Nigeria’s economic growth is choking under the huge burden of debt servicing. - Ebals blog


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Wednesday, 12 August 2020

Nigeria’s economic growth is choking under the huge burden of debt servicing.

 Nigeria’s economic growth is choking under the huge burden of debt servicing. As at end of the first quarter of this year, total public debt had risen to N28.628 trillion. The recent currency devaluation by the Central Bank of Nigeria (CBN) has worsened the debt levels.

The implication of Nigeria’s high debt, particularly under President Muhammadu Buhari’s administration, which has grown the debt toll by more than half from N12 trillion in year 2015 when it assumed office, is choking growth under the guise of provision of critical infrastructure.

This paradoxical situation is so because whereas the credits obtained are supposed to be utilised such that they could generate repayment for their servicing, the case with Nigeria is different. The cost of governance has jumped twice from N2.45 trillion in 2015 to today’s N5 trillion.

To get a better sense of the disturbing development, it would take the country at least a minimum of three years of its current yearly budget size of N10 trillion to offset the debt burden – that is without payment of salaries and undertaking projects of any sort.

At the moment, debt servicing takes the biggest chunk of the country’s yearly budgetary allocations and appropriation, according to figures obtained from the Budget Office of the Federation, the Office of the Accountant General of the Federation and the Ministry of Finance.

According to information sources, in 2020 spending plan, the sum of N3.52 trillion was released for implementation as at end May 2020. Of the amount, the sum of N1.25 trillion was for debt servicing; N1.32 trillion for personnel, while a paltry N253.33 billion only was released for capital projects’ implementation.

Disturbed by the situation, The Guardian sought to know from the Director General of Debt Management Office (DMO), Patience Oniha, where the proceeds of the debts contracted are deployed. She also shed light on the Chinese loans and allayed fears of a possible seizure of Nigeria’s critical assets over failure to meet servicing obligations.

Oniha declared: “The $3.121 billion China loans are project-tied loans. The projects, (11 in number as at March 31, 2020) include Nigerian Railway Modernization Project (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos and Port Harcourt), Nigerian Railway Modernization Project (Lagos-Ibadan section) and Rehabilitation and Upgrading of Abuja-Keffi-Makurdi Road Project.

“Nigeria explicitly provides for debt service on its external and domestic debt in its annual budgets. In effect, this means that debt service is recognised and payment is planned for. In addition, a number of the projects being (and to be) financed by the loans are either revenue-generating or have the potential to generate revenue.”

Unfortunately, this plan hardly materialises leading to government resorting to contracting new credit lines to settle servicing or maturing debts as her revenue projections are hardly met, as confirmed by the Minister of Finance, Mrs. Zainab Shamsuna Ahmed.

While speaking in Abuja recently, Ahmed explained that the rising percentage of debt servicing in the country is attributed to the continuous low performance of revenue generation by agencies of government as their productivity has been below projection, as low in some instances, to 37 per cent of projected revenue.

Ahmed further maintained that Nigeria’s debt continues to be sustainable at 19 per cent per GDP, far from the Fiscal Responsibility’s 25 per cent threshold or the 50 per cent threshold of World Bank/IMF for countries in Nigeria’s category. This stark reality, she finally explained, is the reason for the country’s high debt to revenue ratio, which recently caused a brawl between the presidency and former Vice President Atiku Abubakar.

The minister, however, recently described Nigeria’s rising debt servicing, as higher than desirable. Ahmed spoke during presentation before the House of Representatives’ committee on aids, loans and debt management in Abuja. In her presentation, the minister said the federal government’s intended $22.71 billion loan would be accessed from multilateral and bilateral lenders, which would be concessional or semi-concessional and long-tenured.

This, she said, was in line with the debt management strategy, which aims to replace short-term high interest domestic debt with low-interest long-term external debt to moderate the level of debt servicing.

According to Ahmed, “Nigeria, by the Fiscal Responsibility Act, has a ceiling of 25 per cent on the total debt stock to GDP, and this borrowing will still see us stay within those thresholds. The ratios as of December 31, 2018, and June 30, 2019, were 19.09% and 18.99% respectively. The debt service to revenue ratio, however, is high; it has been higher than desirable and provides strong justification for the current drive to increase both oil and non-oil revenues to enable more adequately resource government and service our debt obligations.”

Providing some insight into Nigeria’s debt situation, former Deputy Governor of the Central Bank of Nigeria, Dr. Obadiah Mailafia, declared that Nigeria was under some serious debt crisis and as such, needed urgent solution and not a spat over the development between the former Vice President Atiku Abubakar and the presidency.

According to him, it has become a truth, universally acknowledged, that Nigeria currently faces an unprecedented revenue crisis.

Mailafia noted that a revenue crunch or fiscal crisis arises when a state is unable to bridge the deficit between its expenditures and its tax revenues.

While Mailafia is persuaded that what Nigeria faces is more of a fiscal revenue crunch, he admits that the line between revenue and debt crises is often a thin one.

He gave more insight: “Revenue crises can easily lead to debt crises. Both can conspire to unleash a downward spiral in terms of capital flight, financial markets’ volatilities, banking crises, financial meltdowns and even economic collapse. Some economists believe that we live in the best of all possible worlds, in which the capitalist system, by its very nature, engenders overproduction, leading to fall in aggregate demand, debt crises, revenue crunches and “manias, panics and crashes”, to echo the late Harvard financial historian, Charles Kindleberger.

He explained that the country’s return to democracy in 1999 opened a new window of opportunity, as macroeconomic reforms and liberalisation of the economy ushered in massive capital inflows both as Foreign Direct Investments (FDI) and as portfolio investments.

“Today, tax and oil revenues have become evenly matched. As the world moves towards a post-oil economy, it is evident that we have to rely increasingly on the non-oil sector to finance the budget. Despite these advances, Nigeria remains one of the lowest performers in terms of tax-to-GDP ratio.

He added that the rising debt burden has compounded the fiscal crisis, submitting that debt-servicing has gulped about 50% of the annual budget, over the last couple of years.

“The world as we know it, will never be the same again. We must therefore begin to think beyond oil. There is a need for a rules-based system in which any revenues beyond the budget benchmark are automatically transferred to the fiscal stabilization fund in our Sovereign Wealth Fund (SWF). There is an urgent need to expand and deepen the tax base and to make revenue collection easy, clear and cost-effective. The operational cost of governance must be brought under control. It is only a fool who does not learn to cut his coat according to his own size.

“Above all, fiscal prudence is critical. If we must borrow from abroad at all, it must only be for capital projects with guaranteed returns on investments. And there must be robust controls on public expenditure to ensure zero hemorrhage and zero rent-seeking. We must institute mechanisms to ensure financial accountability at all levels. We can make Nigeria work. Government must be reinvented as the servant of the people, not their master”, he added.

An emeritus professor of economics and former chief executive officer of a Federal Government Economic think tank, who preferred to speak anonymously, described as an embarrassing development the presidency’s spat with Alhaji Atiku over huge debts, saying the former number two was only echoing the official figures that are already in the public domain. He wondered why the spat by some presidency officials over Atiku’s alarm bell.

For development economist, Mr. Odilim Enwegbara, the situation is embarrassing, saying the advisable thing was for the federal government to embark on debt-buy back to save the country huge sums of monies that could be deployed to invest for wealth-creating investments instead of on debt servicing.

His words: “Rather than the presidency quarreling over the same number coming from an agency of government, which recently put the figure for debt service at over 90% of revenue (and it’s not coming from Atiku), government should be focusing its energy on how to reduce that ratio.

“Why we are having such unheard-of high debt serve obligations is not only because we borrowed at high interest rates without duly subjecting the high debts to debt sustainability analysis, but most important of it all is that most of our debts are for consumption rather than for investment.

“The only plausible solution right now is debt buy-back, using quantitative easing (QE). This is necessary especial given that a major part of our debts and our costlier debts to service are actually priced in naira. This makes QE not only the option right now. In fact, it’s the best option since it will force the economy to become an inward-looking economy.

“Besides, reducing import pressure and forex account pressure, definitely, it will give locally made goods more market share especially to those imported consumer goods that are locally producible. In short, this is our own opportunity to kick-start our belated import substitution industrialization.

“What is more welcoming here is that for the first time, rather than exporting jobs, we will begin to see more jobs created. One of urgent steps should be in the area of local content, which should be expanded to include what retailers across the nation display in their shops.”

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