Nigeria’s Rising Debt Debate

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As the country’s debt profile rises, many fear that the most populous black nation is being prepared for a difficult future. Vincent Obia writes

If the present provides a lot of headroom for borrowing, what does the future hold for repayment? This is the question at the forefront of many minds as the President Muhammadu Buhari government takes advantage of its considerable latitude in borrowing. Minister of Finance, Mrs. Kemi Adeosun, escalated the issue last Sunday in Washington, when she said Nigeria would continue to borrow to be able to deliver critical infrastructure across the country.

Comfortable Margin
“Nigeria’s debt-to-Gross Domestic Product ratio is one of the lowest actually. It is about 19 per cent. Most advanced countries have over 100 per cent. I am not saying we want to move to 100 per cent. But I’m saying we need to tolerate a little bit more debt in the short term to deliver roads, rail, and power,” Adeosun stated at a press conference to mark the end of the 2017 World Bank/International Monetary Fund Annual Meetings in Washington DC.
With a debt-to-GDP ratio of 19 per cent, Nigeria is in a good position to borrow. And it has exercised that freedom quite extensively in the last two years, piling up some $15.1 billion and N14.1 trillion in total domestic and foreign debt stocks, respectively, as at June 30, according to a September report by the National Bureau of Statistics.

NBS said the total foreign debt profile of the federal government, the 36 states governments, and the Federal Capital Territory rose from $10.718 billion in 2015, to $11.406 billion in 2016, and $15.047 billion in 2017. The federal government accounts for $11.106 billion (about 74 per cent) of the current total debt of $15.047 billion, while the 36 states of the federation and the FCT owe $3.94 billion, or about 26 per cent.
The federal and state governments’ shares of the debt stock grew from $7.349 billion and $3.369 billion in 2015, to $7.84 billion and $3.568 billion in 2016, and $3.94 billion and $11.106 billion in 2017, respectively.

Debt-to-revenue Issue
Even though the country remains in a comfortable debt-to-GDP position, there are concerns about the debt-to-revenue ratio, which is said to have increased by 25 per cent within the last one year.

“Nigeria has a decent debt-to-GDP ratio, currently about 19 per cent. It is the debt to revenue ratio that is of concern,” Senior Economist at the World Bank, Gloria Joseph-Raji, is quoted as saying. “That is of concern to us and that is also of concern to the government. The government is aware that the debt is looking more unsustainable from the point of debt service to revenue ratio. The estimate we had for last year at the federal level was about 60 per cent. That is coming from about 35 per cent in 2015.”
The states are also in dicey financial positions, as many of them are said to be using about 50 per cent of their federal allocations to service debts.

Intensified Borrowing
Nigeria has been hurting since 2014, when oil prices began to dip. It slipped into a recession in the second quarter of last year, but announced an exit last month after the NBS reported a GDP growth of 0.55 per cent in the second quarter of 2017.

The government says it needs to borrow to engender economic growth.
The federal government has been borrowing to fund this year’s budget and has a series of debt issues piled up. The Debt Management Office says the country is in talks with the World Bank and African Development Bank for concessionary loans. The amount being discussed is said to be about $3.5 billion.

In a letter to the Senate, which was read at plenary on October 10 by Senate President, Bukola Saraki, Buhari sought the legislature’s approval to borrow $5.5 billion, comprising the issuance of $2.5 billion in the international capital market through Eurobonds or a combination of Eurobonds and Diaspora bonds for the financing of the 2017 budget and capital expenditure projects in the budget; and issuance of Eurobond in the ICM and/or loans syndication by the banks in the sum of $3 billion for refinancing of maturing domestic debts obligations of the federal government.

The 2017 budget of N7.441 trillion has a deficit of N2. 356 trillion, with a projected quarterly fiscal deficit of ₦589.19 billion, which the government plans to finance through privatisation proceeds (₦2.50 billion), foreign borrowing (₦266.88 billion), domestic borrowing (FGN Bond of ₦313.57 billion), and sale of government properties (₦6.25 billion).

The Buhari government appears to be hell-bent on maximising the country’s comfortable debt-to-GDP position, which stands it in good stead for loans. The government has declared a preference for foreign loans, which have low interest rates.

Future Risk
Adeosun says the government’s borrowings are intended to build infrastructure that would generate economic activities, create jobs, and increase incomes.

“It is a strategic decision that as a country we have to make,” she says, declaring, “What I will assure you is that this government is very prudent around debt. We don’t borrow recklessly. We have no intention of bequeathing unserviceable debts to Nigerians. What we are simply trying to do is to ensure that we create enough headroom to invest in the capital projects that the country desperately needs.”

But many stakeholders think that the government’s belief that it can through much borrowing deliver the gravely needed critical infrastructure and stimulate growth is a wrong-headed notion. They believe the government has displayed a lack of capacity to prudently manage the borrowed funds, saying it is merely exposing the country to future risks and difficulties by choosing the easy way out.

“The federal government says they are borrowing for infrastructure development. And we know that government does not spend money judiciously when it comes to infrastructure,” says National President, Manufacturers Association of Nigeria, Dr. Franks Jacobs. “The cost of provision of infrastructure by the government is usually very high compared to what is real and what obtains elsewhere. So if you are borrowing for infrastructure and the money is not judiciously utilised, that amounts to mortgaging the future of the country. And that is not the right thing to do.”
Jacobs believes, “There are other ways you can build infrastructure instead of borrowing money for that purpose.”

Concession
The MAN president says a more pragmatic solution to the problem of infrastructural deficit is for government to grant building and operating concessions for projects to the private sector.
“We think that government should not borrow money for infrastructure because they will mismanage the fund,” Jacobs says.

He says, “The alternative is concession, getting the private sector involved in building infrastructure through concession. There are a lot of investors from within and outside the country that would be willing to invest. That way, we will get value for our money when we build those infrastructure, than when government does it.
“The amount of money required to build infrastructure, government cannot even afford it. The cost is very high. It is better they do it in a more efficient manner, and the efficient manner is to involve the private sector to help build the infrastructure at an appropriate price.”

Economic analyst Henry Boyo also faults the government’s claim that it is borrowing to fix infrastructure and stimulate the economy. Boyo says it is the private sector, which has an “infinitely elastic amount of credit available,” that largely drives the economy, and not government spending. “It is not the budget for the capital expenditure that is really important because that is too small an amount to drive any economy. What drives the economy is in the private sector,” he is quoted as saying. “The total budget for this year is about N7 trillion. Nigeria needs about $100 billion to fix power alone.”

Efficiency
Boyo says deepening the country’s debt burden would do more harm than good to the economy. He recommends greater efficiency, prudent management of resources, and deliberate measures to minimise waste as the way to get the economy out of the woods.

He is reported as saying, “If you are already neck deep in debt, the sensible thing to do is to stop borrowing and see how you can redress the requirement you have budgeted for.
“In this kind of situation, you cut down on your expenses – takeaway the frivolities or reduce the amount you need to spend. Secondly, you reduce your borrowing, especially when you are paying 50 per cent of your revenue to service debt.

“If you have to borrow, it means you are compounding your already existing debt and you have not created a link for servicing those debts without further borrowing. At the end of the day, you find out that in spite of your heavy recurrent expenditure, you are actually borrowing to spend for recurrent expenditure.”

Walking into a Debt Crisis
Nigeria is still reasonably worthy of credit, and analysts say its Eurobond offers would attract considerable interest from foreign investors. With current total debt of about $15.047 billion, the loan of $5.5 billion being sought by the government, if approved by the legislature, would bring the total debt to less than $21 billion, which is less than the current foreign reserves of about $32.491 billion.

Yet, there are fears that the country may be walking into a debt crisis with the present tempo of borrowing.
The International Monetary Fund predicted in its World Economic and Financial Surveys released in May that Nigeria’s indebtedness would reach 23.3 per cent of the GDP by the end of 2017, and 24.1 per cent of GDP by 2018.
According to the IMF surveys, the country had a debt-to-GDP ratio of 18.6 per cent at the end of 2016, and 12.1 per cent at the close of 2015.

NBS said Nigeria’s GDP for the year ended December 31, 2016 stood at N67.98 trillion.
From the IMF projection of 24.1 per cent debt-to-GDP ratio for 2018, the country’s debt-to-GDP ratio would increase by over 100 per cent in three years, 2015-2018. Which is hardly good news for a country trying to keep its debt-to-GDP level as low as possible.

Reservation
Many cannot make sense of the government’s penchant for loans. On the face of it, it would seem that the fall in the price of oil and declining government revenues in the oil-dependent country is behind the increasing tendency to borrow. But recent improvements in revenue make the revenue shortfall argument difficult to sustain.
Director General of the Budget Office Ben Akabueze told the Senate on October 3 that Nigeria made N2.305 trillion revenue in six months, which is nearly the budgeted amount for the period. Akabueze said the total revenue projection for 2017 was N5.084 trillion.

Minister of Budget and National Planning, Udoma Udo Udoma, also told the senators, “Right now, we are producing about two million barrels per day, but we have the capacity to produce 2.2 million barrels per day, though, we are not there yet.”

With crude oil sales above the budget benchmark price of $44.5 per barrel, as well as rises in tax and other revenue sources, reservations have continued to mount about the rationality of the government borrowings.
Besides, high oil prices in the past did not quite stop Nigeria’s debt from increasing. This makes it difficult to sustain the Buhari government’s argument that revenue shortfall is behind its borrowings. The country’s debt stock increased from N5.3 trillion in 2010 to N9.5 trillion in 2014, despite record increases in oil prices.

With the federal government’s seemingly uncompromising commitment to borrowing, a strong debate will continue to rage over the wisdom in acquiring the debts. As the debate rumbles on, what may, of course, swing opinions in favour of the government is prudent utilisation of the borrowed funds and genuine economic recovery.