Rising National Debt Portfolio Sparks New Debate

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The new report by the Debt Management Office may have rekindled a debate on the nation’s rising debt portfolio, writes Kunle Aderinokun

Nigeria’s rising debt profile is once again in the spotlight with the latest data released by the Debt Management Office last week. Following the new DMO report , which came after the Nigerian Domestic and Foreign Debt 2016 Report was rolled out by the National Bureau of Statistics (NBS), issues had been raised on the rationale behind the current administration’s accumulation of debt within a short time, when there are other viable sources of financing the budget and its deficit. And in defence of its actions, the federal government argued that, with low receipts from oil, it had no better option than to borrow to meet its monthly obligations, finance capital projects and exit recession.

According to the Finance Minister, Kemi Adeosun, who spoke recently at a forum, “when we start the argument, should we borrow, should we not? The truth is that we have no choice. If you are waiting for the oil price to recover, the prognosis is that it’s not going to go back to $110 per barrel any time soon. So, to get the economy growing, we have no choice but to look for low-cost funds and put that infrastructure in place, because it is the infrastructure that will unlock the economy.”

In fact, Adeosun had, at various times, argued that Nigeria needed to spend her way out of recession and a better way to do it was for the federal government to borrow to finance infrastructure projects .

Status

Numbers from DMO show Nigeria’s total debt has risen to N19.16 trillion as at March 31, 2017 from N17.36 trillion in December 2016. When compared with the corresponding period in 2015, the country’s total debt stood at N12.06trillion, implying that the debt level increased by N7.1trillion within two years.

Analysis shows that, at N11.97trillion the Federal Government’s domestic debt significantly increased from N8.51trillion at the same period in 2015, representing 40.71 per cent rise.

Likewise, the external debt also rose sharply from $9.46billion to $13.81billion within the two-year period, showing some 45.98 per cent increase.

Only recently, NBS revealed that, as at December 31, 2016, the country’s foreign and domestic debts stood at $11.41 billion and N14.02trillion respectively. While the reported current foreign debt rose by $692 million from $10.718 billion in December 31, 2015, from where it increased to $11.26 billion in the third quarter of 2016, external debt in Nigeria averaged $6.92 billion from 2008 until 2016, reaching an all-time high of $11.41 billion in the fourth quarter of 2016 and a record low of $3.63 billion in the first quarter of 2009.

Concern

The nation’s burgeoning debt stock has given all and sundry cause for concern, especially as regards its sustainability. More worrisome is the rising external debt during a period when the economy is bedeviled with myriad challenges and battling to remove itself from the quagmire of recession.

But the government had variously allayed the fears that may have been expressed, saying there was no cause for alarm. In one of the instances, the DMO Director-General, Dr. Abraham Nwankwo, argued that, “in spite of the drastic drop in the country’s foreign exchange earnings, following the oil-price shock since mid-2014, the external debt liability hardly constitutes a source of vulnerability.”

Nwankwo, who noted that, as at end-June 2016, external debt accounted for only 18.33 per cent of the country’s total debt stock of about N16 trillion (USD 61 billion) – compared to the optimal target of 40 per cent established in the country’s medium term Debt Management Strategy (2016-2019),” stated that, “the annual external debt service expenditure for the last 5 years was always less than 6.5 per cent of the total public debt service outlay.”

According to him, “the external debt service accounted for an insignificant proportion of the total public debt service expenditure.”

Analysts

While agreeing with the Federal Government to spend its way out of recession but more on capital expenditure, a couple of experts have advised it to exercise caution in contracting more debt in the process of doing so.

According to a renowned professor of Economics, Pat Utomi, “A country is not different from a household, more or less generally, in terms of how it manages its finances. So, if your personal debt profile is going up at that rate, will you be comfortable?

“However, there are times that you need to spend your way, literally speaking, out of a challenge of output; recession being one of those. But I think that even at that, you need a certain level of care to make sure that you don’t get into an unsustainable debt scenario.”

“My big worry is that the impact of the borrowing may not be reflected on output, in the sense that if we get into a double whammy where our debt balloons, but we don’t have the necessary stimulation of production, especially when our consumption is very external in its orientation, we need be very careful to watch all of those,” he, however, urged.

In his own suggestion, Chairman, Nigerian Economic Summit Group, Bukar Kyari, noted that, “What one needs to pay attention to is the debt service amount versus the capital expenditure of the budget. The debt servicing and the ability to service the debts are the key areas of concerns that we should pay attention to.”

However, other analysts and market watchers are still worried about the debt rising streak, decrying Nigeria’s heavy dependence on debt. While they suggested viable options for financing the budget and its deficit, they have therefore made suggestions on the way forward in the nation’s debt management.

CEO, The CFG Advisory, Adetilewa Adebajo, expressed concern about “the nation’s critical debt situation”, contending that Nigeria was heavily dependent on borrowing.

According to him, IMF’s projections for debt to GDP ratio (23.3% and 24.1% in 2017 and 2018 respectively) were “a painful reminder” of Nigeria’s heavy dependence on borrowing. He argued that, “With the debt servicing ratio at an all time high of 66% and the 2017 budget provision of 1.84 trillion,, the nation needs to be mindful of its economic choices; foregoing future benefits for present consumption.”

Adebajo advised: “We can therefore suggest that a more aggressive approach should be undertaken to tackle the nation’s increasing debts. The right policies must be put in place and properly implemented else we face the reality of already high interest- payments to revenue ratio escalating beyond control.”

The economist believed, “The debt situation can be properly managed by ensuring that both federal and state government borrow within the proposed limits and provisions of the fiscal responsibility act.”

“Borrowing should be made strictly to finance capital expenditure. In addition, the FG should direct more of its borrowing externally as it attracts lower interest rates relative to domestic borrowing (high interest rate risk).”

Similarly, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, pointed out that the N7 trillion increase in total debt stock in two years was very significant, especially during a period when the fall in total revenue of the county was very significant over the same period.

Ademola, however, argued that while the IMF projection on Nigeria’s debt to GDP ratio was significant, it was still considerably lower than the 40 per cent suggested for emerging and developing countries

“As noted by the IMF, Nigeria’s Debt to GDP ratio has increased to about 19% and could reach 23.3% in December 2017 and 24.1% by 2018. While this is significant, it is still considerably lower than the ideal of 40% suggested for emerging and developing economies. And when compared to other emerging and frontiers, Nigeria will only be bettered by Russia with 17.7% debt to GDP ratio after the acquisition of the planned borrowing. China’s ratio is 22.4%, India has 66.7%, Brazil has 66.23% while South Africa has 50.1%. Among the MINT, Mexico’s 43.2%, Indonesia’s 27.0% and Turkey’s 32.9% are all higher than Nigeria’s,” he noted.

Expressing optimism that, spending from the borrowings was expected to boost economic activities and enhance government’s tax revenues going forward, Ademola said, “This will mean that if properly applied, the debt could be beneficial to the economy in the future.”

Suggesting that, there might be other options to generating revenue for the government which included the sale of assets, Ademola was, however, quick to add that, “this option, as viable is it may be may not be politically practicable.”

Also, in his own view, Director, Union Capital Ltd, Egie Akpata, noted that, Nigeria’s total debt was rising during the years of record high oil prices so it was not surprising that in a time of lower revenue, total debt has continued to rise.

“Based on the federal government’s announced borrowing plans, I would expect the outstanding debt to continue to grow at an increasing pace over the next few years. What is equally worrying from the recently released DMO data is that N474billion was spent on domestic debt servicing in Q1 2017. At this rate, around N2trillion will be spent on domestic debt service this year,” he lamented.

Akpata advised that, “Rather than the FGN borrowing to fund various initiatives and infrastructure projects, these areas of the economy should be concessioned to adequately capitalised and experienced local or foreign firms. These concessionaires should go out and raise required funding so that such project borrowing sits on private balance sheets and not count as FGN outstanding debt.”

To the CEO, Global Analytics Consulting Ltd, Tope Fasua, the new debt report, “calls to question the adopted strategy of foreign debt, which the Finance Minister has embraced and placed much confidence in.”

“A proportion of the leap in debt is due to exchange risk, occasioned by the depreciation in the value of the Naira. Whereas the Naira has stabilised lately, no one can predict the situation in another two years down the line. Domestic debts have increased steadily as a result of the recession,” he noted.

Fasua, however, added that, “in spite of our reality, we have made bad fiscal choices and have not shown the kind of discipline and contrition that countries in recession usually show. Federal and State executives and legislature have continued to binge on everything foreign even as they preach the opposite to the people.

“Our spending is not measured to reflate the local economy as it should. And there is no synergy. Whereas many states find it difficult to pay salaries, some other MDAs have been engaged in aesthetic expenditures that add little value, but sends our hard-earned capital into foreign countries.

Stressing that he didn’t support the minister’s plan of continuous borrowing, Fasua said, “We should do a hard reset instead.”

“This whole idea by which MDAs throw in budget figures based on whims and caprices, and loaded with tricks, is the first thing that should stop. We should lock down the economy for about two years and just stretch our resources if we are serious. We should use the old cars, maximise the use of old government buildings. We don’t even need new roads, if we are serious. There are many roads that are under-utilised in this country. If we go ahead and borrow another $30billion as proposed, we would have ended up mortgaging the entire country,” he suggested.

Echoing Ademola’s view, analysts at Eczellon Capital Ltd, pointed out that, since Nigeria’s debt-to-GDP ratio is below the 40 per cent benchmark for developing countries, it indicates that “the country’s debt level is within the proposed prudential limits and can be increased if need be.”

“The key will be the utilisation of debt proceeds. A school of thought recommends that developing nation should maintain the debt level closer to the optimal limit provided that borrowing is used to finance needed developmental requirements like infrastructure and other needed catalysts of economic development.”

The analysts added: “The above said, maintaining a healthy debt level is important to susainability. A study by the World Bank found that if the debt-to-GDP ratio exceeds 77% for an extended period of time, economic growth would be slowed. According to the research, every percentage point of debt above this level reduces economic growth by 1.7%. It is even worse for developing economies as each additional percentage point of debt above 64% slows economic growth by 2% each year. The risk in this case is usually sensitivity of increase in debt to Primary Balance of the country (i.e., the budget balance net of interest payments on the debt.) It is expected that when debt gets very large, it will be difficult to generate a primary balance that is sufficient to ensure sustainability. Based on this latter point, Nigeria may need to watch its borrowing, especially in the era of low revenues. Debt service becomes a portion of recurrent expenditure over the life of the debt, which stifles available flows to other spending needs of the government.”

As it stands, the Eczellon Capital analysts note, Nigeria is below the prudential debt-to-GDP level, as such her debt levels could either be sustained at its current state or increased to an acceptable level as there is still room to increase borrowing. “What will be important is what the proceeds of debt are used to finance.”

On viable alternative to borrowing, the analysts suggested that the government could expand its’ tax net to cover the informal sector and other firms and persons that have not been under the tax net. “We believe that the increase in the number of persons/organisations absorbed by the tax net will lead to increase in government’s revenue.”