As falling oil prices takes its toll on budget leading to increased borrowing to fund the budget; BENJAMIN UMUTEME examines the implications of increased debt servicing cost on capital projects.
When President Muhmmadu Buhari signed the N10.59 trillion 2020 budget into law in December 2019, he was applauded by Nigerians that the early signing of the Appropriation Act would enable better implementation of the budget.
In signing the bill, President Buhari reiterated federal government’s commitment to bridging the country’s infrastructure gap.
The president noted that for the federal government “to optimise the desired impact, he has directed the Ministry of Finance, Budget and National Planning and all Federal MDAs to ensure effective implementation of the 2020 Budget.”
However, the double effect of the coronavirus pandemic that led to the shutdown of the economy and falling oil prices conspired to make the budget unworkable leading to a proposed revision which is before the National Assembly.
2020 Budget overview
In the 2020 FGN spending (inclusive of GOEs and project-tied Loans) is projected to be N10.59 trillion is 18.8% higher than 2019 with Recurrent (non-debt) spending expected to total N4.84 trillion is 45.7 per cent of total expenditure, and 10.3 per cent higher than 2019.
While Aggregate Capital Expenditure of N2.78 trillion is 26.2 per cent of total expenditure; and 12.6 per cent less than 2019. N2.45 trillion, debt service is 23.2 per cent of total expenditure, and is 14.5 per cent higher than 2019. Provision to retire maturing bonds to local contractors of N272.9 billion is 2.6 per cent of total expenditure, and 148 per cent higher than 2019. However, Covid-19 and low oil price have forced Nigeria to revise its budget once more.
Revised budget
The proposed revised budget before the NASS was revised downward by N84.70 billion leading to a cut in some critical sectors of the economy such as education and healthcare.
The new spending plan presented is higher than the N1.5 trillion cut the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said government would make in March.
Also, the federal government reduced the amount allocated to the NASS for renovation of the complex to N27.7 billion (a reduction of 25.1 per cent), the Basic Health Care Provision Fund, which is meant to cater for all the primary healthcare centres across the 774 local government areas in the country, was significantly reduced by N44.4 billion to N25.5 billion, a decrease of more than 42.5 per cent while the Universal Basic Education (UBE) recorded a significantly cut from N111.7 billion to N51.1 billion. This is more than 54.2 per cent, according to documents obtained by Dataphyte, an open data organisation.
For Dataphyte founder Mr. Joshua Olufemi, the cuts in critical sectors like education and health as a setback to Nigeria’s quest for development.
He said, “But the bigger dilemma borders on Nigeria’s priority. While budgetary allocations to the National Judicial Council, National Assembly, Independent National Electoral Commission, and other agencies of government have been reduced only by about 10 per cent respectively, budgetary provision for education is reduced by close to 55 per cent.
“Similarly, provision for basic health care fund is reduced by over 42 per cent. With the reality of the Covid-19 pandemic, reduction in budgetary share for education and healthcare does not reflect the prioritisation of the citizen’s real needs.
“With the growing number of Covid-19 cases in the country, an increase in budget share to the health sector is expected. To expand education access to the teeming Nigerian schoolchildren who are deprived of education during this period, additional budgetary commitment is also required. This is to cover up the cost of setting up virtual learning alternatives.”
Increased recurrent, debt servicing expenditures
In the revised budget, recurrent expenditure as well as debt servicing increased. For debt servicing, the figure moved from N2.4 trillion to about N2.95 trillion representing a 8.33 per cent increase while recurrent expenditure moved from N4.84 trillion to about N4.92 trillion which is about 1.77 per cent increase.
For capital expenditure, it was cut from an initial N2.46 trillion to N2.23 trillion which is 4.84 per cent reduction.
Nigeria’s revenue realities continue to expose the need for stiffer revenue management measures. In fact with the realities presented by the Addendum to the 2020-2022 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP), the proposed budget revision appears like a mere child’s play. As at Q1 2020, gross oil and gas revenue was short by over 28 percent of the anticipated revenue.
From the revenue earnings in Q1 2020, as well as the existing realities on oil trade and the ongoing global pandemic, hopes for increased revenue earnings may be blurry. The continued lockdown is expected to impact on tax revenue from Nigeria’s business community. Thus, the revised budget may be somewhat impracticable without a corresponding increase in Nigeria’s debt.
A former president of the Chartered Institute of Bankers of Nigeria, Prof. Segun Ajibola, is of the view that it will be a miracle for government to implement the budget.
“It will be miraculous if they meet them” – the new spending estimates. I don’t expect budget 2020 to offer much hope. If there is anything we can strive to achieve, it is a survivor. All we need in 2020 is budget of survival,” he said.
Debt-servicing burden
Meanwhile, Nigeria has continued to pay a lump sum to several external organisations that grant loans to it, and these include the World Bank, African Development Bank, Exim Bank of China, Exim Bank of India and of course local lenders.
In 2015, which marked the start of President Buhari’s first term administration in office, Nigeria paid $378.9 billion to external debt service payment. Fast forward to 2018, the sum of $1.47 billion was recorded while $1.31 billion was paid in 2019.
This means external debt service payment alone rose by 245.9 per cent between 2015 and 2019 while an accumulated $3.95 billion was paid between the four years period. With the government setting aside N2.95 trillion to service its debt in 2020, analysts say capital projects might just suffer again.
Even though, this administration has increased allocations to capital expenditure, painfully, it has been done that on the altar of borrowing.
According to Nigeria’s debt management office (DMO), the country’s debt was about N26 trillion as at December 2019. However, with the approval for the federal government to borrow an initial N850 billion and just this week another $5.513 billion external loan request, Nigeria’s might just be set for a debt crisis. This, meanwhile excludes various amount the government borrowed from the IMF, World Bank and the AfDB to fight the covid-19 disruptions. The implication is that with N2 95 trillion set aside to service debt, experts say, more pressure will be piled on the country’s lean resources.
Particularly, the Lagos Chamber of Commerce and Industry (LCCI) and Manufacturers Association of Nigeria (MAN) have expressed concerns about the federal government’s ability to service its debts, describing the new request as “troubling.”
They lamented that the debt profile grew from N12.6 trillion in 2015 to N25.7 trillion in the second quarter of 2019, an increase of 104 per cent. They also noted that in the 2020 budget, debt service commitment and recurrent spending are beginning to crowd out capital expenditure. This trajectory, according to them, is not consistent with the country’s national aspiration to build infrastructures and a competitive economy.
“Care should be taken to avoid a full-blown debt crisis. For instance, the debt service provision in the 2019 budget was a whopping N2 trillion, whereas the total capital budget was N2.9 trillion. This implies that the debt service commitment was 70 per cent of capital budget allocation. Debt-to-revenue ratio was about 30 per cent, which is also on the high side,” said Muda Yusuf, LCCI’s director-general.
Speaking with this reporter, the director at Praxis Center, Jaye Gaskia, expressed concern over the amount allocated for debt servicing saying it is not sustainable.
He said, “What is your debt service ratio to your annual budget? You have to consider that and consistently, this has been over 30% of your revenue and another 40% goes into recurrent expenditure. It is not a sustainable arrangement and you cannot grow the economy that way. It is a dangerous trend!”
Seun Ajayi-Kadiri, MAN’s director-general advised that, “There is a need to clarify the new loan request in relation to the 2020 budget and the 2020-2022 medium-term expenditure frame-works. Borrowing should strictly be in line with Section 41 of the Fiscal Responsibility Act which stipulates that government at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with a low-interest rate and with a reasonable long amortisation period.”
