Musa: FG Needs to Drastically Reduce Debt Service Cost

Baba Musa

The Director General, West African Institute for Financial and Economic Management, Dr. Baba Musa, in this interview on the sidelines of the recently concluded annual meetings of the International Monetary Fund and World Bank, held in Washington DC, expressed concern about the huge amount the federal government expends on debt service, especially the domestic component. He also proffered some solutions and spoke on some other macro-economic issues. Obinna Chima and Nume Ekeghe bring the excerpts:

Some of the things the IMF and World Bank have emphasising since we came for these annual meetings have been centered around the need to raise non-oil revenue and ensuring fiscal sustainability. Do you think the federal government is doing enough in that regard?

I think the IMF and World Bank are correct. Fiscal sustainability is actually the trajectory any government should pursue. Without it, the nation would head into crises and associated things that come with debt distress such as, paying a high debt service, using the public resources to pay for interest instead of building infrastructure and associated things. So, I think fiscal sustainability should be the target of every government and how to ensure fiscal sustainability is when you have a trajectory over the medium-to-long term that shows declining debt-to-Gross Domestic Product (GDP) ratio or at least having a debt-to-GDP ratio that is sustainable. So, when you look at a country, in order to see the trajectory of the sustainability of the fiscal policy, the first indicator is to look at the trajectory of the debt-to-GDP ratio. Is it on a sustainable path? Is it on a stable path? Or is it on a declining path? In addition, the ability of the nation to mobilise resources internally, specifically the tax revenue, if the nation is able to increase its tax revenue over a sustainable period, it also guarantees fiscal sustainability. But, generating internally generated tax revenue must be accompanied by prudent government expenditure.

So, what is your assessment on the situation of Nigeria presently?

In the last administration, that is 2015 to 2019, we attempted to minimise government expenditure which is one of the indicators of sustainability. If you look at the government expenditure over the medium term, at least over the last four years it appears to be on a stable path instead of general increase as we used to experience the previous years. At least, the administration is on a sustainable path. 

But our debt service cost has remained high?

Yes, what we have been paying as debt service over the years is not good enough for the nation. Last year, the total debt service Nigeria paid, both external and domestic, was about N1.78 trillion, in 2017 it was about 1.5 trillion and in 2016 it was N1.4 trillion. That shows it is on a rising trajectory. The culprit is actually the domestic debt and not the external. So, what we have as domestic debt in the country currently is about $56 billion and the external is about $27 billion. For the domestic debts, we pay interest on the average, 18 to 20 per cent, unlike the external debts where the average interest payment is between five to six per cent. So, the cost of debt service is extremely high in terms of domestic debt. I think the agenda of the Debt Management Office (DMO) should be in the medium term, to develop a strategy to drastically reduce the debt service cost for domestic debt. But this has to go in line with the policy of Central Bank of Nigeria (CBN), because interest rate in Nigeria has to go down first, and when interest rate is down the cost of borrowing to government would also go down. So, bringing the cost of interest down must be a strategy of government which both the Ministry of Finance, central bank, as well as the stakeholders involved need to work together on. Also, part of the issue has to do with government’s borrowing habit. When there is demand, there would always be supply. So, in many cases where you see that there are reforms made to reduce interest rate, it stems from reduction in government borrowing. The government needs to implement strategies that would reduce the need for them to borrow money domestically and definitely when supply exceeds demand in economics, usually the price goes down. In essence, a lot of the commercial banks rely on buying government bond as their business. So, if the government decides not to borrow, the cost borrowing would go down.  We have seen the case in Gambia and Ghana. In many developing countries, government appears to be the driver of domestic interest rate. So, if their demand for domestic loan goes down, the cost of interest would go down. 

Nigerians are not happy with the poor state of infrastructure, there is no employment, so how would they be expected to pay higher taxes and why would they be compared to other countries that have higher tax ratio but have infrastructure and employment?

Nigerians have every right to be angry and my thought on this is that first of all we have to have confidence in whatever the government is doing. The first strategy is for the government to prove itself by letting the people know where it is heading to and what it wants to achieve and transparency is required. I told you earlier how Jamaica did it. Now, we are seeing part of that element in how Nigerian government borrows, particularly the ones tied to a project which is accounted for and audited and the general public sees it. But what of the other borrowings, where does the money go to? When you look at the borrowing of the federal government and compare it to that of some of the states, you would realise that the state borrowings appear to be more prudent and transparent than that of the federal government. The reason why they appear to be transparent is because the states borrow through the bond market which already has in built transparency process. There must be approval of Sate Executive Council which must be tied to a particular project, the syndicated banks normally have supervisory responsibility and the trustees have the responsibility to monitor the project ensuring the money is used for what it is meant for.  But I do not think some of the federal government’s borrowing has some of these processes. 

There is an ongoing debating concerning the state governors demanding for their FAAC allocation to be paid in dollars, do you think that is the way to go?

When state governors made the case that we earn income in dollar and because the constitution says that whatever we earn should be shared among the three tiers of government, so they want their money to be paid in dollar, that doesn’t make sense at all and that is not the standard practice in any nation.

The only country in Africa that allows dual currency is Liberia and even Liberia is working towards having a single currency now, as a medium of exchange. So, do you ask the states to start preparing their budget in dollars? That’s the first question to ask. Do they make their spending in dollars? That is the second question to ask.

So, if your budget is made in local currency and your expenditure is also made in local currency, it doesn’t make any economic sense to say that you should earn the revenue in dollar.

Secondly, once you allow that, it gives room for volatility. Now, you have no control over the macroeconomic indicators. As a state, they don’t determine the exchange rate, they have no control over the determination of exchange rate, which is the exclusive responsibility of the central bank. Secondly, they do not have control over inflation. Again, that is the responsibility of the central bank. So, to say that you want to earn part of your income in dollars, then of course, you should have the capacity to determine the exchange rate and also control inflation; because once you allow what they are pushing for, of course there would be volatility in the budget. And for any nation or state, what they should avoid is to allow the volatility in the budget. So, I think if the governors have issues relating to the determination of exchange rate –that is whether to use the official, interbank or parallel market rate for conversion – I think they should table the issue rather than saying they should be given dollars, because it doesn’t make economic sense.

How is WAIFEM contributing towards achieving some of the measures that you have talked about?

Our primary objective is building capacity among the public sector officials that are involved in macro-economic and financial management

in the countries in the region, which Nigeria is included. As far as WAIFEM is concerned, we try to look at the capacity gaps in all our member- countries and design training programmes that would address those capacity gaps and over the 23 years of our existence we have conducted over 754 training programmes that cut across different aspect of economic issues in our member-countries and we rotate the training programmes around these countries. But one of the things that we have realised is that our capacity building programmes have always been centered on central government and building the capacity of officials in the central government. At the moment, we are drilling down to sub-national entities. We have realised there is always a disconnect between technicians and policy enforcers. We realise that over the years, capacity building has been built among the core team of public sector officials. But at the highest level, when it comes to implementation of policies there are gaps between what the technicians do and what the politicians implement. So, in the aspect of political economy, I think it is an area we are going to be focusing our capacity building efforts to address. In that regard, by January 2020, we would be creating a new department called Governance and Institutional Management Department, strictly to address this issue of political

economy, especially how we build the capacity of our legislatures, permanent secretaries and basically, the people who are involved in policy making and implementation. Our focus would be how do we build their capacity so that they can understand the technical work that has been done by the technicians so that the implementation can be seamless and effective. It is one thing to have a sound technical proposal and a different thing to make a politician understand it and then implement.  Part of the mandate of the Governance and Institutional Management Department is to also build the capacity of media. That is because we believe that transmitting policy should be effective. So, if we have a media that understands the technical terms and convert it to terms the general public would understand in the market, it would help the general public understand government policies. Thus, we are creating training programmes targeted at the media to understand the transmission mechanism, the technical issues involved and how they make sense economically and how to transmit them to the general public.

The single currency policy West African countries are pursuing, how possible is it, looking at what is happening in Europe, and also what are your thoughts on the fact that politics always trumps economy in the region?

The issue of having a single currency within the ECOWAS is a laudable initiative that has to be carefully implemented. We have seen Europe, which is made up of countries that are much more developed in education, transportation, infrastructure and other aspects of economic life. We have also seen how they have developed over the years and the issues that are arising. So, if you are a late starter, you are to take advantage of it and avoid the mistakes of those who preceded you. The objective of this is to promote the economic prosperity of the 15 ECOWAS countries. The idea is, as a Nigerian, if I want to go to Sierra Leone or Gambia, I do not need to take US dollars there. If I have an Eco, I could just collect Eco and go and do my business and then come back. So, rather than taking the foreign exchange rate of the nation to go to another country to do business, I would use my local currency to do that. So, the cost of business is expected to go down if we implement the Eco. But the truth is that, have we met the conditions to bring the currency on board, which is the issue? We have had what we call the convergence criteria and in 2015 there was an agreement amongst the Heads of States that there must be sustained meeting so as to be able to reach the convergence level.

As at August this year, none of the countries met the convergence agreements in a sustainable manner. We found that a country would meet all the convergence in year one, in a year two later, they would miss some, which has been the trait amongst all of them. That shows us some things we need to look at. If countries are missing the convergence criteria, what are the reasons? In many cases we do not determine the price of commodities that affect revenue and so many other indicators. So, are we designing policies that respond to those volatilities? In many cases you find out that countries are not implementing policies that avoid those types of volatilities which brings us to the issue of continuing fiscal sustainability because most of the targets that are missed relate to the fiscal issues. In this case what it tells us is that we need to look inward into our fiscal and make it sustainable so that it would be able to meet these convergence criteria. They have announced that by 2020, we would have a single currency. The implementation would start, but not in a physical form, rather it might be a virtual currency, pending when all the countries would converge and address the issue. On the aspect of politics, it is really about educating our politicians to understand the relevance of economics and at least implement policies that would stabilise the economy.

We have been a bit on the side of criticism, are there policies options that you would advise the Nigerian government to implement in the short-term to accelerate economic growth? 

What we always say is that we have all realised that the cost of debt service is extremely high for the nation which leaves us with two options in addressing this type of situation. The first is, when you have a windfall, if the existing debt has a clause of redemption, then you can retire it, just like what happened in 2005 whereby we used part of Nigeria’s resources to pay off the debt and started from a clean slate. So, when you have that excess resources you can address the issue once and for all and then start again. But, obviously we are not in that situation now. The second scenario is re-profiling the debt and the way to do that is by taking advantage of situations and then reduce the cost to government. At the moment, we say that last year alone we paid N1.8 trillion as debt service, meanwhile, almost 90 per cent of that was domestic debt service cost. If you convert N1.8 trillion to dollars, it is over $3 billion. So, you can imagine that. So, what we need to do is to re-profile the debt by borrowing externally and then retire the short-dated instrument. That would drastically reduce the cost of debt service. Perhaps, if you borrow at maximum of five or six per cent and then pay off the debt that you are paying interest at 22 per cent. When you are trying to address such a thing you have to be strategic. The best way to go about it is when you have excess resources, you can retire it and start on a clean slate which has to be accompanied by good institutional arrangement. The domestic debt is where the issue is, so we need to refocus our strategy to address the issue and the option I am recommending at the moment is to re- profile the debt, pay off the medium term debts that appear to be of high interest and then reduce our domestic borrowing such that the interest rate should be on a sustainable path.

When you say debt profiling, you are also talking about taking foreign loans to pay off the domestic debt, which the government did towards the end of 2017, but that also increases the debt stock. So, what other measures can we adopt to move from this current low growth rate to something higher?

Mobilising domestic resources is an area we feel Nigeria has not been able to maximise its opportunities. The tax to revenue ratio is

far below the average of any developing country, at least for lower middle income countries as we have been classified. The average tax to GDP ratio in most low income countries should be somewhere around 20 to 23 per cent. That of Nigeria is still within the single-digit and far below the average. Even in Africa, the average for African countries is between 15 to 16 per cent and Nigeria even has less than half of what some other African countries have. So, with regards to increasing our revenue target by just telling the Customs that they have to mobilise a certain amount, I think it is not a good strategy. What we need to do is to address the loopholes in terms of those that are outside the tax

net and I do not see any reason why a philanthropist because he or she built a school which he earns millions of naira from would then seek tax relief, that is not proper. If you are going to be a philanthropist it should be in line with the revenue that they earn. The second issue is the informal nature of our country. There are lots of companies that exist which are not yet captured even though they are already making a lot of money. They really need to get those institutions in the tax net and maximise the loopholes. I think in my view, if we are able to do those things it would double the revenue that government earns which would not require any unnecessary domestic borrowing.