Nigeria facing existential threat - World Bank
President Muhammadu Buhari and Minister of Finance, Mrs Zainab Ahmed

BY EMEKA EJERE

Nigeria’s mounting debt profile may soon spike beyond sustainability if reactions trailing the recent extension of the nations petrol subsidy regime by 18 months is anything to go by.
Already there are indications that the subsidy burden on the 2022 budget may worsen as oil industry experts forecast higher landing costs for imported petrol in the days ahead. The prices of imports have been on the rise, following the rise in crude oil prices which hit $90.3 per barrel early in the week.

The Nigerian National Petroleum Company Ltd (NNPC), had estimated the subsidy cost at N3.0 trillion in the next 18 months based on the current landing cost of about N360 per litre.
However, industry operators forecast the expected subsidy cost at about N3.5 trillion for the 18 months of subsidy, as they expect the cost to rise to N413.16, about 14.8 per cent increase, following a continued pressure on the crude oil price.

On Wednesday, the National Operations Controller, Independent Petroleum Marketers Association of Nigeria (IPMAN), Mike Osatuyi, reportedly said at the expected $100 per barrel and exchange rate of N575 to a US dollar, the landing cost would rise to N394 per litre, from less than N360 in recent times.

Data from the NNPC show that from 2017 to 2021, the cost of fuel subsidy rose by 889.41 per cent. In 2017, the company spent N144.53bn in subsidising PMS.

A breakdown of the amount spent on petrol subsidy on a monthly basis in 2017 showed that in January, February, March, April, May and June, N37.26bn, N6.3bn, N8.207bn, N8.207bn, N7.743bn and N11.79bn were spent by the NNPC respectively; while for the months of July to December, the NNPC spent N10.25bn, N7.939bn, N7.522bn, N6.849bn, N16.785bn and N15.677bn, respectively.

In 2021, the NNPC said fuel subsidy gulped N1.43tn, although there was no record for under-recovery in January. In February, March, April, May, and June 2021, under-recovery for PMS amounted to N25.37bn, N60.39bn, N61.96bn, N126.29bn, and N164.33bn respectively.

In July, August, September, October, November and December, the NNPC spent N103.28bn, N173.13bn, N149.28bn, N163bn, N131.4bn, and N270.83bn, respectively.

Economic and energy experts have continued to decry the rising cost of fuel subsidy to the federal government. Recently, the World Bank had warned that further delay in removing the fuel subsidy could see the federal and state governments unable to pay salaries from 2022.
The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, urged Nigeria to remove subsidy on PMS in February 2022, as prescribed by the Petroleum Industry Act (PIA), warning that further delay could worsen the precarious revenue situation confronting the country.

According to him, the present fiscal condition of the sub-national governments would take a turn for the worse in 2022 with 35 of the 36 states unable to meet their financial obligations. He stated that a situation where N250 billion goes into fuel subsidy monthly was unsustainable.

The federal government had planned to stop the subsidy regime by June 2022. But in a move widely seen as a political strategy, it backtracked on the plan, saying the proposed removal of fuel subsidy would be extended by 18 months, adding that the development meant the PIA would be reviewed and sent to the National Assembly.

Special Adviser to the President on Media and Publicity, Femi Adesina, recently said Nigeria would have to pay a price for the governments decision to retain the fuel subsidy regime, noting that the country may have to continue borrowing to meet its obligations.

On the financial cost of the 18-month extension for subsidy removal, Adesina had said, Head or tail, Nigeria will have to pay a price; it is either we pay the price for the removal in consonance and in conjunction with the understanding of the people.

The other cost is that borrowings may continue and things may be difficult fiscally for both the state and the federal government. You know how much could have been saved if the subsidy was removed and how it could have been diverted to other spheres of our lives…we have to pay a price.

An economist and senior lecturer of Economics at the Pan Atlantic University, Dr. Olalekan Aworinde, had said, If subsidy should stay, the government will continue to accumulate debt. And we have trillions of debt already to service, consuming our revenue. These are some of the things we have to think about.

Debt sustainability questions.

In her presentation of the 2022 approved budget, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, disclosed that Nigeria’s total debt stock rose from N32.9tn as of December 2020 to N39.6tn in November 2021, as government borrowed N6.7tn between January and November 2021.
The Debt Management Office (DMO) had disclosed that the country’s total public debt increased to N33.1tn at the end of the first quarter of 2021, from N32.9tn in December 2020, showing an increase of about N200bn. In Q2 2021, the total debt stock rose by N2.4tn to N35.5tn by June 2021. The increase continued by N2.5tn to hit N38tn by Q3 2021, which was the last figure provided by the DMO.

However, based on the ministers presentation, there was an increase of N1.6tn from September to November 2021.

BusinessHallmarks findings revealed that within the 11-month period, debt servicing gulped N4.2tn which represents 76.2 per cent of the N5.51tn revenue generated during the period. This was confirmed on Tuesday by the Senate President, Ahmad Lawan, who stated that the total amount spent by Nigerian government on debt service rose from N2.5 trillion in 2019 to N4.2 trillion by the end of 2021.

Lawan, who spoke at the 40th Anniversary Lecture of the Chartered Institute of Taxation of Nigeria (CITN), in Abuja, also noted that the federal government recorded a budget deficit of N8.74 trillion at the end of December 2021.
But the Finance Minister defended government borrowing and the countrys debt level, insisting the country had a revenue challenge, and not a debt problem, adding that the debt level was still within sustainable limits.

She had said, This is to restate, that the debt level of the federal government is still within sustainable limits. Borrowings are essentially for capital expenditure and human development as specified in Section 41(1)a of the Fiscal Responsibility Act 2007.

Having witnessed two economic recessions we have had to spend our way out of recession, which contributed significantly to the growth in the public debt. It is unlikely that our recovery from each of the two recessions would have been as fast without the sustained government expenditure funded partly by debt.

However, in the November edition of its Nigeria Development Update, the World Bank had disclosed that Nigerias debt, which may be considered sustainable for now, is vulnerable, costly and at risk of becoming unsustainable in the event of macro-fiscal shocks.

It said, Nigerias debt remains sustainable, albeit vulnerable and costly, especially due to large and growing financing from the Central Bank of Nigeria.

While currently the debt stock of 27 per cent of the Gross Domestic Product is considered sustainable, any macro-fiscal shock can push debt to unsustainable levels.

However, the debt to the GDP in Nigeria is rising quickly, and the total stock of debt in absolute value has almost doubled between 2016 and 2020, and without a policy change is expected to reach 40 per cent of the GDP by 2025.

According to the projections in the National Development Plan (NDP) 2021-2025, the federal government is planning to push its public debt stock to N50.22tn by 2023, with domestic debt at N28.75tn and external debt at N21.47tn.

The NDP shows that the Buhari Administration plans to accumulate about N12tn debt in two years from 2021 to 2023. However, based on the plan, the government also targets a reduction in total public debt by 2025.

A tabular illustration in the document shows the government targets N39.59tn debt stock for 2021, N46.63tn for 2022, N50.22tn for 2023, N50.53tn for 2024, and N45.96tn by 2025.
Expressing his agreement with the World Banks assertion, the Fiscal Policy Partner and Africa Tax Leader of PwC, Mr. Taiwo Oyedele, highlighted the high cost of debt servicing, describing it as unsustainable.

“I agree with the World Bank. Although the debt to GDP ratio is not too high, if you think about the debt service cost to revenue ratio, it is already over 70 per cent. Thats when you know its costly.

Nigeria borrows at double-digit, and even when we borrow in dollars, the rates are very high and then you devalue the naira and the cost of servicing the debt in naira goes up because it is dollar-dominated debt.

Put all of that together, and you can easily say to yourself that even though our debt to GDP ratio is very low, our cost of borrowing is unsustainable because it is very high, and therefore, make it very costly.

Similarly, a former Deputy Governor of CBN, Prof. Kingsley Moghalu, criticised the increasing borrowing tendency of the government, urging the officials to re-consider other ways of generating revenue for the country.

He said, There are many ways through which we can improve Nigerias domestic revenue situation without selling the future of our country. As to the argument that Nigeria does not have a debt problem but a revenue problem, that is mere sophistry. If youre spending 90kobo of every one naira you earn repaying debt, you are insolvent.

You cannot say that we have a debt-to-GDP ratio that allows you to continue borrowing. No! That is an argument for sustainable economies. You cannot be comparing Nigeria with advanced economies. We are in an economy that is still very basic.

If you are not earning enough revenue, why are you borrowing? You are just compounding your problem. Why dont you focus on where to get the revenue from instead of lazily ignoring that problem and just trying to survive with borrowing?

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