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Nigeria heads for another debt trap

By Emeka Okoroanyanwu and Babajide Okeowo

Nigerian governments at both federal and states levels have again gone on a borrowing spree. Like the proverbial bull in a China shop, the government seems uncontrollable in this borrowing extravaganza. As a result, the country’s rising debt profile has attracted attention from both within and outside the country, raising concern that if nothing is done urgently to check the ugly trend, the country may again find itself in a horrific debt conundrum.

Figures released from Nigeria’s Debt Management Office (DMO) last week shows that the country’s debt profile as of December 31, 2018 has hit N24.387 trillion.  The debt, according to the DMO Director General, Patience Oniha grew by 12.25 per cent from N21.725 trillion in 2017. This is about N2.66 trillion rise in just one year.  The DMO DG said Nigeria’s domestic debt accounted for 68.18 percent of the figure which consisted of debts owed by both the federal and state governments.

 Going  by the  figure presented by the DMO, the huge addition was recorded in the fourth quarter of 2018 which came with N1.96 trillion or 8.03 per cent increase, against the N22.428 trillion recorded at end of September 2018.

 The rising national debt became alarming when the current administration came into power.  The new borrowings made by the government so far include N1.457 trillion in 2015; N2.321 trillion in 2017; N1.643trillion in 2018 and N1.649 trillion in 2019.

The figures from the DMO show that both the domestic and external debts have been on a steady rise over the last three years.

In 2016, for instance, Nigeria’s debt burden was about N16 trillion, an increase of over N4trillion over that of 2015.  In 2017, the country’s debt was N17.117 trillion but increased to N19.234 trillion at the end of last year, an increase of 11.80 per cent.

In 2019 fiscal year, the government is planning to borrow about N1.6trn from the domestic capital market to partly finance the budget.

On the average, government has spent 25 per cent on debt servicing so far. In 2017, it spent N1.8trillion on debt servicing, while N1.455trn went into domestic debt servicing, N181.40bn was spent to service external debt. In 2018, government allocated N2.2trillion in the budget for debt services.

Of this amount, N1.766trillion was for domestic debt servicing, N250bn for external debt servicing, and N190bn for Sinking Fund to retire matured loans.

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Some of Nigeria’s debt is owed to the World Bank and now stands at $8.52 billion, indicating an increase of 48.69 per cent within a two-year period or 38.6 per cent of the country’s entire foreign debt. Between March 31, 2015 and March 31, 2018, Nigeria’s indebtedness to the global bank increased by $2.7 billion, up from $5.73 billion to $8.52 billion.

A large chunk of Nigeria’s indebtedness in this category belongs to the International Development Association, an arm of the World Bank which gives concessional loans to troubled and “fragile” countries. Nigeria owes the International Development Association the sum of $8.4 billion. It also owes about $124.18 million to the International Bank for Reconstruction and Development, another arm of the World Bank. As at March 31st, 2018, the entirety of Nigeria’s foreign debt portfolio stood at $22.07 billion.

Financial experts at both the International Monetary Fund (IMF) and the World Bank (WB) have complained that the country’s revenue-to-debt ratio is unsustainable and portends a serious danger for the future generation of Nigerians. They are of the opinion that while the effect of the increasing debt may not be immediately felt in totality, it could be catastrophic in the long-term with a chunk of revenue consumed by debt servicing to the detriment of infrastructural development. For instance, about N2.140 trillion of the N8.8 trillion proposed in the 2019 budget has been earmarked for debt servicing, representing about 25 per cent of the total budget allocation.

The International Monetary Fund (IMF) on its part pointed at the gloomy situation of the country’s economy saying that Nigeria spends more than 50 per cent of its revenues on servicing debts, a situation that does not give room for other necessary expenses.

Speaking at the presentation of the Regional Economic Outlook for Sub-Saharan Africa – Capital Flows and the Future of Work in Abuja recently, Senior Resident Representative and Mission Chief for Nigeria, African Department, Amine Mati, put Nigeria’s growth rate for 2018 at 1.9 per cent.

He said that although Nigeria’s debt to Gross Domestic Product remained low at between 20 and 25 per cent, the country spent a high proportion of its revenue on debt servicing as a result of low revenue generation. He said the debt servicing to revenue ratio was more than 50 per cent while for sub-Saharan Africa, the rate was about 10 per cent; a figure he said was too high and reminiscent of what the region went through in the period following debt relief at the beginning of the 21st century.

“Debt to GDP ratio is increasing in the past five years. Public debt is diverting more resources towards debt servicing. The interest rate has gone u

to where they used to be around the year 2000 before the debt relief. The adjustment has relied on spending compression rather than revenues mobilisation. Meeting the Sustainable Development Goals will require stronger growth and more financing,” Mati said.

According to him, “policies are needed today to create more jobs in the coming years. Twenty million jobs are required every year in Sub-Saharan Africa to meet the SDGs. Job creation is complicated by uncertainty to which technology replaces labour,” he said.

Director General of the Debt Management Office, Patience Oniha, had countered this argument stating that it was important for the Nigerian government to borrow especially given the nation’s low revenue generating capacity. She contended that without sufficient revenue and with the recession that the country found itself between 2016 and 2017, the government had no option but to borrow and spend the country out of recession.

Oniha said, “We are borrowing to be able to increase foreign exchange availability. The government needed to borrow in order to spend the country out of recession.” She disclosed that the government would borrow N1.5tn in the 2019 fiscal year, adding that borrowing had reduced as the nation was now out of recession.

Two weeks ago after the two-day Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria, the CBN governor, Godwin Emefiele had cautioned the federal government against the nation’s rising debt profile. According to him, the debt profile was growing at an alarming rate. On External borrowing, he advised the government on the need to be cautious considering the fact that the nation was fast approaching the pre-2005 Paris Club levels where the country was hugely indebted to the group of lenders and they had to write-off $18b of Nigeria’s debt.

In the same trend, some members of the Senate have also raised eyebrows on the nation’s rising debt profile describing it as alarming and unhealthy for the economy.

Deputy Senate President, Ike Ekweremadu, noted that borrowing was becoming increasingly unsustainable and urged the nation’s leaders to caution themselves before they mortgage the future of their children.

In his words, “Some countries are already in danger including Indonesia because of the borrowing they had in the past. For every money we borrow, there must be a day for repayment. We must, therefore, be cautious. Yes, it is important that we address our infrastructural needs through appropriate financing but I believe there are other creative ways of funding infrastructure, including Public-Private Partnership and concessions. It is time for us to ensure that our debt to GDP ratio must not exceed an acceptable level.”

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We are borrowing when we do not have the means to repay- Expert

To Gabriel Idahosa, the Vice President of the Lagos Chambers of Commerce and Industry, LCCI, though the country’s debt to equity ratio gives it room to borrow more, borrowing was not going to be a problem, but the real problem lies in the ability to repay the debt.

“What the government has been doing is to base the budget significantly on debts rather than revenue, the revenue capacity of the budget is at about 30 to 40 percent, so a lot of the budget is predicated on borrowing, as long as you keep borrowing, you are going to have your debt profile going up higher and higher which translates to having to borrow more and more’

“The government might be saying that our debt position relative to the Gross Domestic Product, GDP is not much to worry about at this time. The international benchmark for debt equity is about 40 percent, if you are at less than 40 percent, then you have room to borrow more. This is why the government is saying that they have enough room to borrow, but that presumes that they are also able to generate enough revenue to meet the debt repayment obligation. The real concern for Nigeria is not that the debt to equity ratio is high but the fact that we do not generate enough revenue to meet the repayment obligation of those debts significantly. As long as we continue to maintain the level of our current revenue generation as it is, then our capacity to repay will be going down,” he said.

Similarly, the Managing Director of Kairos Capital, Sam Chidoka said Nigeria’s debt sustainability is precarious.

“One fact that Nigeria has always looked at is our debt to GDP ratio which is in and around 20 percent and still looks good, but one thing which should worry us as a country is the debt to revenue. In terms of debt to revenue, we are not doing too well. In the situation that we are using 63 percent of our revenue servicing debts, this is precarious. The challenges are numerous, firstly, we have a revenue challenge, we are not making enough money, and we need to fix that. Secondly, we have an infrastructural gap that needs to be funded and of course, our ballooning debt situation,” he lamented.

Speaking on the way out, Chidoka said it is high time that the federal government took a look at ingenious ways of fixing the precarious state of the economy and should stop the quick fix approach.

“For the federal government, the need to take a look at the long term solutions is inevitable. I could understand the first four years, there is a race between the next election and your achievement, so you take the quick fix, what is the quick fix; you borrow money and tar a few roads. Now, the President is not going to contest another election, so this is the time to take a long term view at solving the issue of funding the budget, so the FG needs to do concessions, it takes time, but they need to do them now, they also need to privatize some assets which will get them some funds to fund the deficit that you have in the budget and they also need to find a way of using the balance sheet of the FG in more ingenious ways, why not look at PPPs and do guarantees, have the projects fund themselves while the FG will provide the guarantees of contingent liabilities and not a straight up liabilities which is debts.

On his part, Professor Sheriffdeen Tella, senior lecturer in the Department of Economics, Olabisi Onabanjo University, Ogun State, said a highly dependable government should run a balanced budget and avoid borrowing. He noted that borrowing in itself is not a bad economic strategy, but the purpose for which the borrowing is deployed is what matter the most.

“I’m not worried about borrowing because debt is leverage but it depends on what the loan is used for. It must be used for productive purposes and not to finance recurrent expenditure. Oil prices are just beginning to bounce back and so I see the borrowing as a last resort to prevent the total collapse of the economy since we had a serious revenue shortfall. When you have a decline in revenue, you have to resort to borrowing.”

“It’s a very worrisome development and we should not encourage it at all. My candid view is that the National Assembly should stop the federal government from continuing to borrow. Because we have gone beyond the bounds, we should start thinking of how to begin to repay what we owe so that the debts burden and debt servicing will reduce ultimately from our budget” he added.

A Non-Governmental Organisation, Social Action, had earlier lampooned the government for its inclination towards borrowing. Head, National Advocacy Centre, Social Action, Nigeria, Vivian Bellonwu-Okafor, said in Abuja recently that the inclination to borrowing by the government showed cluelessness.

Bellonwu-Okafor said the recent statement made by the Minister of Works, Power and Housing, Babatunde Fashola that ‘those who complain that we (FG) borrow too much should tell us where else to find funds’  was not only unfortunate but also a glaring admission of cluelessness.

She said, “While it is distressing to watch the country’s debt profile balloon into pre-2006 levels – before the debt buyback deal when the Olusegun Obasanjo administration paid $12bn to eliminate over $30bn then owed to the Paris Club of creditors – it is disheartening that the Buhari government seems to be bereft of ideas on what to do to generate revenue without resorting to excessive borrowing.”

Nigeria Employers’ Consultative Association, NECA Director General, Timothy Olawale, said at a recent outing in Lagos that Nigeria’s debt profile is worrisome especially when one looks at the total public debt stock, comprising external and domestic debts of the Federal Government, the 36 states and the Federal Capital territory, hitting US$73.208 billion.

He said: “This trend, which is very disturbing, could have a negative effect on the developmental capacity of Nigeria, despite government’s financial managers’ argument that the rate of increase is within a manageable limit.

 ‘’Financial experts at the International Monetary Fund, IMF, and the World Bank have, in fact, advised that the revenue-to-debt ratio is unsustainable and it portends a serious danger for the future generation.  He said While the effect of the increasing debt may not be immediate in totality, it could be catastrophic in the long term with a chunk of revenue consumed by debt servicing to the detriment of infrastructural development.

 ‘’This sadly,” he said, is the current reality as N2.140 trillion from the N8.8 trillion proposed 2019 budget, has been earmarked for debt servicing, representing about 25 per cent of the total budget allocation.”

Olawale also said that “the size of government borrowing in the domestic financial market also continues to be a major source of concern as this has in no small measure affected the chances of the real sector to access funding at a reasonable cost. He advised both the federal and state governments to take deliberate steps aimed at cutting the cost of governance and recurrent expenditure

Other financial experts who have spoken about the country’s growing debt have advised that the funds borrowed should be injected into the economy to create jobs.

Bismark Rewane, Managing Director, Financial Derivatives Company, said the country’s debt profile would not be a concern if its Gross Domestic Product (GDP) was growing at about eight to 10 per cent. He said existing data showed that the country’s debt was growing at a faster rate than GDP, growing at a time that productivity level had declined to result in less prosperity for the citizens.

He said borrowing to spend and borrowing to invest were two different things and that funding fiscal debt amounted to the government borrowing to spend.

 According to him, Nigeria floated its first Eurobond of one billion dollars in 1978 and used it to complete 25 sector-specific projects, amongst which were Apapa ports, Inner Marina road and aircraft purchase.

“Tell me what roads would be completed or refinery that would be functional by the time the various bonds floated by government matures,” adding that lending should be sector specific and impactful.

He stressed that government should reset its debt profile, adding that the country was moving from debt problem to debt crisis and if left unchecked, it would result in a debt trap. He said that elongated debt could translate to intergenerational debt.

“The solution is to increase the injection at the investment level when you do that, it grows employment and to grow investment means that you increase the level of confidence of domestic and foreign investors.

“Also government’s policies should be well aligned, create an equitable distribution of wealth and equal opportunities for citizens, strengthen tax institutions to increase revenue collections and reduce leakages,” he said.

President of Lagos Chamber of Commerce and Industry (LCCI), Ruwase said the Chamber was concerned about the rapidly growing public debt and its implications for the country’s fiscal sustainability. According to him, “debt service to revenue ratio which currently stands at over 40 per cent is on the high side. It has implications on the country’s capacity to deliver infrastructure investments. Our revenue can barely cover our recurrent expenditure.” He advised that government should set a debt management framework that aligns with its economic growth drive and revenue profile.