How Much Does Nigeria Really Owe?

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The federal government has insisted that Nigeria’s borrowing remains sustainable in the short, medium to long term levels, guided by the DMO objective of prudence. But the problem is not necessarily that we are borrowing, the problem is that we are spending some 60 per cent of national revenue on debt servicing. Without a truthful and forthright government’s acceptance of the debt situation, Nigeria’s chances of escaping its self-inflicted debt trap are fleetingly small. Nosa James-Igbinadolor reports

Since coming into office in 2015, the Buhari administration has ballooned the nation’s debt to as high as $86 billion. A senior fellow at the Jack Kemp Foundation, Dr. Ike Brannon, posits that, “In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a programme coordinated by the Paris Club, IMF, World Bank and the African Development Bank. To have squandered the debt reduction in just 14 years and have no tangible economic progress to show for it is beyond disappointing.”

Without a truthful and forthright government’s acceptance of the debt situation, Nigeria’s chances of escaping its self-inflicted debt trap are fleetingly small.

A critical problem facing the country, is that while most developing countries take advantage of concessionary financing from the World Bank or other international institutions, Nigeria’s debt profile is now increasingly made up of commercial debt. Its recent Eurobond issuances in London, for example, came at a relatively high yield, which makes its economy especially vulnerable to external shocks, such as a sustained drop in oil prices.

At the end of its 126th Monetary Policy Committee meeting of the Central Bank of Nigeria in September 2019, members noted that despite energetic increase in private sector lending, mounting public debt remains a headwind to economic growth.

“The huge concerns expressed in the last MPC meeting about the increases in total public debt remain unabated. Based on the Bond Issuance Calendar of the Debt Management Office (DMO), there were three additional FGN Bond Auctions in July, August and September to raise money to part-finance the 2019 Federal Budget while additional Issuance of Eurobond is expected in the late part of 2019 or early 2020.

“As the threat of debt vulnerability continues, a coordinated domestic revenue expansion with simultaneous fiscal prudence as suggested in the last MPC meeting still remains the key to addressing the weak fiscal position of the economy,” MPC noted.

Deputy UN Secretary-General and former minister of environment, Mrs. Amina Mohammed, had in 2018 expressed worries over the country’s expanding debt profile. Speaking at the International Monetary Fund (IMF) and the UN Working Together Conversation programme, Mohammed explained that although a former minister of finance, Dr. Ngozi Okonjo-Iweala, was very influential in the debt relief Nigeria secured in 2005, the nation has since returned to the path of indebtedness. “As I was coming up from New York, some of the concerns that came up from the meeting we had in China just recently and reports that we have; the debt issues are really big, I mean, having experienced what it was for Ngozi (Okonjo-Iweala) to get debt relief, it took her a few years to convince people, and we are now back again in my country to a level of debt that is worrying.”DMO asserts that with a $26.941 billion external debt portfolio and N58.449 billion local debt, as well as President Muhammadu Buhari’s recent request to the National Assembly for approval of the 2016 – 2018 Medium Term External Borrowing Plan for the sum of $22.718 billion, the country’s debt portfolio is manageable, noting further that the public debt stock of the country is a cumulative figure of borrowings by successive governments over many years.

“The requests in the plan are proposed borrowings from multilateral and bilateral lenders. The proposed loans are concessional, semi-concessional, and long-tenured and are for the purpose of financing infrastructure and other developmental social projects. All of which have multiplier effects in terms of job creation, business opportunities and overall increase in Nigeria’s Gross Domestic Product (GDP). Also, the benefits are long term and will serve generations of Nigerians,” the DMO noted.

It further explained that, “the proposed new borrowing is consistent with the subsisting debt management strategy which seeks to replace short-term high –interest cost domestic debt. With low interest long-term external debt and is one of the measures that is being implemented to moderate the level of debt service. The achievements in this regard are evidenced in the declining share of domestic debt in the total public debt from over 83 per cent in December 2015 to about 68 per cent in June 2019.”

Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, agrees with the supposition that Nigeria does not have a debt problem. “We have heard repeatedly that Nigeria is inching into a debt crisis, and we have consistently said that Nigeria does not have a debt crisis. Our total borrowing today is just under 20 per cent of our GDP while multilateral institutions project for an economy our size to borrow up to 50 to 55 per cent of our GDP. What we have is a revenue problem. Our revenue performance by half-year is 28 per cent so we have designed a strategic revenue growth initiative early this year which has three thematic areas: One is to achieve sustainability in revenue generation. Two is to identify new and enhanced enforcement of existing revenue streams and three is to achieve cohesion of our people and tools,” she explained.

Director, Union Capital Market Limited, Mr. Egie Akpata, is dismissive of the minister’s conclusion. “Everybody has a revenue problem,” he said. “That is not the issue at stake, the issue at stake is that the Nigerian government spends far more on debt servicing than any known organised country and on that basis, we are spending too much, simple! When your income becomes higher, we can afford to spend 60 per cent on debt servicing, but you cannot have a revenue challenge like we do and spend some 60 percent of our revenue on debt servicing. It doesn’t make sense. This is where the challenge is”.

On the country’s debt management strategy that seeks to focus on increasing the external component of the debt portfolio to moderate the debt service costs and elongate the tenor of the portfolio, Akpata called it a “fantastic strategy on the short term, but catastrophic over the long term.”

“If you think of it from a cash flow basis, it is definitely correct, you borrow abroad, which is cheaper, so on a cash flow, on a short term, before the currency gets devalued again, what you are paying out is a lot less. If you use last year as an example, you borrowed the Eurobond at seven per cent and you are issuing Naira bonds at 14 per cent, so, in one year, you pay seven per cent on the foreign currency without any devaluation and issue the naira at 14, so obviously, it is cheaper on the foreign one.

“However, if the currency gets devalued dramatically, the equation will suddenly and certainly change, and we know the naira will certainly go through some substantial amount of devaluation again. This currency used to be considerably stronger than the dollar, it is now N360. So, you can imagine if someone borrowed in 1980 when it was 60 kobo to a dollar and said it was cheaper to borrow abroad, you can imagine the place he will be now. Even if you go back 10 or 11 years to 2008 or 2009, it was N120 to a dollar, now it is N360, so you are owing three times as much. So, on the short-term basis, it is certainly the correct thing to do, on the long term, not only does your cash outflow for your debt service becomes more as your currency loses value rapidly, but the amount of debt you owe multiplies proportionally also. This is what people tend to forget. If the Nigerian government borrowed a $100 in 2008, it was N12 billion, today that $100 million is N36 billion. Three times as much. Now of course the Nigerian government is playing games around the exchange rate they use for their stuff, but the exchange rate in Nigeria is N360 and that is where the market clears. The nominal N305 is purely artificial. It is not the real exchange rate.”

The reality is that the dual exchange rate adopted by the Nigerian government helps to understate the amount of debt the country really has. As Akpata noted, “When they show the debt in naira, it is based on the N305 instead of N360, so they are understating the debt by about 20 per cent. So, the debt is understated by some 20 per cent. Unfortunately, also, what that means is that the government has 20 per cent less naira to work with, particularly the state governments, so they are basically short-changing the entire system. It is not really clear who benefits from this.”

What is clear, is who does not benefit from the Buhari government’s decision to adopt a dual exchange rate. The Nigerian people and a system of accountability do not benefit from the dual exchange rate. It is clear now that the multiple exchange rate system has only helped to promote currency speculation and trafficking at the expense of real production domestically, while providing avenue for stealing government revenue.

The International Monetary Fund (IMF) has consistently warned the Nigerian government that continued foreign-exchange restrictions are among the factors that dampen long-term foreign and domestic investment and keep the economy reliant on volatile oil prices, arguing that the elimination of exchange-rate restrictions and multiple-currency practices would “remove distortions and help economic diversification.”

In addition, Akpata posits that as long as Nigeria continues to spend the bulk of its revenue on debt servicing, it would be unlikely that the country would be able to provide good social services, security and infrastructure to its citizens. “So, it is not surprising that the level of social infrastructure in Nigeria is abysmal and it has not improved at all any time in the recent past and it is not likely to improve any time soon given some of the debt numbers flying around. We are just spending our monies servicing debt.”

On the government’s consistent claim that the country’s problem is one of revenue for servicing and not of debt, Akpata argued that, “If you use the bulk of your monies to pay off debts, then it is because you owe too much. There is no need talking about countries that have high debt to GDP and low borrowing costs. If you go to Japan, where the debt to GDP is about 140 per cent, the government just like many countries in Europe can borrow money at literally zero per cent. So if the Nigerian government can borrow 30-year money at zero per cent, then you would have technically, a very low debt servicing.

“We have to understand that the countries that DMO try to compare us with in their documents have high revenue to GDP. You can’t have low revenue to GDP and expect to have high debt servicing problem, the type Nigeria has. Secondly, these countries tend to owe almost all their debts in local currencies. I am not aware that the U.S government has material debts in foreign currencies, same for Canada, same for U.K. Most of these countries owe almost all their debts in their local currencies. We are at the opposite end and that is why we have constraints. These constraints are the outcome of our poor foreign currency earnings.

“So, you have all these foreign debts and you say you want to tax people. Who are you going to tax? Agriculture is the biggest section of the economy and it is a naira-earning industry and most of the agriculture done in Nigeria is subsistence and it is individual. Who taxes individuals? It is state governments, not foreign governments. So, the challenge is that it is only in Nigeria that the level of debt service to revenue is ignored. The reason it is not generally talked about in these countries mentioned on the DMO site is that their borrowing costs have never been high in the last 20 years. It used to be high in the 1980s when it was some 16 per cent in the U.S, but it is historically low now that a 30-year bond borrowed in the 1980s at 16 per cent is maturing now.

The most borrowings the Nigerian government has done in recent years is the Eurobond and it was at seven percent. You don’t get cash from China Exim bank; they don’t give you cash. So, if you want to borrow cash, the Eurobond is the most commercial…Bottom line is when you have a high interest rate environment, there is a limit to how much you can actually borrow. We do not have big corporations in Nigeria that you can tax, so the burden of tax is on individuals and you don’t raise the kind of monies you want from individuals.”