Rising Debt Stock and Need for Fiscal Adjustment

Patience Oniha
Director-General, the Debt Management Office (DMO), Ms. Patience Oniha

As the debt portfolio swells, the federal government should adopt measures, aimed at ensuring that debt service does not rob the country of its developmental objectives, writes James Emejo

According to the Central Bank of Nigeria (CBN), the total domestic debt of the federal government increased to N13.4 trillion as at the end of June 2019.

The figure is 10.38 per cent higher than the N12.15 trillion of local borrowing in June last year.
The 36 states of the federation including the Federal Capital Territory (FCT), on the other hand, had borrowed N3.96 trillion within the same review period, according to the Debt Management Office (DMO).

The apex bank, however, noted that the FGN Bonds amounted to N9.69 trillion or 72.26 per cent of local borrowing while Nigerian Treasury Bills (NTBs) raked in N2.65 trillion or 19.77 per cent and FRN Treasury Bonds of N125.99 billion or 0.94 per cent was recorded.

Other components of the domestic debt stock included FGN Promissory Notes which accounted for N707.76 billion or 5.28 per cent, FGN Sukuk valued at N200.00 billion or 1.49 per cent, FGN Green Bonds amounting to N25.69 billion or 0.19 per cent as well as FGN Savings Bonds of N10.43 billion or 0.08 per cent.
According to the DMO, the country’s total public debt stock stood at N25.70 trillion with the external component put at $27.16 billion as at June.

The CBN had noted that despite rising debt stock, the cost of debt servicing declined by 15.00 per cent to N800.73 billion in June, compared to N941.99 billion in the corresponding period of 2018 due to declining yields in the fixed income market during the review period.
Nevertheless, there have been growing concerns over the country’s rising debt profile and cost of debt servicing in recent times.

Amidst the current revenue constraints especially, concerns have centered around the ability to honour debt obligations on the one hand, and the implications on the country’s infrastructural development and improved living standards for Nigerians.
According to the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, out of the N10.33 trillion budget for next year, a total of N2.45 trillion, is earmarked for debt service, representing 23.74 per cent of target expenditure.
She noted that the provision to retire maturing bond to local contractors had also increased by 169.09 per cent from N110 billion to N296 billion in 2019.

The federal government had severally attested to the fact that it is currently faced with a huge revenue crisis, prompting analysts to wonder why the country had continued to borrow, notwithstanding- leading to insinuations in some quarters that the future of young Nigerians were being mortgage by the increasing debt profile.

But of particular concerns were arguments that borrowing had not translated to meaningful infrastructural development amidst poor transportation system, particularly impassable road networks, power among others- while poverty had been on the rise according to a recent report by the World Bank.

Ahmed had further highlighted the challenges of government to service existing debts when she admitted that low revenue was affecting the federal government’s ability to service debts and fund day-to-day recurrent expenditure.
The minister had specifically insisted that although the country does not have a debt problem, underperformance of revenue had continued to cause a significant strain on its ability to service debt.

Notwithstanding, she further justified the federal government’s fresh move to borrow an additional $3 billion loan from the World Bank to finance the power sector.

Already, most of the states of the federation, who are also trapped in the debt servicing conundrum have not had any respite as the situation continues to weigh in on their ability to deliver on developmental aspirations.
A cursory look at their monthly revenue receipts from the federation account in August, showed that a significant chunk of their revenue had been committed to debt servicing particularly the external components.

However, some experts have expressed concerns over a situation whereby government is unable to honour debt service as a result of revenue constraints- and the likelihood of its assets being confiscated to offset its contractual liabilities.
The minister had further dampened expectations for improve oil revenue to fund the 2020 budget when she explained that a lower benchmark oil price of $57 per barrel (against $60 per barrel for 2019) was assumed considering the expected oil glut in 2020, as well as the need to cushion against unexpected price shock.

According to Ahmed, there are strong indications of an oversupplied market in 2020, adding that all three of the major forecasters – including the Organisation of the Petroleum Exporting Countries (OPEC), International Energy Association (IEA) and the U.S Energy Information Administration (EIA) generally already predicted non-OPEC production growing by about two million barrels per day (mbpd) in 2019 and by more next year.

According to her the United States shale oil accounts for most of the total supply increase, but new projects in Norway, Brazil and Australia will also contribute to the increase in non-OPEC supply.
Among other things, she said market sentiments do not support an expansion in demand, adding that growth in demand for OPEC oil and condensates specifically are projected to slow down next year.
Ahmed noted that oil production volume is projected to average 2.18mbpd for 2020, although this is lower than the projected oil production volume of 2.3mbpd for 2019.

“We believe that this is a more realistic projection. For 2021 and 2022, the projections are 2.22mbpd and 2.36mbpd respectively. Actual daily crude oil production and exports have been below budget projections since 2013, despite installed capacity of up to 2.5mbpd, for a number of reasons.
Although the federal government had recently signaled its intention to explore a variety of options to increase revenue generation including an increase of VAT from five per cent to 7.2 per cent amidst other “tough policy initiatives”, experts have nevertheless expressed worry over the rising debt and ability to service same

Speaking in an interview with THISDAY, a former banker and erstwhile Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, describe the country’s increasing debt portfolio as worrisome.

According to him, the rising debt profile of the country is worrisome. It is also worrisome that our debt service figure is higher than our Capital budget figure for 2020.
“Whereas the capital budget figure is N2.1 trillion, our Debt service figure is N2.4 trillion. More than one quarter of our revenue for next year will be used to service our debt.

“All these will be reversed if we increase our revenue. Nigeria and Nigerians should seriously consider the cost of governance. If the revenues are not growing, we should reduce drastically, the cost of governance at all levels.”
Also commenting, a development economist and Chief Executive, Pan Africa Development Corporate Company, Mr. Odilim Enwegbara, said there was an imminent debt crisis as the current situation appeared to be out of control.

He said: “We are now in a state of economic mess. If the government does not know how deep the mess is, how will the same government know how to dig us out of the deep hole?
“What started with recession in 2016 has now grown to the state of hopelessness, with our debt profile now out of control as both domestic and foreign debts have us trapped.”
He said: “Soon lenders will begin to demand for their money or else they will sell whatever they can lay hands on. It will start like a joke the same way the P&ID contract scam started like a joke.

“But if the P&ID scam against the Nigerian state can hold water, why should the current debt trap our so-called elected government officials are taking us into not be legitimate?”
According to him: “Soon the chain reaction will begin as all the things that keep our economic heart to be beating are beginning to shut down one after another.
“Unfortunately, there is no more time remaining to keep the economic heart beating since all the support organs are now silently dying.”

Enwegbara said: “The questions we should be asking ourselves right now are: how can we go on borrowing without having in place any form of repayment plan? Can you repay when you can’t stop borrowing in order to remain fiscally afloat? How can you repay your bloated debt when you have trapped yourself into borrowing in order to keep your big government growing? How can you stop borrowing when rather than borrow for investment, you’re enjoying borrowing for keeping your extravagant lifestyle intact? And above all, how can you stop borrowing when it is the oil in someone else’s backyard that is targeted as the collateral should you default?”
There’s however, no gainsaying that in the current revenue predicament, the present administration must ensure that increased borrowing and debt service do not further retard economic prosperity of Nigerians.