when compared to those of their foreign counterparts.
With the recent NEC’s decision to borrow N2 trillion from the pension funds to finance infrastructural development, Nigeria’s debt profile will jump to N28.2 trillion from thepresent N26.2 trillion standing of both foreign and domestic debts.
Data released by the Debt Management Office (DMO), on January 20, 2020, showed that the nation’s total external debt was N8.27 trillion or 31.55 percent and total domestic debt was 17.9 trillion or 68.45 per cent. In recent times, government reliance on borrowings has raised concerns on the sustainability of public debt given the huge interest payment incurred in debt servicing.
However, Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, has consistently insisted that the nation faces no debt problem. Speaking recently at the World Economic Forum (WEF) in Switzerland, recently, the minister reaffirmed that Nigeria does not have a debt problem but the challenge of under-performing revenues, which makes debt service obligation a struggle for the country.
Little wonder government is considering unconventional methods of financing to bridge the huge infrastructural deficit. El-Rufai believes that with paltry N200 billion allocations for road construction and maintenance in the 2019 budget and N169 billion in 2020 budget, the country will never be able to address its road infrastructure deficit.
According to him, highway infrastructure deficit can only be effectively addressed by long term funds such as pension funds. He said with the pension funds owned mainly by youths in their 30s who still have several years ahead of retirement, utilising the funds for infrastructure would not generate any problem.
He said: “In 2019 budget, N200 billion was budgeted for construction and maintenance of federal highways. In 2020, the budget is N169 billion. If we continue this way, we will never be able to fund highway infrastructure. We need to unlock funds to construct and maintain highways.
“We will never be able to construct and maintain highways with N200 billion every year. Highway infrastructure and maintenance can only be done with long term funds.”
Listing rail, road and power as areas identified by his committee for the pension funds to be invested, el-Rufai added that the borrowing would be done through bonds with private companies investing in road and rail infrastructure and paying within a period of 20 years.
Analysts believe that the long-term investment horizon of pension funds makes them ideal funding source for financing infrastructure, since these investments are expected to generate predictable and stable cash flows which are used to service the debts over time.
They, however, expressed reservation that given incomplete or abandoned infrastructure projects, project delays and cost overrun history of the federal government, pension funds administrators may be reluctant in extending funds to government projects as this may affect the returns on their assets and ultimately the realization of retirement benefits for their principals.
Discordant tones
Mr. Joe Aligbe, national vice president, Association of Senior Civil Servants of Nigeria, while speaking on the justification of the federal government borrowing from the pension funds at a time, sees nothing bad about the move if only government will pay back the money as and when due. He said there is no problem if the pension administrators ensure that the rules governing the utilisation of pension funds are followed before the release of such funds to government.
His words: “It is not a bad thing to borrow from the pension fund, but why we kick against it is that there are no safety nets; there is no guarantee that the government will pay back as and when due.
“However, in economics, it makes no sense to have idle funds. Funds such as the trillions of naira we have in pension savings should be invested. Whether the federal government is borrowing or not, the expectation is that it is following the rules.
“There are guidelines that govern the utilisation of these pension funds. If the pension administrators ensure that these rules are followed before the release of such funds to government, then there are no problems; it is welcome.
“Why the labour unions will always kick against government borrowing these funds is that we do not trust government to deliver on its promises and we do not want what happened to savings made during the closed pension scheme to happen to the contributory pension scheme.
He, however, argued that the fact that government has not been fulfilling its obligation to the pension funds places a moral burden on it.
“However, this borrowing is not justified because whoever comes to equity should come with clean hands. The government has not been fulfilling its obligation to the pension fund; you can find that out from the pension fund administrators.
“That is why retirees, even in the contributory pension scheme, find it very difficult to get their pensions as and when due when they retire. There is a delay because government has not paid what it should pay.”
Last year, the national chairman of the All Progressives Congress (APC), Comrade Adams Oshiomhole, advised the federal government to stop borrowing from the pension funds to finance budget deficits. Oshiomhole, who spoke at the opening of a presidential policy retreat at the Presidential Villa, Abuja, said all pension assets must be deployed to investments in critical sectors that impact directly on the lives of ordinary Nigerians.
He said it was unfair to use pension funds that are the contribution of poor Nigerian workers to finance projects that often do not benefit them directly.
Oshiomhole had cautioned, “I ask our experts to recognize that the primary purpose of the workers’ social capital is that it would be creatively managed and deployed to workers’ social needs, including housing, education and all the other factors.”
“It wasn’t meant to fund government’s deficit, it wasn’t meant to support federal government deficit; it was meant to address the primary social purpose of those who work so that they are sure that by the time they are retired, they have a modest home to retire to.”
Prof. Uche Uwaleke, head, Department of Banking and Finance, Nasarawa State University, Keffi, has a contrary view. He believes that faith in the federal government is usually what makes borrowing instruments issued by the government attractive. Except for the impact of inflation, he said, they are generally considered risk-free.
Uwaleke said, “Pension funds are not meant for high-risk investments. Liquidity consideration is paramount in managing pension funds. It is not surprising therefore, to have the bulk of pension funds lent to the Federal Government.
“So, the borrowing is justified on the grounds that retirees’ funds are safe and especially so where the funds have been invested in critical capital projects.
“It is therefore right to claim that pensions funds lent to the government have contributed in no small measure to the pace of economic recovery.”
