Nigeria’s rising debt profile is a symptom of underlying problems- low revenue and high spending. The country is borrowing for debt service, capital expenditure and partly to fund recurrent expenses. How does it avoid the doomsday prophecy? VICTOR OKEKE offers some insights.
Last week at a programme in Abuja, Benedicta Akpan, who works for a non-profit, painted a real picture of Nigeria’s economic reality. She said: “Exactly this time last year, a 12.5 kg cylinder of cooking cost N3400, today, it goes for N9,500. And here’s currently a government’s proposal to remove subsidy payment from petrol which will see the product go up from N165 per litre to N340 by January. Everyone is shrinking themselves to the harsh times.”
Inflation is rife, the government is broke but also unwilling to cut down the cost of governance. So it borrows more and more to feed its appetite. And for proponents of the ongoing debt accumulation, their catchphrase is that Nigeria’s debt to gross domestic product (GDP) ratio is still healthy. Chief among this group is the Minister of Finance, Budget and National Planning, Zainab Ahmed who has consistently said that the debt levels in Nigeria are not high.
“If you consider the size of the Nigerian economy, we have a debt to GDP ratio now that is at 33 per cent. Some of the countries in Africa that you can compare us with have as much as 70 per cent of debt,” she said in a recent TV interview.
At the end of March 2021, Nigeria’s external debt stock was about US$32.9 billion. Of this amount, debt to multilateral institutions such as the World Bank accounted for 54.3 per cent, followed by commercial debt (33%), bilateral debt (12.7%) and promissory notes (0.55%). Domestic debt stock was about N16.5 trillion or US$40 billion, using the Central Bank of Nigeria’s 30 August 2021 official exchange rate of N410 to $1.
Nigeria’s total public debt was about $87 billion. Domestic debt represented 62.3 per cent of this at 31 March 2021, and external debt 37.6 per cent.
Nigeria’s external debt as at June stood at US$33,468.92 billion, out of which 9.7 per cent or $3.3 billion was owed to the Export-Import Bank of China. The debt to China formed 80.1% of bilateral debt, or $4.1 billion. Other countries that have lent to Nigeria are France, Japan, India, and Germany.
In November 2021, following the Senate’s approval of the government’s new loan request, Nigeria’s external debt moved up to $54.87 billion from US$33,468.92 billion at the end of June.
In principle, borrowing is spending tomorrow’s money today, so it must benefit tomorrow to be optimal. This cost of borrowing must be balanced against the benefits that accrue from these financing sources, which involves assessing what the borrowed money is being spent on. It is possible that the net benefit will be positive, but this needs an assessment of the composition and effectiveness of government spending. If the government is merely borrowing to fund consumption expenditure, then this is difficult to justify.
Some have argued that it is not accurate to judge a country’s debt and its ability to pay simply by how much has been borrowed. But debt risk is not only about how much a country has borrowed, but also the country’s ability to service its debt.
Economists use two indicators to determine a country’s debt sustainability. The first is gross debt as a percentage of a country’s economy as measured by the gross domestic product (GDP). This is what Nigeria’s Finance Minister spoke about earlier as debt-to-GDP ratio. The second indicator of debt sustainability is the debt service ratio, which is the proportion of export earnings that is used to service a debt, including principal and interest payments. Based on these two indicators, Nigeria debt is said to be theoretically sustainable.
So why are there concerns around Nigeria’s rising debt? One reason may be concerns about Nigeria’s ability to meet its debt obligations in the future.
“Debt repayments are often made from revenue generation. At less than 5 per cent, Nigeria has one of the lowest revenue-GDP ratios in Africa. The average for sub-Saharan African countries is almost 20, and 30 per cent for oil exporters,” according to Stephen Onyeiwu, a Professor of Economics at Andrew Wells Robertson, Allegheny College.
Government figures show that about 65 per cent of revenue and over 90 per cent of foreign exchange earnings in Nigeria comes from the oil sector. Uncertainties in the global oil market and sluggish revenue growth, as well as the negative impacts of COVID-19 on the economy, imply that the country would face challenges generating enough revenue to service its debt.
At the presentation of the proposed 2022 national budget, President Buhari’s speech to the joint session of the National Assembly raised a lot of issues that have been identified by the Centre of Social Justice (CSJ) Nigeria in a review of the appropriation bill. Some of these issues include, the poor performance of the revenue projections in 2021 (January – August) at -27.3 per cent of aggregate revenue including government-owned enterprises (GOEs) and -32.2 per cent being retained revenue excluding GOEs, which followed the trends in 2019 and 2020 financial years.
There is also the issue of recurring deficit (N6.26tn which represents 3.39% of GDP) and in excess of the 3 per cent rule in section 12 of the Fiscal Responsibility (FRA) as amended in the Finance Act of 2020, which states that aggregate expenditure can only exceed the ceiling imposed by the FRA when there is a clear and present threat to national security or sovereignty of the Federal Republic of Nigeria.
The 2022 appropriation bill is heavily dependent on sovereign debts of N5.02 trillion to finance key infrastructure and budgetary provisions. This is the result of the failure to activate key domestic resource mobilisation mechanisms, utilise existing ones, block leakages and fiscal drainers and build the fiscal architecture needed to harness the economic potentials, resources and energy of the Nigerian people for development.
By October last year, only 64 per cent of the revenue expected from oil had been generated. This was as a result of the poor performance of crude oil production in 2021 which averaged 1.4mbpd and lower than the Organisation of Petroleum Exporting Countries (OPEC)+ quota. Meanwhile, government expenditures have been growing faster than expected, meaning that the deficits will be covered by borrowings. More borrowings means that an increasing proportion of revenues generated will be devoted to debt service.
Nigeria must reduce the high governance cost, rein in corruption and promote faster economic growth by investing in infrastructure. The relatively poor performance of MDAs capital expenditure over the years including the 2021 fiscal year should not be allowed to continue. As at August 2021, the capital budget has underperformed by -34 per cent. However, the aggregate capital expenditure inclusive of government-owned enterprises’ capital expenditure underperformed by -47.1 per cent.
The continued failure to provide the details of Statutory Transfers and big votes in the Service Wide Votes (SWV) and simply stating them as lump sums is a very fertile ground for grand corruption. This is against the rules of fiscal responsibility as no MDA or authority in a constitutional democracy is authorized to spend public resources in a way and manner that is unknown to the citizens who are the ultimate sovereigns.
There is also a need to up the nation’s capital vote. Previous experience indicates that the capital vote is very poorly implemented. For instance, out of the 2021 aggregate prorated (January to August 2021) capital vote of N3.323tn, only the sum of N1.759tn has so far been released which amounts to 52.9% capital budget implementation. This is a very poor record in an infrastructure starved economy. It is also imperative for the administration to ensure that in these times of lean revenue, priority is given to developmental capital expenditure rather than administrative expenditure. This will ensure that the expenditure has a direct impact on the majority of citizens.
It is imperative to note that budgetary funding alone cannot scratch the surface of Nigeria’s demand for infrastructure. The National Assembly should therefore consider alternative funding sources for key capital projects.
Governments have many competing demands for financial support. Any spending should be tempered by fiscal responsibility and by looking carefully at the spending’s impact. When a government spends more than it collects in taxes, it runs a budget deficit. It then needs to borrow. When government borrowing becomes especially large and sustained, it can substantially reduce the financial capital available to private sector firms, as well as lead to trade imbalances and even financial crises.
Currently, there is a concerted move by the National Assembly to amend the Fiscal Responsibility Act (FRA) 2007 to among other things give the Fiscal Responsibility Commission more financial disciplinary powers to call the shots in the event of fiscal rascality by the government.
Like other acts of law, the principles of sound fiscal management as laid out by the proposed amendments in the Fiscal Responsibility Act needs to be given the status of not just a theoretical framework rather than actual implementation.
Consistent implementation of sound principles of fiscal and debt management would not only reap rewards now but for generations to come. It is crucial for Nigeria to move towards actual implementation and not just discuss measures that make for good statements.
“The preponderance of fiscal challenges as currently experienced at federal and state levels where debt service is gulping the bulk of available revenue, salaries being paid with borrowed money and some states practically becoming insolvent, is of no benefit to anyone,” Eze Onyekpere, the Lead Direct of CSJ said in support of the proposed FRA amendment.
Therefore, the enthronement of fiscal responsibility through a new legislation is a task that ought to be supported by all patriotic citizens.
Credit: Leadership