Debt sustainability depends on the ability to pay back

Prof. Joseph Ajibola, a former President of the Chartered Institute of Bankers of Nigeria (CIBN). He is a Professor of Economics at the Babcock University, Ilisan Remo, Ogn State. In this interview with Sustainable Economy’s Managing Editor, Clara Nwachukwu, he argues that Nigeria’s debt sustainability depends on its ability to pay back. Excerpts:  

Let us look at Nigeria’s debt sustainability against the backdrop of concerns over the ability to pay back following the Senate’s recent approval for the Federal Government to borrow an additional $6.18billion. Do you think our debt as it stands is sustainable?

Debt is like two sides to a coin, so your ability to pay back a debt whether you’re talking about an individual or sovereign debt is a function of where the money is going to. What have you done with the money? It is what you have done with the money that will determine whether that money has the capacity to regenerate itself, reflate the economy and generate multiplier effects that will be beneficial to the economy and create the capacity to repay.

I won’t have a direct answer to your question, but what some of us have been canvassing is that borrowing should be project-tied, in which case you can choose to borrow for specific projects that are capable of generating returns and pay back the loans.

If you borrow to finance railways for example, that’s revenue generating, if you put in place a good management template that can account for the revenue from such a project, then there is hope.

If you build a road and you toll the road, you collect the toll and you are able to account for the toll appropriately, it is hoped that the toll, even if not 100% will substantially repay the loan.

Such projects have ways of contributing to the economy; generate something from the economy and are able to pay back.

But when you borrow to finance overhead, to finance consumption that is money that is sunk into the system and it does not have the capacity to grow the economy and has not been able to develop any specific areas of the economy that will generate returns to pay.

Even though in reality, some of these things are also important, it is better that you generate your own money locally to finance your overhead and your consumption.

When you borrow and you don’t trade such monies; money that is borrowed for consumption goes into a pool or a basket; you can’t trace it in the system. But today, if you borrow to develop hydroelectric projects, you can always identify where that money is, same thing if you borrow to construct the Lagos Ibadan Expressway. If you borrow to finance the Abuja-Kaduna rail project, you can identify it and be able to hold people accountable. You can drive performance arising from those projects. Such projects can help.

When you tie back to what happened yesterday (on Thursday), you know this year’s budget has N4.5trillion deficits, which is supposed to be financed through foreign and local borrowing. So if the portion that went to the National Assembly was approved for the Presidency, it is part of the 2021 budget that is supposed to be financed through foreign loans, which means that it has already been pre-approved. The President merely informed the National Assembly that I am now working on the approval you gave me early in the year to borrow from foreign institutions and agencies to finance this year’s budget.

One would wish that this aspect of the budget that is now subject to foreign borrowing will go to finance capital projects in the budget. Again, don’t forget that we also have two other major issues from January to date – one is the pressure from inflation, so if inflation has increased between January and July, this means it would have affected some cost estimates in the budget, necessitating additional money.

Also, there is the Naira devaluation, the aspects of the budget that were in foreign currency in projects that were estimated maybe at 360/$ (official), which is now N420/$ (official) that will require additional money to make up the difference to complete all the projects, which will increase the budget size and additional borrowing too. These are some of the issues that will affect the foreign borrowing that was approved yesterday.

The government says because our loan-to-GDP ratio at 29% is still bearable since it is below the 40% prescribed for developing countries. Do you think we really should get comfortable with the level of debt we are now exposed to?

If we are not comfortable, the question is: what are the options open to us? At 29% I am aware that there are countries that are running at higher rates than that but what are the options open to us, which takes us back to what I said earlier – can we trade these loans, can we ensure better accountability?

…I asked because currently our debt service-to-revenue is estimated at over 90%, meaning practically all our earnings are going into debt servicing, and we are a mono-product oil economy. Where will the funds for the payback come from?

It’s a matter of hopes and desires, if I can put it that way i.e. that the economy will perform better and there will be a multiplier effect, and the high inflation rate will fall and foresee good returns from what we have on ground today in terms of the loans. Like I said, the question is what are the options open to us given the situation and condition that we have found ourselves in today?

Other than to say that we should continue to hope for better performance of the economy, we should also continue to call for better accountability from our Ministries, Departments and Agencies (MDAs). We should also ensure that we develop the local capacity in various sectors of the economy. The local capacity is very low and that is why we can’t produce what we consume or consume what we produce. It’s a difficult situation but then we must continue to look for impactful initiatives and programmes to get out of the difficult situation.

In terms of fiscal governance, do you think the government is transparent enough especially as you talked about the MDAs being accountable and that they remit the revenues generated to the national treasury?

I don’t have the facts, so I can’t say authoritatively whether they are or not doing what they are supposed to … (the Accountant-General of the Federation recently indicted them for not remitting the monies generated). Yes, we have heard this time without number against most of the revenue generating agencies, and we’ve had to watch arguments and counter-arguments over issues arising from revenue generation even when they are before the National Assembly, including even the Economic and Financial Crimes Commission (EFCC).

The question is: how do we improve on what is on ground rather than repeating ourselves, complaining and complaining over the years?

Do you think increasing taxes without expanding the tax net will help to increase the revenue base as being proposed?

But the tax net itself is still very narrow. When you increase taxes without expanding the tax net, you’ll still target the same people/PAYE, who are compliant with the tax rules and regulation. Whereas the problem is with those who are outside the tax net; those who have the means, those who are statutorily compelled to pay that are not paying. So when you increase, the burden is still on those who are already paying and complying, whereas the work is with those that are not complying at all.

There are also those who have not taken up the responsibility to pay, the informal sector for example, and other high net individuals and others who should be in the tax net.

 Apart from the external borrowing, we also have the internal or domestic borrowing. The Federal Government is said to have borrowed about $25billion from the Central Bank of Nigeria (CBN), but it doesn’t seem like they are actually solving the problems they set out to solve. What more can they do?

It’s all about what I’ve said before, if we are borrowing, what are we borrowing for? This is why we say we should not borrow for consumption. We should borrow to promote investments, we should borrow to implement projects, and we should tie the borrowing to specific projects. We should have templates for accountability at all levels of government so that we will be able to repay, and to be able to recoup and create multiplier effects of such borrowing.

The Federal Executive Council (FEC) also approved the 22-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTF & FSP). The Framework provided for a N5.6trillion budget deficit through sundry borrowing; and within that three-year band, they plan to borrow about N15trillion. How will they be able to manage this pool of borrowings that they now have?

When you borrow today and withdraw on the borrowing to implement budget or implement projects and to sponsor specific plans. The benefits may not also come to you until another two to three years. So your capacity to pay and the benefits of such borrowing to the overall economy may not be seen immediately. However, you may be laying the foundation for a better tomorrow if well-managed. The most important thing when you talk about middle term planning is that if the plan is faithfully implemented, whether you borrow or you raise the resources, the most important thing is to improve the capacity of the economy to grow and develop. If this is done, there will be light at the end of the tunnel, and at the end of the day, the benefits will come to the economy so it won’t matter if this administration started and which administration finished it.

Finally, if you were in a position to advise the government on how to make the debt sustainable what would you say?

I’ll say about four or five things:

One, borrow for projects, not for consumption. Let borrowing improve the overall capacity of the economy to grow and develop.

Two, borrow in a prioritised manner – which is the number one priority of the economy today. The power sector is still begging for attention. There is an infrastructural deficit in the economy; borrow for those purposes.

Three, let there be accountability in terms of the usage of the money. We have read from the media that when they borrow for such projects, the costs are usually much higher in Nigeria; I don’t know. But let the borrowing be subjected to serious negotiations in a way that we will reap the maximum benefits at the barest minimum cost to the economy. If we have this, then we will know there will be no question of over-bloated cost.

Four, let there be accountability in terms of return from such projects. We have quite a number of them running now – the Abuja/Kaduna rail line, Lagos/Ibadan line; and we have others in the north, let there be an accountability template so that returns from these projects would come to the government and not individuals. And the government will be able to apply the revenue generated to pay back the loans, and then it would have benefitted the economy.

Transparency and Accountability templates can be introduced on all of the government’s activities to make the exercise more scientific, and we will be able to know where we are

Finally, let there be accountability by way of performance measurement. For example, the Abuja/Kaduna rail line, after two to three years of operation what is the record of performance? Can they publish a performance report for Nigerians to see? This way, at the end of the day there will be justification for further borrowing. If we can gauge the performance of these projects three or five years after, what are the lessons learnt? What are the areas of improvement that we need? That is the business sense that has not been introduced in government projects in this part of the world.  Let somebody be accountable for the performance, let Nigerians see the record of performance and be able to say: this is how we have fared, and we have not done well here, how can we improve on this?

And all that we are saying is not rocket science. Templates can be introduced on all the five points that I’ve said to make the exercise more scientific, and we will be able to know where we are.

Most of the comments coming from analysts based on the decisions taken would now be based on scientific evaluation and scientific reports not guess-work. More often than not, analysts make comments based on guess-work and what they feel, not based on facts because most times, they don’t have the facts. Let the facts be laid on the table.

For example, on a yearly basis, how much has Nigeria generated from the projects – Lagos/Ibadan, Abuja/Kaduna rail lines? How much has been realised, how much did we borrow, and how much have we paid back? What were the revenue projections when the project was completed? Are we measuring up to date with our projections as a country, and if not what are the issues, what are the lessons learnt? If we have these kinds of reports, then it will be easy for Nigerians to make subsequent decisions based on similar projects. I have not seen such reports anywhere, and these are the things we can bring on board for national accountability in our national life as a country.

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