Till Debt Do Us Part

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OUTSIDE THE BOX BY ALEX OTTI , Email: alex.otti@thisdaylive.com
OUTSIDE THE BOX
By Alex Otti; alex.otti@thisdaylive.com

“I sincerely believe that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity under the name of funding (debt) is but swindling futurity on a large scale” Thomas Jefferson (1743-1826).

Close to a year ago, I had drawn attention to the challenges of government’s attempt to borrow about $30billion in the next couple of years ostensibly for infrastructural development across the country. Though my intervention did not go down well with the Debt Management Office (DMO) at that time, I was convinced that the danger in plunging the nation into such a huge debt was clear and real. Close to 12 months after, we are back to the same issue as the debt debate seems not to be receding.

Following the conclusion of the World Bank/IMF meetings in Washington, the Minister of Finance, Mrs Kemi Adeosun, at a press conference on Sunday, October 15, 2017 stated that the country will have to borrow more money to deliver on critical, but lacking infrastructure. According to her, “Nigeria’s debt to GDP ratio is one of the lowest. We are at 19%, but most advanced countries have over 100%. I am not saying we need to move to 100%, but I am saying we need to tolerate a little more debt in the short-term to deliver the rails, the roads and power so as to generate economic activities, jobs, revenue, which would be used to pay back the debt”. She also noted that the government adopted an expansionary fiscal policy with an enlarged budget in order to deliver a fundamental structural change to the economy, thereby reducing the country’s exposure to crude oil.

She explained that the government was borrowing because mobilizing revenue aggressively was not advisable, nor indeed possible, given the economic challenges recorded in the last two years. With the positive growth witnessed in the last quarter, and subject to continued growth, the government’s revenue strategy would be accelerated. You must please, permit me to quote the Honourable Minister quite extensively, as this is crucial. In her own words, “This is being complemented by a medium-term debt strategy that is focusing more on external borrowings to avoid crowding out the private sector. “This would also reduce the cost of debt servicing and shift the balance of our debt portfolio from short-term to longer-term instruments. This Government will be very prudent around debt. We won’t borrow irresponsibly”. According to her, one of the advantages of foreign borrowing is that the cost is low and therefore is a veritable way to avert job losses. “With Nigeria’s source of revenue dropping by nearly 85 per cent, the country had no option but to borrow. The option before the country was to either cut public services massively, which should have led to massive job losses, or borrow in the short-term, until it begins to generate sufficient revenues”.

“We felt that laying-off thousands of persons was not the best way to stimulate growth. Also, when we came into office, about 27 states could not pay salary. If we had allowed that situation to persist, we would have been in depression by now. So, we took the view as a government that the best thing to do was to stimulate growth and spend our way out of trouble, get the state governments to pay salaries, making sure that the federal government pays and invests in capital infrastructure,” Mrs. Adeosun concluded.

However, a day later, the Word Bank came out with a starkly different position from that of the Honourable Minister. Gloria Joseph-Raji, Senior Economist at the Word Bank insisted that Nigeria’s cost of borrowing was no longer sustainable. Her argument was that the country did not have the capacity for more loans in the light of dwindling revenues. She further explained that in one year, Nigeria’s debt to revenue ratio had increased by an alarming 25%. In 2015, the country’s debt to revenue ratio stood at 35%. This figure jumped to 60% by 2016. The only way this could have happened was that either the debt went up astronomically or that revenue plummeted sharply or both. While agreeing that Nigeria’s debt to GDP ratio was low at less than 20%, she maintained that what was worrying was the sustainability of the debt represented by the debt to revenue ratio. She also pointed out that a chunk of the debt denominated in local currency had put more pressure on sustainability as these debts were contracted at very high interest rates. She supported the view taken by the DMO to rebalance the government debt portfolio in favour of foreign loans. The strategy is to switch the ratio from the then 80% domestic and 20% foreign debt to a more comfortable 60% and 40% domestic to foreign debt components, respectively.

Before we delve deeper in this discourse, it will not be out of place to highlight some important statistics. According to the DMO, the Federal Government has total external debt stock of $15.05b and domestic debt of $39.34b. In addition, states have domestic debt of almost $10b. This brings the total debt for both the Federal and State governments to circa $64.2b as at June 2017. At the current CBN official rate of N305 per dollar, the Naira equivalent would be about N19.6t. The external debt stock is broken down as follows: Multilateral Debts, $9.67b (64.29%), Non-Paris Club Bilateral Debts, $2.07b (13.78%) and commercial (Eurobond), $3.3b (21.93%)

Considering that we completely exited the Paris and London club of creditors barely 10 years ago with a write off of about $18b after we had paid down $12.4b, we cannot be said to have been of good behaviour in the way we manage our debts. At the time of our celebrated exit in 2006, our outstanding debt reduced from over $30b to about $3b and a little above N1t. So, we are basically on our way back to where we were in 2005. Sadly, in 2005, patriots were worried that there was nothing on ground to justify such large amount of borrowing by successive governments and that the debt service obligations were crippling the economy. It is in this context that the new debate on borrowing should be understood.

In the first place, I sympathize with the government as it is faced with a situation that looks like, “damned if you do, damned if you don’t”. Unfortunately, that is the nature of challenges in economics. What is required in the circumstance, is to delicately execute trade offs. If there is any where that trade offs are required, this is it. Readers would recall that in analyzing the 2017 budget this column had described the budget as being “between the rock and a very hard place” (Outside the Box of May 29, 2017). As highlighted in the column, the budget stands the risk of partial implementation if government was unable to sustainably fund the deficit of N2.35t which represents almost 32% of the budget and constitutes 46% of projected revenues. At the current exchange rate, the deficit works out to about $7.7b. Given that the government has sent a request to the Senate to approve external borrowing of $5.5b, out of which, about $3b would be used to refinance existing maturing domestic debt obligations, the calls for the Senate to withhold consent, even if understandable, is misplaced as the same Senate approved the budget in the first place. There are, however, more serious concerns that border on sustainability.

Listening to the argument made by the Honourable Minister, there is no dispute over the fact that she made sense. However, it is important that we move away from the justification of more loans merely on the basis of the Debt to GDP ratio. That argument is unhelpful like we had argued in the write up under reference in May. We had opined thus, “there is this misleading argument made by “experts” about Nigeria’s debt profile. The argument goes this way: “Nigeria has a lot of room to borrow more and more to the extent that our debt to GDP ratio is lower than the average of 42% for developing countries and 56% benchmark for developed countries as per the IMF/World Bank Debt Sustainability Framework”. The problem with this argument is that it does not take into account the revenue earning capacity of the country. It also doesn’t account for the low Tax to GDP ratios of the country. While Nigeria’s Tax to GDP ratio is a meagre 6%, the global average is about 15%, leaving the country with oil as the major financier of the budget. Given the heavy drop in oil prices, the ability of the country to generate revenue is therefore impaired. … The Federal Government is said to have ramped up its debt “at a compounded annual growth rate of 16.2% over the last 5years to about USD42.1b (N13.8t) in 2016. Going by the borrowing plans for 2017, the debt stock could increase by as much as 20% year on year to USD54.4b (N16.6t) with debt to GDP rising to 17% from 15% in 2015.

You cannot isolate the issue of debt to GDP ratio from debt service capacity. If at 15% debt to GDP ratio, we are using up to 50% of revenues to service debt, it follows that doubling the debt would still leave us below the debt to GDP ratio threshold while we may use all our revenue to service debt annually. This does not work and is the problem with the argument of the experts”.

I guess it was this same position that the World Bank Senior Economist had taken a week ago.  It is instructive that some of the estimated numbers I posted have already been exceeded as total debt is now about $64b (N19.6t). The point being made is that debt cannot be repaid by GDP but by revenue. So, while it may be helpful for purposes of analysis, comparing debt to GDP, tend to mask the real danger. A more useful and realistic tool is the debt to revenue numbers. To drive the point closer home, there is a better measure which relates debt service to revenue. In 2015, the debt service to revenue ratio was 33%, by 2016, it had worsened to 59%. This number is sure to get even worse by the end of this year if the government adds close to $8b to the national debt. What this means in simple English language is that while 33% of our revenue went into payment of interest in 2015, we spent close to three fifth of our revenue to pay interest in 2016. Professional lenders would most times only lend when they are convinced of capacity to repay. As we get to the point where we use virtually all we earn in servicing debts, we will become more and more unattractive to serious and well-meaning lenders.

Beyond all these, there are a few other concerns that discerning citizens have. One of them is the use of the funds borrowed. This concern becomes more serious given the intrinsic inefficiency in public sector operations worsened by our penchant for mismanaging resources. Who would believe that with oil prices as high as they had been in the recent past, we could not put appropriate infrastructure in place. On the contrary, we were borrowing to pay salaries. So, government must continue to pay attention to the possibility of the borrowed funds disappearing into private accounts. Citizens are also concerned about the impact of the loan on the domestic economy, quite unlike the government’s theoretically correct argument that the loan would stimulate the economy. We say “theoretically correct” because if the funds are spent on goods and services imported from China, the full impact of the spending would be felt in China and not in Nigeria.

The latest suggestion of switching more of our loans from Naira to Dollar, even though sounds logical because of assumed lower interest rate of the Dollar has some hidden danger. With devaluation, the more dollar we are exposed to, the more the Naira we have to cough up to pay back the loan at maturity. Not long ago, exchange rate was at N150 per dollar and now it is at least N305 to the dollar. This means that you require over twice the Naira you required before now to pay back a dollar loan. Besides, dollar loans expose the country to external shocks. For instance, if like it happened recently, the US economy has to borrow dollars, interest rates will immediately go up.

All said and done, there is a need for the government to pay attention to a few critical issues. First, given the already high debt service to revenue ratio, there is a limit to how much it can borrow, no matter how bitting the needs are. Secondly, government needs to prioritize in such a manner that its new borrowing should not only be closely tied to need, but should also be tilted towards self-liquidating projects. Borrowing to build hospitals may be necessary, but given our present debt profile, such a project may not self- liquidate in the short to medium term. Thirdly, government would need to do everything to harness private capital as some of the projects with proper conceptualization and incentives may become attractive to the private sector. Fourthly, government should continue to engage the public with a view to improving the revenue profile of the country. The economy needs to run predominantly on taxes and like I had argued before, taxes can only be understood in the context of government’s share of the prosperity of the populace. An economically emasculated and anemic populace cannot pay tax. Fifthly, the drive towards the diversification of the economy should remain on the front burner of government policies. We must engage our universities and research institutes in a very dynamic manner if we must make progress with industrialisation of this economy. That is how it is done elsewhere. We should not be different. Finally, government must be seen to eradicate all the fat around it by reducing waste and reigning in cost. It must continue in the recovery of stolen funds and transparently sell to the private sector, underperforming and inefficient national assets to make money from the sales and turn them around for maximum contribution to the economy.

In conclusion, government must apply caution in adding to our national debt. It cannot afford to be cavalier about it. After all, it was the second American President, John Adams (1735-1826), who said “there are two ways to enslave and conquer a country. One is by the sword. The other is by debt”. If this was true in the 1820s, it is even truer today.
  • FrNinja

    Debt is not the issue. Lending it to a 57 year old rascal and swindler called Nigerian government is the problem.

    We have seen for example what Stella Oduah did with a loan from China to refurbish airports. Contracts were awarded for cheap fittings and fixtures while enriching her and her cronies massively.

    In the 1970s and 1980s Nigeria piled on debt building flyovers and bridges to Victoria Island, while neglecting basic public water supply for its residents. We have seen steel plants built at massive cost that never functioned while power plants for the nation remained on the drawing board. We have seen debt used to construct refineries thousands of kilometers from crude oil supply in kaduna and airports built at huge public cost to serve governors and cronies while one quarter of the children of the state die during childbirth or are stunted from malnutrition.

    Certainly Nigeria needs monies to fix its legacy of government failure but there should be rules for an unruly steward. Lending should be delivered by creditable lenders in charge of project execution that are subject to accountability. So multilateral institutions like the World Bank, EU, UN should be more actively engaged in health and education. It should involve private sector finance where private profits are realizable such as tolled high traffic routes, airports and water utilities.

    For anything else let the government dig deep to create fiscal space to fund its bad habits. Let it cut the pay of legislators, shut down or merge many of the frivolous organizations such as frsc which should be a function of policing.

  • RumuPHC

    The bogie of huge debt is a real fear for Nigeria. The truth however is that we must fear this kind of fear because of the fear that our leaders will not do the needful with borrowed funds.

    It is not actually that debt is bad , the issue is always on how borrowed funds are utilized. It is inconceivable to think our average revenue of about $70-$80 Bn and a federal budget of less than $40bncan sustain our recurrent expenses and provide for capital projects to spur growth. The state of Texas – comparable in size with Nigeria- budgets about $200 Bn for 21m people yet there are still challenges in Huston . Nigeria really need to borrow more if the country must develop.

    No country parts with debt. It is only debt that can make a country prosperous

    It is only the availability of modern infrastructure that can ensure sustainable development in Nigeria. Unfortunately these projects cost billions of dollars that we don’t have. On the flip side, we can however have such revenue only if the infrastructure is available to unleash the potential abundant resources of the country . So why not borrow to build infrastructure to reap the rewards of huge revenue to government and prosperity for the people.

    No country can ever part with debt. Rather the prosperity of a country is linked to its capacity to take on debt. Nigeria cannot be an exemption.

    • walefromnigeria

      I don’t believe we need to borrow more. Does the FG have a document showing all the critical infrastructure needed, cost to build and run and the commercial viability? If they do, shouldn’t they get the Ministry of Trade and Investments to start shopping for potential investors working with investment banks, wealth funds, private equity firms etc?

      And the none commercially viable ones with economic importance funded from Looted funds and other sources of independent rev?

      • RumuPHC

        Borrowing is important if we must sustain the required economic growth necessary to sustain our ballooning population.

        I don’t know what lists of infrastructure the government keeps . What is clear is that we lack critical infrastructure. It is only through borrowing that we can bridge the deficit. The mighty 3rd Mainland bridge was built by World Bank loan .

        Nigeria will need to attain investment grade rating before private and corporate finances can pour in. We are far from there .

  • “Korede

    Many thanks to Alex Otti for his intervention on our economic policy. A wise government will take caution and listen to your advice, This is the little you can do and I am happy you have not stopped to offer it on this page. Outside the box it is.

  • Yemi

    Good article although Dr Otti seems to conflate domestic with foreign debts. Dr Otti’s statement “…..This brings the total debt for both the Federal and State governments to circa $64.2b as at June 2017…..” is meaningless. For his analysis, reporting domestic debts in dollars does not add any value. He should have said the total debt stock of Nigeria comprises of $15.1 billion in foreign debt and N15.0 trillion in domestic debt.

    • Thompson Iyeye

      You are right. However, expressing the total debt in the equivalent dollar makes it easier for comparison purposes.

      • Yemi

        As stated by Kemi and in the article above, the major objective of the current borrowing is to rebalance Nigeria’s debt from domestic to external. Therefore, it is always useful to maintain the distinction of these debts in their respective currencies.

        • Thompson Iyeye

          This happens to be Alex Oti’s article and not Kemi’s.

          • Yemi

            That is why you have the “and”. Kemi made the argument about rebalancing the debt atleast 3 months ago. Actually, rebalancing the debt is part of the National Debt Management Strategy

          • Thompson Iyeye

            The major objective of the current borrowing is to provide critical and lacking infrastructure. Rebalancing domestic and external debt is simply how to go about the borrowing. You need to be factual in your comments.

          • walefromnigeria

            FG is looking at raising $5.5B debt. $3 billiob to rebalance the debt and $2.2B for infrastructure financing.

            I believe the senate shoudl assent only to $3B to rebalance the domestic to Foreign debt. FG should look for creative ways to get $2.2B to fund whatever infrastructure

    • Ibrahim Olawale Uche

      Yemi, there’s nothing wrong with how he put it. This is the way debt is reported. Even DMO reports it the same way. Please visit their website and you will see that Otti lifted those figures from there as at June 30, 2017. He also converted everything to Naira giving a figure of N19.6t. If you were to pay all the debt today, you will pay back Naira Equivalent of $64.2b. You must be able to compare with foreign currency benchmark. I believe that is a small point as many weighty and frightening matters were raised in this article that need serious attention.

      • Yemi

        You are right that is how DMO reports it on their website. Okay, put that aside and let us reason on our own. Does that make sense? The answer is NO. If Nigeria is going to repay all its debt today, it will repay $15 bill and N15 trillion not $64.2 bill. We can print Naira but we have to earn dollars. From a debt management perspective, the currency of the debt is extremely important. The debt exit we had in 2006 was entirely on the external debt side. The $30 bill Otti referred to above does not include the domestic debt then. If this distinction is not important, the rebalancing that Kemi is talking about from domestic to external debt will be meaningless.

        • BankyMons

          “The answer is NO. If Nigeria is going to repay all its debt today, it
          will repay $15 bill and N15 trillion not $64.2 bill. We can print Naira
          but we have to earn dollars.” Yes and NO – no sensible government goes on currency printing spree as she knows the implication of that to her wider economy. So in both cases, we actually have to earn to repay the debt. And as @Thompson Iyeye rightly pointed out above, there is really no need trying to make a mountain out of a molehill. There are more serious issues raised by Dr Otti’s article.

    • FrNinja

      Considering that govt revenue is less than 7 trillion per year means total public debt represents 3 years of govt revenue.

  • Political Affey

    How does a government survive a condition in which society places emphasis on consumption and producing stuff is like climbing mountains? No commitment to standard, and policy flip flop reigns. On top of that, heavy taxation is suggested to generate revenue for the state. Where are the people with the real productive skill to tax, other than those struggling with their SMEs? If you produce anything in this country, irrespective of how substandard, the attitude is for the entrepreneur to brag and brag. Yet, the impact of their contribution to the economy is hardly felt where it matters. I wish we get real about how poorly we have done in terms of lack of capacity in the real sector and the unsustainability of the economy in the long run. This government is just being real. They need money. The trouble is a preponderant percentage will be diverted into paying salary arrears. Capital project will have to wait. We have been there before.

    • Michael Kadiri SocioPolitical

      Exactly
      Which is why we must take a different course because taking panadol will not cure this cancer.
      Why do we have 36 largely meaningless states? Why are we copying America’s democracy and ours cost more? Why do we not design our own Government that represents the people? Why are we persisting in a nonesence civil service that does nothing but steals money – why does government own airports these days – who does that?
      We have to seriously restructure our political and economic arrangement before we can have policies that make sense.
      I do not even understand how we are dealing with money matters when we do not even know how many we are?

      • Political Affey

        Absolutely correct Michael. Our democracy is very costly. It is gulping a very huge part of our resources, leaving practically little for everything else. Our civil servants literally drag their feet to office and still end up stealing most of the budgetary allocations to their departments. You are right, we need restructuring before it’s too late. Buhari’s government cannot play the Ostrich on that one for ever. Borrowing is another way of funnelling money into a deep hole, when we already know that nothing works. We can no longer be fooled. Our elected officials still don’t get it.

      • Obi Ike Sorres

        The Aboki hate that word : restructuring. You have to hear ElRufai

        • Michael Kadiri SocioPolitical

          It is fine my broda
          As a great poet once said;
          exploration of ideas and dogma is good and it will eventually lead you back to the place we stand today, the place of the truth, where for the first time, you will understand.

  • Olufemi Bello

    I hope they will not be wise in their own eyes.

  • Michael Kadiri SocioPolitical

    The one thing Nigeria is good at is the demonstration of compromise in our mental status as a people. It is the only way to describe the return to the slavery of debt as if we have forgotten that it was once no good to us.

    We have all these stupid ‘not economically viable’ states, created only out of ego and not sense, we have a system of government that is bloated and populated by illiterates and unfit for purpose, we run a corrupt civil service that is the main source of grand larceny.

    Even in matters of God we have missed road. We have all these churches and mosques that are the opium of the people and we cannot see that religion and spirituality are two different things – like Jomo Kenyatta once said; the missionaries came and taught us how to pray with our eyes closed, and when we opened our eyes, they had our resources and left us with the bible. Our modern day thief thief pastors have taken it to another level – stealing from the poor for the purchase of gleaming private jets – classic black on black crime.

    You must and can never divorce these borrowing decisions of government from our condition as a people. A person’s CV is an indication of future conduct based on pointers from past performance and there is nothing in our past that tells me that we know what we are doing. It is not rocket science that borrowing money to pay salaries is like keeping the bar open and hoping the drunk will walk out himself. Those saddled with the task of managing our economy erroneously harp on about our GDP. We are the clearest example of “who GDP epp?” – you will have a huge GDP if 170m monkeys are selling bananas to each other, and government telling us that our borrowing is ok because comparing our situation with other countries is disingenuous at best.

    Alex has been screaming for sometime now about this borrowing and no one is listening. What Alex has not even added to his essay is the issue of population growth. This is the elephant in the room and in typical African style, we think if we do not talk about it or we say in Jesus name, it will go away. Heck, we do not even know how many we are! This is like a woman going to the market to buy food for her family without knowing how many children they have. How can people borrow us money when we cannot count? I’ll tell you how; these lenders know what they are doing – they are seeking our vast resources because they know we cannot pay back. I urge the reading of a book called; “The confessions of the economic hitman”.

    Hmmmmm – we are so individually bright and resourceful, but put us together and it’s like some kind of evil social experiment.

    • obinnna77

      Oil must flow, even if blood flows with it, and Zebu cattle must have right of way, even over your dead bodies. That is all the economics that you need to know. Ask Iska Countryman, our resident herdsman.

    • FrNinja

      Nigerians are so bright that 70% of the time we live in darkness because of lack of electricity. The Ghanaians and Kenyans must be fools for having steady power! We are brilliant to the point where potholes pervade our roads and rather thsn facing government we just order more SUVs. Egyptians that booted out Mubarak must be dumber than lead.

    • walefromnigeria

      i believe every state can be viable. Once their is land, people and God involved, money can be made.

  • Daniel Obior

    Before this administration, the country ran a N4 trillion budget, which was full of fat and padding. On coming to power, with fall in revenue due to low oil price, prudence required seriously reviewing all aspects of our budget to surgically remove the fat and padding. This would have freed a substantial amount of money that would have been available for capital development including infrastructure. Unfortunately, this government instead ballooned our budget from N4 trillion to some N7 trillion, full of more fat and padding, and of which recurrent costs is some 70% of the budget. With a revenue that cannot fund this high level of budget, this government in its wisdom has embarked on serious borrowing that will hang future generations in debt. How can a government justify this rise in total debt from less than $10 billion when it took over to over $60 billion, in a space of only two years? This is simply insane and reckless, as it is dumb and dangerous.