Issues in FG’s debt levels

Minister of Finance Mrs Zainab Ahmed said recently that the country was comfortable with its borrowing. In this analysis, BENJAMIN UMUTEME examines the implication of Nigeria’s huge debt.

As at December 31, 2016, the country’s total public debt, according to the Debt Management Office (DMO), stood at about N17.36 trillion and N57.39 billion.

Based on a debt management structure of 80:20 per cent between domestic and external respectively, the profile consisted of external debt of N3.48 trillion and $11.41 billion, as well as domestic debt of N11.06 trillion and $36.26 billion.

With the coming of the present administration, the debt management agency said the figure has grown to about N22.43 trillion and $73.2 billion as at September 30, 2018.

Details of the debt profile published in the agency’s website showed N6.62 trillion and $21.59 billion were in respect of the country’s external debt, while N15.8 trillion and $51.6 billion were for domestic debt.

Generally, government’s debt as a per cent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields.

In what has become a cliché among government officials, ‘the country’s debt is still within sustainable limits’ the Minister of Finance, Mrs. Zainab Ahmed, insisted that Nigeria’s debt-to-GDP ratio is within acceptable fiscal limits.

Speaking at the Deloitte Economic Outlook conference in Lagos recently, the finance minister said: “We have been very strategic in the management of our debts, revenues, infrastructure, and human capital.

“These plans and the tighter coordination, monitoring within and among Ministries, Department and Agencies (MDAs) with economic functions have placed us on a positive trajectory. We intend to maintain a steady course. Our borrowing is still within very good fiscal limits.

“Our targeted revenue to GDP ratio is 15 per cent as set out in the Economic Recovery Growth Plan.

“We will continue investing in the ERGP implementation by leveraging finance for critical infrastructure and our social investment programmes. These investments, we believe, will guarantee a sustainable future.”

IMF, World Bank’s warnings

For the umpteenth time in recent years, the World Bank Group and the International Monetary Fund (IMF) have cautioned against Nigeria’s rising borrowing profile and the economic consequences of debt overhang.

On the sidelines of the annual meeting of the IMF and World Bank Group in Bali, Indonesia last year, the International Monetary Fund (IMF) warned that Nigeria’s current sovereign debt servicing obligation was becoming unsustainable compared to its revenue generating capacity.

According to the organisation, the situation may impair infrastructure and social project financing over a short to medium term. IMF Director of Fiscal Affairs Vitor Gasper said there was indeed “an issue over how Nigeria can increase its revenue base to match a growing infrastructure financing need,” stressing that the Fund “sees increasing non-oil revenue as a crucial priority for the country.”

Similarly, the World Bank, through its Vice President for Africa, Mr. Hafez Ghanem, urged the federal government to reduce its borrowing and tap private investments that will yield multiplier effects on many sectors of the economy.

Although Nigeria’s current Debt-to-GDP ratio is 21 per cent, it is within the acceptable global threshold of 56 per cent. Ghanem said the best option for the country’s government “is to channel more investments to fund development needs.” According to the international multilateral institute, debt levels in emerging markets and developing countries is very high eating up revenue and it can get to a point where these countries may be unable to repay their debts.

The Fund stated that about 40 per cent of developing countries “are in or at high risk of debt distress and some emerging markets, to remain highly vulnerable.”

The Bretton woods institute stressed that many a time, transparency of debt such as the volume and terms of loan by borrowers as well as by lenders, and over-reliance on financing resulted to higher debt service costs which further aggravates the debt level.

Has Nigeria changed?

Even though the Minister of Budget and National Planning, Senator Udo Udoma, agreed with the International Monetary Fund on Nigeria’s debt vulnerabilities, nothing much has changed as the country once again in its 2019 budget hopes to borrow finance part of its budget deficit. The minister, however, said the issue would be adequately monitored. Udoma said over time, it has dawned on the government that there it has to improve its revenues in order to bring down the debt service to revenue ratio.

“Even though we in Nigeria have one of the lowest debt levels among our African peers, we realise that we need to improve our revenues to bring down our debt service to revenue ratio to more comfortable levels,” he said.

To address the issue, Udoma explained that the federal government was intensifying efforts on domestic revenue mobilisation and maintaining fiscal discipline.

“We are broadening our tax base through policy reforms such as the tax amnesty programme. This, among, other measures, has resulted in the number of taxpayers rising from 13 million to over 19 million. We are also deploying technology in tax and customs’ collections to automate processes and enhance efficiencies.” The minister noted that the government was also shifting its domestic debt portfolio to longer-term maturities. “Our external debt is primarily concessional borrowing, representing 54 per cent of our external debt as of June 2018. The Debt Sustainability Analysis is conducted annually to reaffirm that our public debt stock is sustainable. In Nigeria, our borrowing is being utilised principally to fix our infrastructure.”

Experts’ views

Many analysts say it is all rhetoric without action. In the last couple of years, the government has been championing the diversification campaign but till date, not much has been done in that regard. Rather, the government continues with ‘business as usual. Dr. Adedoyin Salami of the Lagos Business School, in a chat with Blueprint Weekend, said Nigeria’s debts levels have gotten to an alarming level.

According to him, the situation did not augur well for development as monies that would have gone into projects would be used for debt servicing.

“When you get to a situation where at current levels almost 50 per cent of government revenues will be needed to service debt,” he said. For consultant and convener of Protest2Power movement, Jaye Gaskia, the government continues to compare itself with countries that have a solid infrastructure foundation.

“Must the country’s debt get to 54 per cent which is the international threshold before we know that our debt level is not sustainable,” he asked.

Economist Friday Efih told Blueprint weekend that the country’s debt level is already bad as it is at the moment especially with the volatility of the oil market.

“Add that to the warnings from both the World Bank and the IMF and you will understand that Nigeria is in a very dire situation. “But I doubt if our people know all this or they pretend not to know.” So, what should Nigeria do? To escape this debt trap, IMF suggests that Nigeria must first improve debt transparency. Comprehensive review of debt policies ensure citizens, policy makers and leaders have a more accurate understanding of vulnerabilities.

“For countries at risk, pause with any aggressive financing or spending and focus on raising domestic revenues. Countries should support that with the right reforms that allow business and entrepreneurship to flourish. For countries already in distress, they should continue to work with creditors to restructure when necessary. The IMF has raised concerns about increasing debt levels and debt transparency for some time. In the same vein, Efih said Nigeria should focus more on attracting private capital that will invest on infrastructure though a Public Private Partnership arrangement.

Whether the government will heed the expert advice or not remains to be seen. 

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