President Muhammadu Buhari and Minister of Finance, Mrs Zainab Ahmed

By OKEY ONYEWEAKU

Nigeria may be in for a more bumpy road giving her intention to accumulate additional debt to the tune of N15 trillion in the next 3 years.

This information emanated from the 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) which was presented and endorsed at an emergency meeting by the National Economic Council a few days ago.

The development has alarmed not only analysts but also other discerning Nigerians who believe the nation may be plunging deeper into a deadly debt trap sooner or later. There is a indeed a consensus that accumulating more debt contradicts strategic and best economic management practices.

All things being equal, the estimation is that the country which is already burdened with a documented debt stock of N33trillion would struggle to defray N48trillion debt in 2024. Within these three years covered in MTEF/FSP, the Federal Government intends to take fresh loans amounting to roughly N15 trillion – an amount spread installment ally thus: N4.893 trillion (2022), N4.75 trillion (2023) and N5.356 trillion (2024). In fact, Minister of finance said the 2022-2024 MTEF was prepared to reflect the global economic recovery given improved vaccination outlook and lower incidence of Covid-19 infection. A few days ago, the Senate approved President Muhammadu Buhari’s request for the authorization of N2.343 trillion ($6.183 billion USD) as External Borrowing in the 2021 Appropriation Act.
‘What is our economic blueprint meant to achieve? exclaimed an economist who would not want to be mentioned in print.
There have been serious concern from every quarter over the increasing stock of debt already hanging on the country’s head. Recently, at the African Development Bank meeting, Director-General of the World Trade Organisation (WTO), Dr. Ngozi Okonjo-Iweala, observed that Nigeria’s debt to GDP which stood at 35 per cent was discomforting. This contrasted with the Minister of Finance, Zainab Ahmed who played the Debt to GDP down to 29 percent. The contradictions have been worrisome over the statistics and direction of the economy.
Whatever may be the case, experts explain that public debt is how much a country owes to lenders outside of itself. These can include individuals, businesses, and even other governments. The term “public debt” is often used interchangeably with the term sovereign debt.

Public debt according to them usually only refers to national debt. Some countries also include the debt owed by states, provinces, and municipalities.
BH research shows that government may decide to borrow when its total income earned over a period of time falls below expectation. Therefore, it can borrows in order to finance a huge capital project which the recurrent expenditure cannot finance. Whereas governments borrowing is not bad in itself, economists believe that borrowing above your capacity to repay can be challenging.
They also noted that high government borrowing brings about higher debt interest payments. ‘’As borrowing increases, the government have to pay more interest rate payments on those who hold bonds. This can lead to a greater percentage of tax revenue going to debt interest payments’’, said experts.

However, as Nigeria’s debt stock continues to rise, FG feels convinced that since its debt-to GDP ratio was still below 25% per cent, it still has a lot of room to accommodate more debts.
Already, details show that Nigeria has a deficit of N5.2trillion, representing 3.6 per cent of the N13.5trillion. Nigeria will be spending about 80 or 90 per cent of its revenues as interest on the loans burden. The country expects revenue of about N8trillion which it is not absolutely sure to realise given the head winds and other challenges.

In this instance, the government may be borrowing a leaf from economies that have sustainable ways of servicing and refunding the loans as and when due. For instance, in October 2020, the total U.S. debt was over $27 trillion. The debt-to-GDP ratio was 139% at that time. That’s based on the second quarter 2020 GDP of $19.5 trillion. Whereas the U.S economy and other developed economies are productive and can realise good revenues, Nigeria is still a mono-economy depending up 80 per cent for its foreign exchange inflow. The development does not place Nigeria on the same pedestal with the developed economies. Unfortunately, as the debt stock of Nigeria continues to rise even with last week
An expert who wouldn’t want to be mentioned said Governments tend to take on too much debt because the benefits make them popular with voters.

Increasing the debt allows government leaders to increase spending without raising taxes. Investors usually measure the level of risk by comparing debt to a country’s total economic output, known as gross domestic product (GDP). The debt- to -GDP ratio gives an indication of how likely the country can pay off its debt.
Some economists explained that a country’s debt is sustainable if it is able to finance its debt obligations without external help or going into default.

‘’There is no single accepted measure of debt sustainability but the two most common metrics are the Debt-GDP ratio – which compares the size of a country’s debt to its economy – and Debt Servicing-Government Revenue ratio – which compares how much a country pays in debt financing with how much it earns in a given period,’’ they maintained.

The fear of many discerning Nigerians has been that the country’s debt may be headed to about $40billion if conscious effort is ignored to apply adequate strategies.

But many experts have faulted this line of argument of the government on debt ratio to DGP instead of using debt ratio to revenue. Already analysts believe that the nation is being plunged into another round of deeper indebtedness given that debt to revenue which now stands at about 60 per cent.
Former President of Chartered Institute of Bankers and CEO of Maxifund Securities ltd, Mazi Okechukwu Unegbu told BH that whereas borrowing was good for financing capital projects, he explained that it could be dangerous to over borrow.
According to him, Nigeria’s debt servicing ratio was is high. That is debt service alone and not even the principal.

“When Obasanjo and Okonjo Iweala were there and helped in writing off our loans when we owed billions, I don’t know what we are going to do now that we owe trillions. It is so sad. And this debt is being accumulated for the new or future generation. It is unfortunate. The problem is we do not know what they are doing with these debt. We don’t have infrastructure as in good roads and no unemployment. The best thing to do is to tackle unemployment. Even if it is opening the gutters and closing them that will be work for them, he said.

Similarly, the immediate past Director-General, the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said the rapid rate at which Nigeria is accumulating debt was dangerous to the economy and unsustainable.
According to him the borrowing spree of FG was becoming worrisome and disturbing.

“It has inflationary implications; it is not healthy for the economy because inflation erodes the value of people’s income and affects their standard of living. The value of a currency has a lot to do with poverty and welfare. We must be worried about the fast rate of money supply because inflation triggers poverty,” he said.

He also expressed concern, “We need to caution the government against being too dependent on the CBN for financing deficits because of the high inflationary impact. Inflation is a terrible thing. When people complain about hunger and poverty, it is because the money they have in their hands cannot buy anything much.”

Now, public debt is on the rise again, driven by aggressive borrowing by the present administration and currency devaluation that increased the size of foreign debt. Many international bodies such as the World Bank have raised concern over the speed and scale of Nigeria’s borrowing, often highlighting its weak Debt Servicing Ratio.

“When debt approaches a critical level, investors usually start demanding a higher interest rate. They want more return for the greater risk.’’ Said a senior banker who pleaded anonymity.

A respectable economist and former Managing Director of a big bank in Nigeria, Mr. Emma Nwosu had in an article said, “The Minister of Finance begs the question by rationalizing the borrowing spree with her purported 21 per cent Debt to GDP Ratio, relative to the universally acceptable 50 – 55 per cent. She ought to know that GDP-based ratios could only be presumed for dynamic economies, with efficient allocation and domestic capacity to respond promptly to government spending and other measures for driving the economy to a new equilibrium. It is the Debt to Revenue Ratio that applies to inelastic, mono-product and import-dependent economies like ours. Transition is not imminent either. Our rulers are primarily interested in measures for clinging to power. The ones for economic transformations are secondary and half-hearted.”

‘’By maintainable revenues, Nigeria is over-borrowed and has crossed the threshold of the debt trap, as would be demonstrated. The economic outlook is very bad. Crude oil and Gross Domestic Product (GDP) are in decline. There is the threat of full-blown recession, accelerated by Covid-19 lockdown. Tax coverage and other sources of revenue remain limited. The ethical track record of the government is also bad,” he added.

There is a consensus that the level of debt that an economy can bear depends on numerous factors: the economy’s expected rate of economic growth; whether domestic or foreign borrowers, or domestic government institutions, own debt; the country’s fiscal capacity; inflationary expectations; currency risk; and default risk. While it easy to determine where Nigeria ranks in this parameter now given the new budget, both local and international communities are aware that the country economy is very weak in every standard measurement. However, Nigeria’s debt to Gross Domestic Product may look good, but analysts believe that the devil is in the details of debt to revenue and servicing.
Dr. Alex Otti has opened the eyes of many Nigerians to the sad and alarming situation of the country’s indebtedness. He stressed that the issue was not in accumulating debt but in the capacity to service it.

Economists define debt service as the cash that is required to cover the repayment of interest and principal on a debt for a particular period. … This ratio helps to determine the borrower’s ability to make debt service payments because it compares the company’s net income to the amount of principal and interest the firm must pay.

According to them, debt service ratio is the ratio of debt service payments (principal + interest) of a country to that country’s export earnings. A country’s international finances are healthier when this ratio is low.

Amongst other things, there is a structural defect that ensures that we spend over 70% of our budget on recurrent expenditure and less than 30% on Capital expenditure. The recurrent vote goes mostly into running government while the rest of the people are meant to benefit from the capital expenditure.

Our final submission is that we must restructure this country to streamline and tame cost of governance and focus on pulling our people out of poverty. We can choose to do it voluntarily or wait for economic forces to force us to do it. The choice is ours.”
He said this in an interview he granted a newspaper in Nigeria recently.

Not even the crude which is the mainstay of the economy can pull the country out of the quagmire. Despite that crude price hovers between $60 and $70 per barrel, a member of the economic advisory council, Bismarck Rewane who spoke at a Webinar fora advised that more must be done in the right areas and sectors if the economy must grow. He went ahead the puncture the argument of dependence on oil by projecting that by 2024 that Nigerians might start buying more of electrical cars than engines with fossil oil.

Even though he expressed optimism that the economy still had a chance to grow depending on what the country does from no, he said, ‘’We don’t have time. Population is a time bomb.Oil is going away. Nigeria has to re-invent itself very very quickly. Nobody is buying your fuel in the next ten years.”

Rewane explained the economy could slip back if the growth drivers are not encouraged.

Sharing in the views of many that FG is trading a dangerous route by accumulating more debt, former Deputy Governor of the CBN and a Presidential hopeful, Mr. Kingsley Moghalu said:
‘’The rate at which Nigeria’s public debt has increased in the last six years is unprecedented, alarming and unsustainable. From$10.31billion at the end of June 2015, the total external debt increased to $32.85billion at the end of March 2021, which represents a 218 per cent increase. The total outstanding public debt stock increased by 173 per cent in the same period, from N12.11 trillion to N3310trillion. On the average, over N3.6 trillion is being added to public debt annually.’’

Unfortunately, the insistence of the government to continue on a borrowing binge is happening at a time the Nigerian economy is not strong and has no immediate indication of turning around. The economy only recorded a paltry growth of 0.51 per cent in first quarter 2021 after suffering a recession in 2020 and 2016. Recent statistics revealed that the rate of unemployment, the second highest in the world is 33%; Underemployment rate stood at 22%; inflation which however retreated to 18.12 percent the roof top at 18.17 per cent in April 2021; diaspora remittances inflow in the country fell 27 per cent year on year (YoY) to $17.2billion in 2020 from $23.55billion.

Many have not forgotten that the operating environment last year was choking for almost all the businesses including banks.

The 2021 budget runs a deficit of N5.2trillion representing 3.6 per cent, while the country owes N33trillion ($82bn) debt. The fear here hinges on the fact that federal government spends over 60 per cent of its revenue to service debt.

The major revenue earner for the country, crude oil price, which hovers between from $65 pbd to $70 pbd as at July, 2021 still fluctuates.

Insecurity has not only hobbled agriculture, many parts of the Northern part of Nigeria have been taken over by bandits that not much business activities can subsist.

With the fearful scenario above, economic trajectory of the country is still uncertain. This is because even the apex bank has warned that care must be taken to galvanize and push the economy out of slumber.

Many are reminded of 2005 when Nigeria and the creditors Club reached an agreement on the US$ 30 billion debt with the Paris Club. The creditors cancelled US$ 18 billion, and Nigeria repaid US$ 12 billion.

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