Government Borrowings: Any End in Sight?

Ugo Aliogo examines federal government incessant borrowings and suggests measures to address it

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 to the borrowing spree by the federal government. However, the arguments from economists and financial analysts are that Nigeria’s huge debt burden is of significant concern right now given its debt service outlay, the seeming stagnant state of the economy, its anaemic income generating capacity and the consistent increase in recurrent expenditure whilst existing inadequate infrastructure is mostly rapidly dilapidating. In the 2021 budget, N3.12 trillion was allocated to debt service, accounting for 24 per cent of the annual budget. The total debt stock reported by the Debt Management Office (DMO) represents an 8 per cent increase from the debt stock value of N33 trillion as at December 31, 2020. According to the Federal Ministry of Finance’s budget implementation report, the debt service-to-revenue ratio was approximately 98 per cent for the fiscal period January to May 2021. These numbers are dire and are justifiably of extreme concern.

To provide deeper understanding on the country’s debt profile, THISDAY spoke to the Chief Executive Officer, AVA Capital Group, Mr. Kayode Falasinnu, who noted that the way out of the current crisis facing the country isn’t something that is either novel or complex, it is something that we have talked about consistently as a nation over the years but have not been able to do.

He stated that there is the urgent and imminent need for a diversified revenue base through the revival of the country’s lagging non-oil sectors.

He further explained that the diversification of revenues can be achieved by creating an enabling environment for business and entrepreneurs through implementation of effective policies that enhance domestic production and promote import substitution.

Falasinnu affirmed that sectors such as on manufacturing, agriculture, information technology, financial services and natural resources are extremely important to improve income generation and diversify revenue.

The AVA boss urged government to create an environment where businesses can thrive and create incentives for FDI in the country, adding that such efforts would bring improvement in the economy and be able to comfortably service, “our debt whilst improving the lives of Nigerian citizens.”

Also, lending a voice to the discourse was the Chief Executive Officer, Cowry Asset Management, Johnson Chukwu, who noted that the country’s debt is getting to a level that it is no longer sustainable, “not that the debt to the GDP is too high, but the revenue to the GDP is low.”

He affirmed that the country has low revenue profile unlike other countries, and the economic structure of the country shows low productivity.

His argument that since employment is weak, there is no direct link between the GDP and government revenue, therefore if the weak revenue is not well managed, the debt to GDP would not be sustainable.

On the flipside of the discourse, President Muhammadu Buhari argued that the federal government’s debt was within sustainable limits, stating that the nation’s borrowings were tied to specific strategic projects.

The President said the projects for which the funds were secured could be publicly verified, and the deficit arising from the N16.39 trillion 2022 budget would be financed by new borrowings.

Buhari also stated that the two economic recessions witnessed by his administration necessitated the debt.

According to the President, “We plan to finance the deficit mainly by new borrowings totaling N5.01 trillion, N90.73 billion from privatization proceeds and N1.16 trillion drawdowns on loans secured for specific development projects.

“Some have expressed concern over our resort to borrowing to finance our fiscal gaps. They are right to be concerned. However, we believe that the debt level of the Federal Government is still within sustainable limits. Borrowings are to specific strategic projects and can be verified publicly.

“As you are aware, we have witnessed two economic recessions within the period of this administration. In both cases, we had to spend our way out of recession, which necessitated a resort to growing the public debt.

“It is unlikely that our recovery from each of the two recessions would have grown as fast without the sustained government expenditure funded by debt. Very importantly, we have endeavored to use the loans to finance critical development projects and programmes aimed at improving our economic environment and ensuring effective delivery of public services to our people.

“We focused on the completion of major road and rail projects; the effective implementation of power sector projects; the provision of potable water; construction of irrigation infrastructure and dams across the country; and critical health projects such as the strengthening of national emergency medical services and ambulance system, procurement of vaccines, polio eradication and upgrading Primary Health Care Centers across the six geopolitical zones.”

Recurrent and Capital Expenditure

In shedding light on the conversation that bulk of federal government’s borrowing is going into recurrent expenditure, rather than capital expenditure, Falasinnu noted that while recurrent expenditure is a necessary cost at all levels of government, borrowing to fund it is just sub-optimal fiscal policy and outrightly unfortunate.

His stance is that the use of debt should mostly be focused on building infrastructure and enhancing the economy through investments in key sectors including education, health care, energy, and others.

He further argued that in the 2021 budget N5.65 trillion was allocated to non-debt recurrent expenditure whilst N3.12 trillion was allocated to debt servicing, noting that on the other hand, the capital expenditure budget allocation was N3.85 trillion, constituting approximately 29 per cent of total 2021 budgeted expenditure, “this was only 2 per cent more than the money allocated to personnel costs.”

He revealed that the high budgetary allocation to recurrent expenditures is not sustainable in the long term and government must start focusing on investing in things that would improve the living standard of Nigerians in the short, medium and long term.

According to him, “A growing population and a stagnant economy where inflation has been significantly high (especially food inflation) coupled with high unemployment cannot spend all its earnings and borrowings on recurrent expenditure items most of which comprise of unnecessary expenses, bloated personnel cost and huge debt service costs. To fund recurring budget items, the federal government must ensure expenses are managed in a sustainable way whereby revenue is at least 2-3X expenditure. That way the government can service the existing debt conveniently whilst also addressing the infrastructure dearth in the country.

“It is important that we cut our spending (especially those frivolous items we see annually in our budget that cost multiple billions) and focus on investing in key sectors of the economy. It is also important the government has a strategy to engage some of our debtors to start to explore the potential of debt forgiveness given the impact of the pandemic on the Nigerian economy. Finally, there must be transparency in the execution of the projects the government had borrowed money for such that the funds are optimally deployed to the projects and all potential leakages are blocked.

“A lot of analysts focus on our debt to GDP ratio and highlight that some developed countries have higher ratios than we do. The important point to note here is the quality of our GDP is not the same as developed countries. This is because whilst we do have a huge population, a lot of economic activity occurs on a subsistence basis with little revenue generating potential for the government thereby having little effect on the government’s ability to effectively service its debt. Hence a more relevant ratio is the debt service to revenue which is currently too high. The immediate focus has got to be revenue diversification through enhancing of other key economic sectors and fostering a friendly business environment attractive to investors and entrepreneurs.”

Judging with the present economic realities, Chukwu said every monies government spends on infrastructure is borrowed, noting that with such arrangements, the capacity of the economy is not likely to increase.

The Cowry Asset Management CEO advised government to invest in physical infrastructure that has the capacity to capitalize stronger economic activities, “infrastructure includes rail lines, highways, airways and seaports.”

Chukwu’s suggestion is that logistic infrastructure such as the airports and seaports are critical to improving the capacity of the economy to drive efficiency and productivity.

He noted that power and medical infrastructure are two critical investments that government needs to build to improve productivity and reduce the cost of doing business in the country.

Chukwu said: “The starting point is for government to eliminate the expenditure that are absolutely not necessary in the economy such as fuel subsidies. By all standards, we spend three trillion naira on fuel subsidy. Just imagine the impact of the 3 trillion going on infrastructure development, you will realise the level of infrastructural growth will rise astronomically. If we are able to implement such an effort, it will help to cut down the cost of doing business in the country and make taxation more efficient.

“The starting point should be to eliminate those expenditures that are not necessary and that are supporting productive activities which are supporting products that you don’t produce and hampering some sectors of the economy. Transport and energy infrastructures are critical and it is the starting point for the Central Bank of Nigeria (CBN) to take away subsidies on petroleum products.”

Economic Outlook

Falasinnu is delighted that while the GDP grew marginally by 0.51 per cent year-on-year in Q1, there was a more impressive rebound of 5.01 per cent in Q2.

His viewpoint is that whilst NBS is yet to release Q3 numbers, there is expectation that the year-on-year figure for Q3 and Q4 would be decent as the global and local economy seems to be finally rebounding from the impact of the COVID-19 pandemic and vaccine administration seems to be getting more successful with more people getting vaccinated.

The economist said there is likely not going to be a decline in GDP, if the country doesn’t experience another COVID-19 wave as a result of the vaccine resistant variant.

According to him, “We need a more aggressive growth to attract the kind of investments needed to drive further growth and development. I think the Nigerian government should be targeting double digit growth in 2022 and enacting policies (fiscal and monetary) that would ensure the achievement of this.”

On his part, Chukwu expressed assurance that the economy would experience marginal improvement, but it’s not going to be strong enough.

He added that the economy would continue to see post economic growth at the end of the year, “and once you see that economic growth is below population growth rate, you would observe that the level of poverty in the country will continue to increase and growth per capita will be lower.”

“One is expected to see some level of moderation in inflation rate, some level of improvement in exchange rate because of the monies the Europe government has accessed. And this will ensure that stability meets demand,” Chukwu noted.

Headwinds

Analysts are of the view that the major headwinds affecting the investment climate in Nigeria are high inflation, exchange rate instability, insecurity and others. Falasinnu takes a similar position by arguing that with inflation at 17 per cent which is an improvement from earlier months, an FDI has little incentive to invest given the negative spread or negative return on investment in the country.

He further explained that the exchange rate instability remains a huge deterrent to foreign direct investment in the country, noting that there is need to adopt a foreign exchange policy that fosters confidence in the economy.

Continuing, he added: “Insecurity and incessant news around criminal activities of cattle rustlers, bandits and kidnappers are a huge problem with respect to attracting investments especially in the less commercial States and cities in the country. A conscious effort to tackle and successfully alleviate these problems is important for Nigeria to once again be an attractive economy for investors both locally and internationally.”

Chukwu corroborated Falashinnu views that the major headwinds facing the country’s investment is heighten level of insecurity, which makes it difficult to sell products from one to another, stating that beyond that there are people straightening their agricultural plans, agropolicies, telecommunications, and others because of insecurity.

FDI Inflows

Chukwu disclosed that FDI inflows have been very huge, while predicting that in 2022, portfolio investment would be weak, because forex constraints limited the number of petroleum investments in the country, “those are the things that would define the remaining part of next year.”

The AVA boss argued that despite the pandemic and the impact in 2020, FDI increased by 4 percent to $2.4 Bn in 2020 from $2.3Bn in 2019, noting that in 2021, according to the NBS FDI fell to $77.97 million in Q2 2021 from $154.76 million recorded in Q1 2021 , a decrease of 49.6 percent, “this figure is also dire when compared to Q2 2020 where FDI inflow was $148.59 million.”

He hinted that the lull in FDI in the economy is directly a result of the seeming inconsistencies in the foreign exchange policy coupled with increased concerns around insecurity across the nation.

Policy Interventions

Falasinnu posited that the development of a prudent approach towards financial management is imperative in order to establish a sustainable economic plan for the country.

He espoused that federal and state governments need to heavily tap into the Public Private Partnership (PP) model to spur infrastructure development, adding that such model has a three-pronged effect of reducing current high levels of public sector funding, ensuring efficient management of assets and potentially increasing Foreign Direct Investment (FDI).

He called for the establishment of policies that would facilitate increased supply of import-substituting commodities and exportable goods to promote decline in the country’s borrowings.

He added: “Government must participatively involve itself in growing the supply side of the economy by aggressively driving public and private sector investment initiatives in the agricultural, services, industrial and other sectors.

“The current administration can enhance investors’ confidence and allay concerns surrounding the country’s economic situation by firstly easing and/or eliminating policies (monetary and fiscal) that hinder private sector investment in infrastructure development within the country. Secondly, the current administration has a number of robust policies and programmes within the agricultural and services sectors. Ensuring awareness and effective adoption from end to end will also restore investors’ confidence in the economy. You must understand, a healthy economy implies enhanced government revenue such that there are no concerns about the government’s ability to settle its debt obligations.”

Chukwu urged the government on the need to review the concessioning of the power sector as part of measures to address some of the weaknesses and failings of the investors.

In his words: “On the power sector, they have failed with the commercial viability of the sector, government needs to come out with a policy that will review the capacity of investors in the power sector and that requires arrangements. There is a need for the implementation and reviewing the tariff structure to ensure that the aggregate and losses are well reviewed.”