Ending Nigeria’s Borrowing Spree

With the troubling revelation of Nigeria’s debt servicing pegged at 98% of revenue, Nume Ekeghe writes that the federal government’s borrowing spree is unsustainable

With a total debt stock of N35.465 trillion as of June 30, 2021, an amount that is growing with each passing day, and has been serviced with N11.679 trillion within five years, there seems to be no end in sight yet for the borrowing spree by the Nigerian government.

The President Muhammadu Buhari -led government had sparked an outrage on the rising level of the country’s indebtedness after it once again requested the approval of the National Assembly to further increase the country’s borrowings.

In a letter to the Senate, President Buhari sought the approval to obtain $4 billion and €710 million loans to address critical projects approved by the Federal Executive Council (FEC). In the letter, the president said the projects listed in the external borrowing plan are to be financed through sovereign loans from the World Bank, French Development Agency, EXIM Bank and IFAD in the total sum of $4.054 billion and €710 million and grant components of $125 million.

Spending on Servicing

The worry over the rising indebtedness was further stoked by the State of the Economy presentation made by the Chairman of the Economic Advisory Council (EAC), Dr. Doyin Salami.

According to the renowned economist, with debt service-to-revenue ratio at 97.7 per cent (January to May 2021), the country’s public debt profile was unsustainable.

Salami noted that the country’s debt stock is estimated to hit about N54 trillion when Ways and Means as well as the Asset Management Corporation of Nigeria (AMCON) liabilities and projected fiscal deficit for 2021 are put into consideration.

In the past five years, the federal government had committed a total of N11.679 trillion into debt servicing, while N8.31trillion was expended on capital/development expenditure between 2015 and 2020. This translates to a yearly average of N1.386 trillion.

A breakdown of the amount showed that in 2015 and 2016, N953.620 billion and N1.475 trillion respectively were spent on debt service, while N1.841 trillion and N2.203 trillion went into same line item in 2017 and 2018, respectively.

The figures were unveiled in the “Analysis of the 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper,” presented in Abuja by the Centre for Social Justice (CSJ). The sums of N2.254 trillion and N2.951 trillion went into debt service in 2019 and 2020, respectively.

At the presentation, the Lead Director of CSJ, Eze Onyekpere, whose organisation has been in the forefront of the campaign for fiscal discipline and transparency in public affairs, stated that Nigeria’s debt had also been increasing in double digits year-after-year since 2015, with the highest increase recorded between 2015 and 2016.

Citing the Debt Management Office (DMO) statistics, Onyekpere observed that public debt stock stood at N12,603 trillion in 2015, N17.360 trillion in 2016, and N21.725 trillion in 2017. In 2018, 2019 and 2020, public debt stood at N24.387 trillion, N27.401 trillion, and N32.915 trillion, respectively.

The highest increase was recorded between 2015 and 2016, while between 2015 and 2020, Nigeria’s public debt increased by 161 per cent, indicating a yearly average increase of 37.74 per cent.

The CSJ chief executive stated that the debt service figures provided the factual background to the presentation of the Medium Term Expenditure Framework (MTEF’s) position on consolidated debt.

He said, “The Consolidated Debt Statement affirms the Medium-Term Debt Management Strategy (MTDS) 2020-2023 as the governing policy strategy. The MTEF states that the MTDS focuses on the development of an optimal borrowing structure to fund the government’s financial gap and needs, taking into consideration borrowing options, cost of borrowing and the associated risks with borrowing.

“Under the MTDS, the proposed portfolio composition is 70 per cent for domestic debt and 30 per cent for external debt while total debt as a ratio of the GDP has been increased from 25 per cent to 40 per cent; average tenure of debt portfolio is a minimum of ten years.

“It proposed up to five per cent of the GDP in sovereign guarantees for private companies executing public projects and Promissory Notes is to be issued to settle government arrears, Ways and Means Advance at the Central Bank of Nigeria (CBN), and the debt stock of 5 state owned enterprises (SOEs.”

Onyekpere recalled that the Consolidated Debt Statement setting out and describing the fiscal significance of the debt liability of the federal government was expected to process measures to reduce any such liability.

Borrowing to Continue

However, Onyekpere regretted that the MTEF’s proposals were about measures to increase the liability, noting that debt as ratio of GDP increased from 25 per cent to 40 per cent and up to five per cent of GDP in sovereign guarantees for private companies executing projects, among others.

According to him, Nigeria would continue borrowing in the medium term to finance expenditure, adding that the borrowing projections in the 2022-2024 MTEF contradicts the provisions of the Medium Term Debt Strategy (MTDS), which sets a portfolio composition of 70 per cent for domestic debt and 30 per cent external debt.

The trajectory, he noted, was leading to a 50:50 ratio, adding that debt service to revenue would be increasing in the medium term, while capital expenditure as a percentage of total federal government spending, would be decreasing in the medium term.

Similarly, he pointed out that from available facts, recurrent expenditure as a percentage of total FGN’s spending would be increasing in the medium term. Onyekpere pointed out that in the FGN Revenue Framework, the share of oil revenue to FGN overall revenue was projected at 43 per cent in 2022, 51 per cent in 2023 and 46 per cent in 2024, while the share of non-oil taxes (VAT, CIT and Customs collection) to FGN overall revenue is projected at 29 per cent in 2022, 28 per cent for 2023 and 34 per cent for 2024.

He stated that the FGN Expenditure Framework showed that statutory transfers as a percentage of total FGN budget amounted to 4.31 per cent, 5.15 per cent, 5.23 per cent and 4.96 per cent for the years 2021, 2022, 2023 and 2024, respectively. “Debt service, including Sinking Funds to total FGN budget is 29 per cent, 33 per cent, 39 per cent and 44 per cent respectively for the years 2021, 2022, 2023 and 2024.

“Recurrent non-debt expenditure amounts to 48.94 per cent, 52.11 per cent, 47.81 per cent and 44.29 per cent respectively for the years 2021, 2022, 2023 and 2024. The high level personnel costs as a component of recurrent non debt expenditure (66.4% in 2021; 68% in 2022; 67.9% in 2023 and 67.9 per cent in 2024) is further evidence of the imperative for reducing the cost of governance.

“Special interventions funds amounts to 3.04 per cent, 2.94 per cent, 2.61 per cent and 2.39 per cent respectively for the years 2021, 2022, 2023 and 2024. Capital expenditure (excluding Government owned Enterprises and statutory transfers) amounts to 32.87 per cent, 23.82 per cent, 20.22 per cent and 18.50 per cent for the years 2021, 2022, 2023 and 2024 respectively.”
CSJ recommended that MTEFs should be prepared on the strength of high-level overarching national policy instruments, pointing out that a clear successor to the Economic Recovery and Growth Plan (ERHP) should be articulated and made available to Nigerians for input.

According to the organisation, there are references in the MTEF to a Medium Term National Development Plan (MTNDP), which is neither in the public domain nor a product of the popular participation by Nigerians.

increase in Revenue base

To improve revenue, therefore, Dr Salami said the government must block leakages, unlock opportunities at state levels, improve tax efficiency and coverage, and sell-off dead assets, which are estimated at $900 billion.

Salami had pointed out that the federal government’s expenditure had been on the increase, and at a faster pace than its revenue. He added that public debt had continued to expand on the back of growing fiscal deficit.

He said from January to May 2021, actual fiscal deficit was N3.01 trillion, representing 53.8 per cent of total budgeted deficit for 2021. “While overall expenditure has grown by 102 per cent from N5 trillion to N10.1 trillion between 2015 and 2020, revenue increased by just 15 per cent.

“This subdued government revenue is as a result of constraints around domestic production/investment; low tax base, as tax revenue to GDP still revolves around seven per cent; limited effort to explore and unlock opportunities for revenue generation at state level; over-centralisation and issues relating to efficiency in revenue collection.”

The economist pointed out that macroeconomic stability, consistency of policy and regulation, sectoral reforms, human capital development, and resolution of the security crisis were key to the economy’s ability to rebound. He also stated that the investment climate in the country currently faced major headwinds as total foreign investment inflows into Nigeria remained low.

The presidential advisor said foreign direct investment (FDI) inflow was $875 million in the second quarter of 2021, which was the lowest quarterly inflow since first quarter of 2016.
Salami said FDI inflow into Nigeria had revolved around $1 billion in the last five years, adding that FDI inflow in the second quarter of 2021 was $78 million, even lower than Q2 2020.
He said the country’s investment climate was being constrained by macroeconomic instability, policy inconsistency, inadequate infrastructure, insecurity, as well as tough business climate.

Salami said the way forward for the country was for the state Houses of Assembly to help in improving state competitiveness by reallocating spending priorities. He said more emphasis should be given to human capital development and the provision of social amenities for the populace. Among other things, Salami said they serve as champions of Ease of Doing Business, adding that the legislative bodies can review existing legal impediments to doing business in the states.

The steps, according to him, would include amending tax laws; reforming procurement laws to support indigenous private sector; improving access to construction permits; and making it easier to register properties.

A rising debt portfolio

Meanwhile, Nigeria’s total public debt, comprising states and federal government debt obligations, rose by 7.75 per cent, from N32.916 trillion in December 31, 2020, to N35.465 trillion as of June 30, 2021. The federal government carries 83.07 per cent of the debt burden, while the states and the Federal Capital Territory (FCT) account for 16.93 per cent.

Domestic debt accounts for 68.40 per cent, while the external component stands at 38.60 per cent.

Director General of the Debt Management Office (DMO), Ms. Patience Oniha, noted that while the total external debt component stood at N12.706 trillion as of December 31, 2020, it rose to N13.711 trillion as of June 30, 2021.

She said total domestic debt increased from N20.210 trillion as of December 2020, to N21.754 trillion as of June 30, 2021. A breakdown of this gives N17.632 trillion for the federal government, while N4.122 trillion is for states and the Federal FCT. Of the N13.711 trillion external debt, the federal government only accounts for N11.828 trillion while the states and FCT make up the balance of N1.883 trillion.

Explaining the latest move by the federal government to secure $4.054 billion, €710 million and $125m fresh borrowing, Oniha stated that it had nothing to do with President Muhammadu Buhari as an individual. According to her, approval has already been secured from the Federal Executive Council (FEC) and the National Assembly under the under the 2018-2020 External Borrowing (Rolling) Plan to finance capital projects.

Oniha noted that there were entrenched processes and statutory instruments, including annual budgets, anchored on the Medium Term Expenditure Framework (MTEF), which allowed borrowing.
The president said the projects listed in the borrowing plan were to be financed through sovereign loans from the World Bank, French Development Agency (AFD), China-Exim Bank, International Fund for Agricultural Development (IFAD), Credit Suisse Group and Standard Chartered/China Export and Credit (SINOSURE).

He said the loans would be used to fund federal and state governments’ projects that cut across key sectors, such as infrastructure, health, agriculture and food security, energy, education and human capital development, and COVID-19 response efforts.

Oniha also spoke on the Central Bank of Nigeria (CBN) overdrafts to the federal government, noting that at the beginning of the year, they stood at N10 trillion, and must have increased by now. When added to the current debt profile, it would certainly increase the debt figures, she stated.

She noted that the process of adding the CBN loans had commenced, adding that the approval of the Federal Executive Council and the National Assembly would be secured to that effect.