Nigeria’s rising debt: DMO’s failure?




…Country won’t develop without borrowing more – Minister

… Other options available – Odeyemi

…It’s worrisome, back to pre-1999 situation – Expert

…Profile huge burden, unsustainable – TBN

… Nigeria meeting obligations without defaulting, DMO insists

Nigeria’s ever increasing debt profile continues to be a huge source of concern to most citizens even as many fear the country may eventually run into a cul-de-sac especially with dwindling revenues. Is the debt profile an indication of Debt Management Office failure? BENJAMIN UMUTEME asks.

Over the years, the issue of Nigeria’s debt has continued to divide opinions across the country, however, there appears to be consensus of opinion on the fact that the country’s debt profile has grown significantly in the past six years.

This in itself has not been helped by the fact that the country’s main source of revenue which is petroleum has not been high yielding since 2014. Thus, Nigeria plunged into a first and second recession coupled with the coronavirus pandemic which further worsened an already difficult situation for the country revenue wise.

In spite of the gradual return to full commercial activities, volatility in the oil market coupled with OPEC production cuts, have made oil revenue inflow a far cry from what it used to be pre-mid 2014.

Genesis

Nigeria’s foreign indebtedness started during the military regime of General Olusegun Obasanjo in 1977. The government first borrowed N600 million ($1billion) which was followed with another huge borrowing of N734 million ($1.456 billion) in 1978. Thereafter, there was borrowing by both the federal and state governments which aggravated the Nigeria’s debt problem.

The debt overhang, which was less than one billion dollar in 1970, had by the second half of 1980s deteriorated seriously due to inability of the country to meet its external debt service obligations.

The external debt stock, which was about $9 billion in 1980, grew to nearly $19 billion by 1985. By 2001, the debt stock as percentages of total export and Gross National Product (GNP) was 14 per cent and 83 per cent respectively. The country’s total external debt stood at N10.6 trillion as at December, 2016.

Borrowing for infrastructure

Regrettably, borrowing has become a very lucrative option for the Muhammadu Buhari-led government with its resolve to bridge the country’s infrastructural gap which experts have estimated would gulp $30 billion over the next 30 years.

When the Buhari-led government came into power, it promised to fix the country’s dilapidated infrastructure and this led to massive borrowing as revenues had decreased significantly.

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, has repeatedly said that the federal government would continue to borrow more money to fund critical infrastructure as the country would not make any meaningful headway in its quest for development if it doesn’t borrow more.

Speaking at the maiden special media briefing by Ministries, Departments and Agencies (MDAs) organised by the Presidential Communications Team in February, she said in spite of the increase in borrowing it was still within the country’s borrowing limit.

“I think it’s useful to look at the budget for each year; look at the revenues; look at the expenditure; if you take out the new borrowing, really, what will the size of the budget be? How much can the government spend?

“So, there will be a lot of capital projects that are affected. So, we need to look at it that borrowing is, even as you see it in the budget every year, used to support infrastructural development. Otherwise, there will be a challenge.

“We need to borrow to build our major infrastructure. We just need to make sure that when we borrow, we are applying the borrowing to specific major infrastructure that will enhance the business environment in this country.

“Only recently, the federal government submitted a proposal to borrow the sum of N5.62 trillion to finance deficits in the 2022 budget and also slash capital expenditure in 2022 by N259.315 billion.

“The deficit is going to be financed by new foreign borrowing. And domestic borrowing, both domestic and foreign in the sum of N4.89 trillion, then privatisation proceeds of N90.73 billion and draw downs from existing project titles of N635 billion,” the minister said.

‘Not bad to borrow to fund infrastructure’

Speaking with Blueprint Weekend, the first Professor of the Capital Market in Nigeria, Che Uwaleke, said it is not a bad thing to borrow to fund infrastructure as it is a global practice.

This is as the DMO has continued to back the government with the usual cliché: “our debt to GDP is still below 25 per cent.”

Also, in a chat with our correspondent, the Vice President, CITITRUST Advisory Limited, Adebayo Odeyemi, insisted that there is nothing wrong with public debt because the government must raise money to perform his functions and roles, particularly for provision of infrastructure and economic development.

According to him, the country can borrow without jeopardising its growth and stability or even threatening its existence.

“So, the DMO is saying that our debt carrying capacity can sustain the current level of indebtedness. In other words we can meet all our obligations without defaulting.

“The key thing is that Nigeria can borrow without jeopardizing her growth and stability or even threatening her existence,” he stressed.

Experts react

Despite assurances by the federal government and the DMO analysts have continued to question the rationale behind government’s borrowing. This is as some experts have said that the rate of government’s borrowing was becoming unsustainable and a cause for concern.

Nigeria’s debt profile’s rise from N2.1 trillion in 2015, to N12.7 trillion as at December 2020, may have brought the country nearing the debt precipice, other experts have said.

Also, the federal government spent a total of N1.02 trillion to pay interest on domestic and foreign debt in the first quarter of 2021.

Govt in denial

For the CEO, GDL Assets Management, Kola Ayeye, the country’s debt situation was worrisome.

Ayeye, who spoke on Channels TV programme Sunrise Daily in Abuja, added that with Nigeria debt profile climbing over N12 trillion, the country was back to the pre-1999 situation.

According to the economist, the federal government’s determination to fund infrastructure was what has led to the debt challenge the country was facing.

“I think we have a situation where debt servicing is almost 100 per cent. As it is now, the government spends almost its entire revenue to service debt. By the time you use 95 kobo out of every N1 you earn it is not sustainable.

“We must be careful not to allow ourselves to walk into the debt trap which does not fully reflect the totality of our situation. But people may say, our debt to GDP ratio is still at a certain rate but those assumptions are at a certain level of GDP, government is generating a certain amount of revenue, we are not generating that level of revenue. You don’t pay back debt with GDP, you pay it with revenue.

“There is no economic entity that can survive with the situation we are. It is only a matter of time before we start having the issue of default. For the government to say it doesn’t have a debt problem is not the best way to approach it,” he further said.

Debt serving challenge

Similarly, Professor of Economics at the Olabisi Onabanjo University Ago-Iwoye, Ogun state, Sheriffdeen Tella, said the government spending a sizeable amount of its revenue to service debt was a big challenge.

Tella said, “We have a debt problem because when you have problem with debt servicing, then you have a serious debt problem.

“Currently, what we are still doing is debt servicing using a huge proportion of the annual budget to pay debt. That is serious because the money that you would have used for other things is now being used to pay debt.

“So, we really have a problem with debt. The debt is still mounting and the servicing that we are doing is quite huge,” he told stated.

Rate of borrowing unsustainable

Similarly, the Co-convener, Take Back Nigeria (TBN), Jaye Gaskia, told Blueprint Weekend that the rate of government borrowing “was unsustainable.”

Jaye said borrowing in itself was not a bad thing so far it was utilised for the purpose it was borrowed.

He, however, pointed out that with dwindling inflow from our main source of revenue (petroleum), sustaining the borrowing would become a huge burden in the country.

Nigeria more vulnerable to external shocks

Speaking further the first Professor of the Capital Market in Nigeria queried: How are we going to pay back with the volatility of the oil market?

He said the country’s rising public debt was becoming a huge burden and a cog in the wheels of the nation’s development.

Uwaleke said: “More worrisome is the debt service to revenue ratio which spiked to about 90 per cent in the first quarter of 2020. This disturbing situation has negative implications for the country’s economic growth as the high debt service ratio crowds out expenditure on critical projects.

“The situation makes the country more vulnerable to external shocks, raises country risk and consequently attracts downgrades for Nigeria from global Rating Services such as Fitch and Moody’s with grave implications for investment flows.”

Options outside borrowing

On his part, Odeyemi told our correspondent that there were other options available to the government apart from borrowing to fund infrastructure.

“Of course, there are other ways to mobilise financing, such as raising domestic revenue, improving the efficiency of spending, reducing wastages, and improving the business environment to encourage future investments. However, it may take time for these to provide tractions and the volume may not be sufficient.

“The government is currently exploring the choice of improving the efficiency of spending by concession of some of her assets. It will not be surprising if more assets are privatised.

“Also, the government is trying to reduce wastage by fighting corruption though some might argue that the government is not doing enough.

“The government reserves the right to increase revenue by way of increased taxation but this is the worst-case scenario.

“Instead of focusing on the absolute value of our debt, the emphasis should be on responsible borrowing, which is a condition where debts are taken to finance productive social and infrastructure which can in turn lead to higher income that may ultimately offset the cost of debt service,” the CITITRUST advisory vice president said.

Don’t borrow for consumption

Similarly, an economist Bismarck Rewane averred that the country should avoid borrowing to spend on consumption.

“Do not borrow money if you are going to be using it for consumption; borrow to invest. For example, you borrow to build a rail track and then you concession the rail track for companies to come and run it, then the proceeds from that can be used to build a road, power station or an airport. That is the way to go,” Rewane stated.

Govt must improve revenue

Uwaleke opined that to address the debt problem Nigeria has dragged itself into with eyes wide open the federal and state governments should devise means of improving their revenues.

According to him, governments at all levels should create conducive environment for businesses to thrive.

“To boost IGR, state governments should create an environment conducive for economic activities such that taxes can be generated on the income from such activities.

“This includes partnering with the private sector to provide enabling infrastructure such as energy, roads and housing. It also includes investing in the Agriculture value chain to boost exports,” he suggested.

Similarly, a recent report by research and investment firm CGF Advisory called on the federal government set its priorities right in terms of its financing needs, its borrowing limits in compliance with the fiscal responsibility act, among others.

As part of its recommendations to reset the Nigerian economy, the firm stated that a major policy overhaul to reduce revenue vulnerabilities and budget deficits that jeopardise the economy was needed.

It pointed out that key policy reforms would be imperative to support and sustain macroeconomic stability.

These, it listed to include, among others, a foreign exchange management framework that reflects the market fundamentals; the acceleration of the country’s economic diversification agenda; and the oil and gas sector reform; among others.

Also, it advised the federal government to cut overhead and recurrent expenditure, while increasing capital expenditure to total budget ratio.

“There is an urgent need to reduce debt service to revenue ratio and also urgently raise non-oil revenue through programs such as initiatives to drive more people into the tax net and increase tax to GDP ratio,” the report added.