Debt, Debt, Everywhere…


At the rate at which the federal government is borrowing, the country may plunge into a debt trap, writes Obinna Chima

While there was cause for celebration recently after the federal government issued its first diaspora bond in the international capital market where it raised the sum of $300 million, some Nigerians have expressed concern that at the rate the government is going, the country may be approaching a debt trap.

A debt trap is a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.

The country’s weak revenue generating profile is also a source of concern.
For instance, the 2017 budget with an aggregate expenditure of N7.44 trillion has an ambitious revenue projection of N5.08 trillion. With total capital expenditure of N2.178 trillion and non-debt recurrent expenditure of N2.987 trillion, the federal government is proposing to fund the projected fiscal deficit of N2.36 trillion by borrowing.
The federal government also earmarked N1.841 trillion for debt service, which unfortunately is 24.74 per cent of the total budget and 36.3 per cent of revenue projections for the year.

By implication, for every N1 to be made by the federal government this year, about N.036 will be spent on debt servicing, leaving it with N3.2 billion for recurrent and capital spending. Expectedly, this will be augmented by borrowings from mainly foreign and, to a lesser extent, local sources.

The Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo had explained that the diaspora bond was structured to appeal to a wide range of investors and was offered through private banks and wealth managers, rather than institutional investors, which normally deal in large volume transactions.

Beside the diaspora bond, the DMO disclosed that arrangement has been concluded for the issuance of the first sovereign sukuk, otherwise known as Islamic Bond or non-interest bond this month – US$328 million to fund road projects.

Also, in line with the government’s borrowing plan, there is an outstanding issue of a US$64 million Green Bond.
All these are happening at a time when the DMO revealed that Nigeria’s total debt stock increased to N19.15 trillion at the end of first quarter 2017, from the N17.36 trillion at the end of last year.

According to the DMO, the external component of the country’s debt stood at $13.80 billion at the end of March 2017, as against $11.40 billion at the end of December. But the domestic component of the debt fell to N11.97 trillion, as against N13.88 trillion last year.

A breakdown of the domestic debt component had shown that while FGN Bonds was N8.178 trillion, Nigerian Treasury Bills N3.6 trillion, Nigerian Treasury Bond was N191 billion and the FGN Savings Bond N2.068 billion.
The federal government also raised a total of $1.5 billion through Eurobond sales in two tranches in the first quarter of this year.

The country had earlier gotten a lifeline from the African Development Bank (AfDB), with the bank stating that it would support the country with the sum of $1 billion to help it address its budget deficit.
It had also been in talks with the World Bank to plug its budget deficit, just as it is getting set to issue a $1 billion Eurobond.

Crucially, the amount of the government’s debt is expected to expand further considering that the Central Bank of Nigeria (CBN) plans to issue treasury bills worth N1.021 trillion between June and August this year alone.

Looking Back
Six years into the administration of former president Olusegun Obasanjo, the government was able to get the Paris Club to write off the country’s debt.
According to Obasanjo, the move then represented, for the first time, a total exit and freedom from Paris Club debt.
The package in final terms then yielded debt relief of about 60 per cent on Paris Club debt and Nigeria was made to pay off the 40 per cent balance through a buy back operation.

The total write off then was close to $20 billion which compared very favourably with the $40 billion write off of debts for the 18 highly indebted and poor countries of the world by the developed nations during that period.
The former president had stated then: “This, debt relief offered to us, I am pleased and proud to say is the direct product of our relentless and persistent endeavour over the past six years.
“Fellow Nigerians, how did we get to the point where our debt burden became a challenge to peace, stability, growth and development?

“Without belabouring the point we can identify political rascality, bad governance, abuse of office and power, criminal corruption, mismanagement and waste, misplaced priorities, fiscal indiscipline, weak control, monitoring and evaluation mechanisms, and a community that was openly tolerant of corruption and other underhand and extra legal methods of primitive accumulation.”

He then urged Nigerians to learn from the past, saying Nigerians; especially policymakers must all show collective responsibility to prevent a return to the past. “We must all commit ourselves to protecting, rather than squandering the future of our children. We must all agree not to remove the solid blocks on which our nation stands by accumulating debts that we cannot repay,” he had said.
Unfortunately, recent developments, especially with Nigeria’s debt stock appear to suggest that the country might return to the past.

Defending Government’s Debt
Minister of Finance, Kemi Adeosun recently stressed that Nigeria’s debt is not too high. However, she pointed out that the country’s revenue was too low.
She had said the country’s debt to Gross Domestic Product ratio remained low.
“It is important that we all understand the overall strategy. When we came in, Nigeria was in trouble, there was no strategy to deal with our problems. We had missed the opportunity presented by some of the highest oil prices ever.

“During that period of high oil prices, Nigeria experienced a rising debt profile that was a period when we should have been worried about debt. In fact, we should have been alarmed,” she said.

According to her, when income was high, the country had no reason to borrow especially when it was spending just 10 per cent on capital.
“We increased our debt level from N6.5 trillion in 2011 to N10.9 trillion in 2015 and at the same time, reserves declined from US$45.6 billion to US$29.8 billion. That wasted opportunity created the ingredients for slow growth and recession.

“We looked closely at the situation and realised that in the short term, we needed to spend our way out of trouble, so we set an expansionary budget to provide stimulus spending. “This has been successfully applied in many nations to reverse the downward trend by providing counter cyclical intervention. This entailed increasing borrowings to fund capital expenditure and increase aggregate demand to turn the economy around. That was the short-term and very urgent imperative,” the minister said.

According to Adeosun, the government’s medium-term plan is based strongly on increasing revenue mobilisation.
She stressed that increasing the country’s revenue is not something that can be attained instantly.
“For example, in some cases like tax collection we needed data, we needed to sign some treaties and we needed tax policy reforms. We have been working hard on these measures.

“Our focus on revenue is total. Revenue generation is not as rapid as raising debt but it is permanent. Increased revenue will ensure sustainability, will prevent us falling into a debt trap and will reduce our debt service to revenue ratio,” the minister added.

Mixed Reactions
Economic experts and financial market analysts have expressed divergent views about the situation with Nigeria’s debt.
While they all agreed that borrowing in itself is not a bad thing, some however expressed concern about appropriate utilisation of the funds.
To the Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, the “monies that they have borrowed so far- about N7 trillion – cannot be said to have gone into physical infrastructure.”
According to him, the government’s total capital expenditure in 2016 was not up to N4 trillion.

“If you look at the actual disbursements to capital expenditure, I am not sure we have done up to N2.5 trillion, whereas we accumulated debt of about N7 trillion in 2016.
“So, the challenge is that we have been servicing recurrent expenditure with our debt. The physical infrastructure required to catalyse economic growth that would enable the government to generate revenue to pay back these debts have not been built with the funds.

“So, barring any windfall, we would servicing debt from existing income base because there have not been any investment to increase the income base of the country. “If we had borrowed exclusively for infrastructure and today we can point our hands to speed rails, new airports, new seaports, highways, improved electricity grid, better network of gas pipelines, then we would understand where these funds are going.

“But today, we can’t point our fingers to the infrastructure that has been built with the monies that have been borrowed. Not even social infrastructure like schools! So, that is where the challenge is. The government borrowing has been for recurrent expenditure and that would create a challenge when paying back,” Chukwu argued.

But the Head of Research, SCM Capital Limited, Mr. Sewa Wusu, believes there is nothing to worry about. He opined that borrowing is a common trend across the world, saying that most African countries are now borrowing more, because that is the way to go, particularly since the decline of commodity prices.
“A lot of countries don’t have the wherewithal to raise funds to finance some of their infrastructure projects. That is why the likes of Ghana, Tunisia, Angola, and a lot more, are borrowing.

“There is nothing wrong with borrowing, in as much as the funds are applied appropriately, to fix the needed infrastructure with which the monies are meant for. And looking at our condition right now, we just have to borrow.
“We have a budget of N7.4 trillion. The question people are asking is how the government can finance the budget? So, to finance the budget, you have to borrow, and that is what this government is doing. Once there is the will to deploy the funds appropriately, then we would see the benefits in the economy,” he explained.

But, Wusu pointed out that if the funds are not applied appropriately, then it would not augur well for the economy.
“That is when you discover that you are piling up debt for generation unborn and that is where there is problem. Most of the developmental projects you see in most advanced countries where borrowed funds. Again, if you look at the threshold of our borrowing, it is still below the global benchmark,” added.
He urged members of civil society groups and the media to demand for social accountability by ensuring that they monitor how the funds are being utilised.

On his part, the Chairman, Polar-Afrique Consulting Limited, Dr. Chris Itsede, believes the government is getting into indebtedness and an ambitious spending plan which obviously outstrips its expected revenue stream.

The founding Director General of the West African Institute for Financial and Economic Management, said what he expected was for the government to scale back expenditure and tighten spending efficiency, so that for example, if you spend N1, it would be sure of getting at least 85 per cent of the real value of that N1.
“That is spending efficiency and that is what we should be thinking about now. If you look at the numbers now, our debt profile as a country is really alarming. It has never been this bad.

“It was not even as bad as this before we had the Paris debt relief. Obviously, the debt numbers are worrisome.
“What is going on is that people go into government, they mortgage the future income streams of Nigerians. In order for them to spend four or eight years in office, they would spend the income stream of 25 years from now.
“That is precisely what is going on. It is worrisome and I think the debate should be around the tendency towards more debts and expenditure efficiency. The income stream that we have now, if properly managed, can get us out of the woods.

“But they would not look at them because everybody is trying to eat with 10 fingers. I don’t know where Nigerian politicians got the idea that a good politician is the one that has a massive spending budget which nobody monitors and is not accountable,” Itsede added.
Nonetheless, a former bank Executive Director, Mr. Abdulrahman Yinusa urged Nigerians to focus on what the borrowed funds were meant to be used for.
“We should concentrate more on making sure we do the right things and get them to be productive. For example, instead of cutting off monies budgeted for the second Niger Bridge, we expected that they borrow money to complete such projects.

“So, I don’t think we should worry about the debt level itself, the level is not high, it is what we do with the money that we should worry about,” he added.
Also, a former bank CEO, Mr. Okechukwu Unegbu, argued that he has no problem with any borrowing tending towards rising the country’s debt profile, but being utilised for productive resources, to invest in infrastructure, particularly education.

But if the reverse is the case, then the future generation is in trouble, he said.
Therefore, while there are evidences to suggest that more debt can actually cure an economy of its calamities, not applying fiscal discipline would always have negative consequences on the nation in the future.

The government must strive to push through its drive to enhance its non-oil revenue because presently, the Nigerian economy is still a mono-product economy and if crude oil prices drops below the country’s benchmark price, its loan repayment plan would clearly be jeopardised.
Finally, in order not to revert to the past, the government will have to be strategic in its borrowing plan.