2015 budget and Nigeria’s debt trap

In this piece, EZREL TABIOWO looks at the nation’s debt profile through the eyes of the budget, with the most recent being that of 2015 as proposed in the Medium Term Expenditure Framework/Fiscal Strategy Paper submitted to the National Assembly last week

 

Nigeria’s high debt profile from the General Ibrahim Babangida regime till date has been a major factor behind the economic misfortunes suffered by the nation overtime, and a burden yet to be limited to the barest minimum as a feature in the annual budget.
Recently, Nigeria recorded a Government Debt to Gross Domestic Product of 11 percent of the country’s Gross Domestic Product in 2013.
Government Debt To GDP in Nigeria averaged 35.96 Percent from 2000 until 2013, reaching an all time high of 88 Percent in 2001 and a record low of 11 Percent in 2013.
Generally, Government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

The 2014 budget of N4.7trn approved by the Senate and House of Representatives on April 9th and 10th respectively had spending raised by just over 1% from the initial proposal by the executive arm of government.
According to the Economist, following the announcement on April 6th of the results of the rebasing of Nigeria’s national accounts, which almost doubled its GDP to an estimated US$510bn in 2013, some of the parameters in the budget proposals now appear out of line with the re-evaluated size of the economy.
The publication noted that for example, the expected fiscal deficit to GDP ratio is now substantially lower than the 1.9% projected by the government when the spending plan was first submitted. Also, the new GDP data reduced Nigeria’s public debt to GDP ratio to 11% for 2013, according to the National Bureau of Statistics, compared with previous estimates of around 20%.
Referring to the debt sustainability issue, it added that the ability of the Nigerian government to service its growing debt is more determined by the country’s level of revenue than the size of its economy.
The publication stated that: “In a country where tax collection is poor (and looks even poorer as a share of GDP after the rebasing) the fact that debt servicing is taking up over 15% of planned spending remains of concern.”
Condemning the easy temptation for politicians to rely on oil revenue rather than endeavour to expand the tax net in the run-up to and aftermath of the 2015 elections, it cautioned that doing same is likely to slow things further for the Nigerian economy.

2014 budget Highlights
The co-ordinating minister for the economy and minister of finance, DrNgoziOkonjo-Iweala, had, on December 19, last year, submitted the budget proposal to the National Assembly on behalf of President Goodluck Jonathan.
Highlights of the 2014 budget as approved by the National Assembly are statutory transfers (N408,687,801,891), debt service (N712,000,000,000), recurrent expenditure (N2,454,887,566,702), and capital expenditure (N1,119,614,631,407) while the aggregate expenditure is N4,695,190,000,000.
Though the executive pegged $74 per barrel as benchmark oil price for the budget, the conference committee of the Senate and House of Representatives reviewed it upward to $77.5 per barrel.
But other parameters like estimated crude oil production of 2.3883million barrels per day, GDP growth rate of 6.75 per cent, inflation rate of 9.5 per cent and exchange rate of N160 to one US dollar tallied with the ones approved by the Senate in the budget passed.
The executive proposal submitted by President Jonathan was N4,642,960,000,000 which included N399,687,801,891 ( statutory transfers), N712,000,000,000 (debt service), N2,430,665,361,597 (recurrent, non-debt expenditure) while the balance of N1,100,606,836,512 is for contribution to the development fund for capital expenditure.

2015 budget
Just last week, the Federal Government proposed a US$78 per barrel oil benchmark for the 2015 budget. This was contained in the Medium Term Expenditure Framework and Fiscal Strategy Paper (FSP) document sent to the National Assembly by President Goodluck Jonathan.
The document showed that the federal government estimated the benchmark oil price to be $73.28 per barrel based on the 15 year moving average, while the 10 year moving average gives a price of $78 per barrel.
The federal government also set the projection for crude oil production for 2015 at 2.2782 million barrels per day; 2.3271 million barrels per day for 2016; and 2.4067 million barrels per day for 2017.
The figure projection for 2015, it further noted, which was lower than the 2.3883 million barrels per day programmed for 2014, is about the reported actual production at present.

The drop in oil production projection for 2015 the federal government however added, “is reflective of lack of new investments in the oil sector due to uncertainties owing to the delay in the passage of the Petroleum Industry Bill (PIB).”
According to the MTEF document already referred to the Senate Joint Committees on Finance and Appropriation, the oil production projection for 2015 through 2017 are indicative of government’s position to improve actual production capacity of the oil sector.
The federal government explained that the projection for crude oil production for 2015 is predicated on present realities in the oil sector and extensive consultations with relevant stakeholders.
It attributed the production losses recorded in 2014 to the activities of oil thieves and pipeline vandals in 2012 and 2013, respectively.
The federal government explained: “For 2014, we applied a risk factor (production losses) of 300,000 barrels per day to the oil production projection due to production shut-in resulting from activities of oil thieves and pipeline vandals in the late 2012 and early 2013. This has come down to about 150,000 barrels per day as government’s effort at tackling the setbacks in the sector continue to yield results.”

Giving insight into Nigeria’s macroeconomic performance, the MTEF document indicated that the Excess Crude Account (ECA) is gradually being rebuilt as balances had dropped from about $9 billion as at early 2013, following drawdowns to make-up for shortfalls in revenue in 2013, to about $2.28 billion in December 2013.
It accordingly stated that with prudent management of the 2014 budget, a build up can be expected in 2014 as the Excess Crude Account currently stands at $4.09 billion.
On Nigeria’s public debt breakdown, the document showed that the country was indebted to the equivalent tune of $65.26 billion as at March 31, 2014.
It said of this amount, the federal government was responsible for about 80 percent of the accrued debt, while the 36 states and Federal Capital Territory (FCT) accounted for the balance of 20 percent; one which implies a debt to Gross Domestic Product (GDP) ration of 12.8 percent.
Nigeria’s total debt the document revealed is comprised of external debt of $9.17 billion and domestic debt to the tune of $56.09 billion.

Nigeria’s Debt Stock
Giving reasons for Nigeria’s external Debt burden, the Country’s Debt Management Office attributed same to six causes: Inefficient trade and exchange rate policies; Adverse exchange rate movements; Adverse interest rate movements.
Other reasons adduced were: Poor lending and inefficient loan utilization; Poor debt management practices; and Accumulation of arrears and penalties.
The DMO stated that Nigeria’s debt burden was brought about due to what it described as the “Reckless, Inefficient and Massive external Borrowing” which took place in the 1980s, largely to offset the collapse in oil prices. Such massive borrowing was not linked to future growth or exports, as insufficient  regard was given to economic viability of projects.
The outcome of so doing resulted in Poor implementation of projects due to weak absorptive capacity and governance problems; Mismatch between loan terms and project profiles; Interest rate risk as LIBOR rates escalated; and above all, Leakages associated with governance problems.

According to a publication by the Ministry of Finance, prior to the Paris Club debt relief in 2004, Nigeria’s overall debt stock was very high.
External debt stood at US$35.9 billion while the stock of the domestic debt amounted to US$10.3 billion resulting in a total of about US$46.2 billion or 64.3% of GDP excluding contractor and pension arrears.
After the successful debt relief initiative, Nigeria’s stock of foreign debt declined dramatically. In August 2006, Nigeria’s foreign and domestic debts amounted to US$3.5 billion and US$13.8 billion respectively – a total of US$17.3 billion or 11.8% of GDP.

By August 2011, Nigeria’s domestic debt stock had grown substantially to US$42.23 billion, while the external debt was still a modest US$5.67 billion. This implied a total debt stock of US$47.9 billion or 21% of GDP.
The Minister of finance, Dr. NgoziOkonjo-Iweala explained that, “the key noticeable change in Nigeria’s indebtedness in recent years has been the growth of domestic debt.”
According to her, “There were two main reasons which resulted in this outcome. First, the initial growth of the domestic debt stock was because the federal government wanted to deepen the domestic debt markets and generate a yield curve for Nigeria which ultimately could help our corporate bodies to access the capital markets and borrow funds at more affordable rates. The DMO through its work has been successful in doing this.
“Nigerian corporates can now raise money at reasonable rates at home and abroad, helping them secure resources to invest in the economy. Secondly, however, domestic debt was also raised to finance increased budget expenditures including consumption.

“For example, in 2010, the 53% salary increase for civil servants was financed by raising domestic bonds. Borrowing for recurrent expenditure or consumption, as was the case here is a practice that is less than ideal and one that we should endeavour not to repeat. We must learn that domestic debt should be incurred sparingly at modest and manageable rates so that government is able to service it and pay back domestic creditors. Failure to do so would severely undermine the finances of our private and institutional creditors to the detriment of the economy,” the Finance Minister said.
The Finance minister further disclosed that the federal government had also put in place several measures to limit and manage the national debt given the number of specific policies already introduced in the current administration to slow down the increase in Nigeria’s overall debt stock.

Among such measures taken to limit and manage the nation’s debt were moves to bring expenditures and revenues much more in line, through a low fiscal deficit of 1.81% GDP, to reduce the need for domestic borrowing.
The result, the finance minister stated, reduced annual domestic borrowing from N852 billion in 2011, to N744 billion in 2012, to N577 billion in 2013; and with the overall aim of reducing government’s domestic borrowing to below N500 billion in the 2014 budget.
She however advised that close attention be paid to external borrowing, which if not closely monitored, may take the country down the path of indebtedness.
The finance minister also called for close monitoring of borrowing by states governments so as to ensure that same stays within the limits of being managed.
“We need to be constantly vigilant to limit the amount of debt and create room for the private sector instead to borrow. As such, we need to stay focused on three main priorities.

First, we should continue to monitor our external borrowing and ensure that we do not slip back to our high indebtedness prior to the debt relief programme. As I mentioned earlier, the External Borrowing Plan, helps to address this concern by ensuring that we always have a comprehensive, transparent view of our foreign borrowing.
“Second, we should closely continue to monitor and limit our domestic debt, and ensure that it stays within a prudent and conservative range. We should pay off debt that is due to the extent of our ability.
“And third, we should also continue to closely monitor borrowing by states to ensure that the debt burdens of our state governments remain within manageable levels and that borrowings are applied to specific projects that yield results for citizens of the state. In that regard, we enjoin banks and other lenders to be careful and prudent when lending to ensure that this is done within the existing rules, regulations and guidelines,” Okonjo-Iweala cautioned.