.Debt sustainability resonates
.Where is the money to fund proposals?
Clara Nwachukwu
President Muhammadu Buhari, yesterday, presented a N16.39trillion 2022 total budget expenditure to a joint session of the National Assembly. This is 25% higher than the 2021 budget proposal of N13.08trillion.
The N16.39 trillion estimates are derived from the revised Medium Term Expenditure Framework (MTEF), which was approved by the National Assembly on Wednesday, against an earlier request by the President to increase the value to N16.45 trillion based on some adjustments, which was turned down by the lawmakers.
Tagged the budget of “Economic Recovery and Sustainability,” the President said it is aimed at diversifying the economy, investing in critical infrastructure, strengthening security, reducing poverty, and minimising regional, economic and social disparities.
Therefore, the proposed total expenditure for 2022 is predicated on a crude oil benchmark price of $57/barrel and daily oil production of about 1.88 million including condensates of 300,000 to 400,000 barrels per day.
Other assumptions of the Budget are: Exchange rate of N410.15/$; gross domestic product (GDP) growth rate of 4.2%; and Inflation rate of 13%.
Budget propositions
In his presentation, Buhari said the total federally distributable revenue is estimated at N12.72 trillion, against available total of N10.13 trillion, which includes Grants and Aid of N63.38billion, plus the revenues from 63 Government-Owned Enterprises (GOEs).
He said the total federally-collectible revenue is estimated at N17.70trillion; oil revenue, N3.16trillion; non-oil taxes, N2.13trillion; and independent revenues, N1.82 trillion.
The budget also contains a non-debt recurrent expenditure of N6.83trillion, personnel cost of N4.11 trillion; and debt service of N3.61 trillion.
Furthermore, Statutory transfers, including the National Assembly expenditure at N768.28billion, Pension, Gratuities & Retirees Benefits N577billion, and Overhead cost at N792.39billion.
Some have expressed concern over our resort to borrowing to finance our fiscal gaps. They are right to be concerned. However, we believe that the debt level of the Federal Government is still within sustainable limits.
New borrowings
Buhari explained that the budget deficit will be financed mainly by new borrowings. “We plan to finance the deficit mainly by new borrowings totalling N5.01 trillion, N90.73 billion from privatization proceeds and N1.16 trillion drawdowns on loans secured for specific development projects.
“This represents 3.39% of estimated GDP, slightly above the 3% threshold set by the Fiscal Responsibility Act 2007. Countries around the world have to of necessity over-shoot their fiscal thresholds for the economies to survive and thrive.
“We need to exceed this threshold considering our collective desire to continue tackling the existential security challenges facing our country.”
Agreeing that Nigerians are right to worry about his government’s constant borrowings, he defended that they are still within limit. “Some have expressed concern over our resort to borrowing to finance our fiscal gaps. They are right to be concerned. However, we believe that the debt level of the Federal Government is still within sustainable limits. Borrowings are to specific strategic projects and can be verified publicly.”
He also assured that defence and internal security will continue to be the government’s top priority in the coming year.
Public debt levels across Sub-Saharan African countries experienced a steep increase, a trend that predated the COVID-19 crisis… Rising fiscal burdens are expected to cause significant debt sustainability concerns.
Debt management
While the fiscal economic managers continue to insist on the sustainability of the government’s borrowings, development finance institutions think otherwise and have expressed their concerns as well.
For instance, the October edition of World Bank’s Africa Pulse, noted that Public debt levels across Sub-Saharan African countries, which include Nigeria’s, “experienced a steep increase, a trend that predated the COVID-19 crisis… Rising fiscal burdens are expected to cause significant debt sustainability concerns.”
On average, the global lender projects general government gross debt at 71% of the GDP for 2021, an increase of 30 percentage points of GDP since 2013. In its opinion, “Increased funding on commercial terms, partially reflecting the recent surge in Eurobond issuances, has raised the exposure of Sub-Saharan African countries to interest rate, exchange rate, and rollover risks.”
The World Bank therefore called for improved debt transparency. “In particular, African countries need to collect and publish more and better debt data and improve contingent liability reporting. And it is imperative to continue building government staff capacity for improved debt management, including for audits and internal controls.”
On his part, the President, African Development Bank (AfDB), Dr Akinwumi Adesina, during a meeting with African ambassadors last Friday, in Washington, U.S. said the issue of debt sustainability continues to resonate.
Participants agreed that the 75% rise in Africa’s debt-to-GDP and the continent’s quantum $845billion of debt was a matter of grave concern. “The share of Africa’s debt from private and commercial debt has risen from 17% in 2002 to 40% today. Most of this is high yield short-term debt.”
Like the previous budgets, the major worry around the 2022 budget is that of fiscal sustainability, especially in the context of recent trends of weak revenue performance.
Reactions to Budget proposals
At N16.39 trillion, the question on the lips of analysts in the face of over N47trillion debt comprising external, domestic and CBN ways and means is: Where will the government get the money to fund the 2022 Budget?
For the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, while the general assumptions appear realistic, however, issues relating to the current exchange rate and oil production are not.
“Oil output had continued to suffer setbacks as a result of security challenges faced by oil producing companies. The companies have also been contending with numerous policy and regulatory challenges,” he argued.
He argued that “Like the previous budgets, the major worry around the 2022 budget is that of fiscal sustainability, especially in the context of recent trends of weak revenue performance. Over the years, revenue performance has consistently fallen significantly below targets, and the 2022 revenue outlook may not be different.”
For Yusuf, the 2022 fiscal environment would be characterised by:
- High risk that the deficit would exceed the budgeted threshold;
- Debt sustainability challenge would persist. Debt service would continue to exert severe pressure on government finances;
- CBN financing of fiscal deficit would likely persist. This has serious consequences for inflation because of the profound impact on money supply growth;
- Capital budget will be financed entirely from borrowing. The finance Minister already hinted that government revenue could barely cover recurrent expenditure and debt service;
- The huge and mounting recurrent expenditure would persist. The prospects of reduced cost of governance remain dim; and,
- Fuel subsidy regime would persist with attendant fiscal pressure and leakages.
Against this backdrop, he said the way forward for the economy in the light of the budget rigidities is for the President to walk the talk by first of all fixing the security problems to create the environment for increased real sector activities.
The government should discontinue the accumulation of commercial debt because of sustainability concerns, in line with the Fiscal Responsibility Act.
There is also a need to review the foreign exchange policy regime to reduce distortions, eliminate arbitrage opportunities, minimize uncertainties, reduce exchange rate volatility and mitigate investment risks, and to align CBN financing of deficit strictly to the provisions of the CBN Act.
Additionally, he called on the government to muster the political will to deal with the crisis at the Lagos ports, and refrain from imposing new Excise Duties on the manufacturing sector. “The sector is currently grappling with too many macroeconomic and structural challenges already.”
