Experts say Nigeria’s revenue base cannot support debt sustainability

Clara Nwachukwu

Is Nigeria’s current public debt stock put at N33.107trillion or $87.230billion by the end of March 2021, according to the Debt Management Office (DMO), plus the borrowing of additional $6.18billion (N2.53trillion) approved by the Senate last week, sustainable?

The answer to the question depends on who you ask and what interest is being protected or pursued. While the Federal Government insists there is no cause for alarm, economic analysts however disagree, saying such an enormous exposure is not only unsustainable but also pushing the bars given our mono-product oil economy.

The experts insisted that while borrowing in itself is not unusual, the concern is that the majority of the debt is being used for extraneous purposes – consumption and personnel cost rather than for return-yielding capital investments.

Sustainability challenges

Leading the arguments, a former President, Chartered Institute of Bankers of Nigeria (CIBN), Prof. Joseph Ajibola, who declined a yes or no comment, looked at Nigeria’s debt sustainability from the angle of 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.

Ajibola, also a Professor of Economics at the Babcock University, told Sustainable Economy in a telephone interview that sustainability can only be assured when the borrowing is 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.”

But another Economist at the University of Lagos (UniLag), Prof. Ndubisi Nwokoma, and the Deputy Managing Director, Afrinvest West Africa, Victor Ndukauba, without mincing words told Sustainable Economy that Nigeria’s current debt stock is not sustainable.

Besides, they noted that spending over 90% of the national income on debt servicing means that Nigeria will perpetually remain a debtor country, a situation it had exited in 2005 during former President Olusegun Obasanjo’s tenure, after protracted negotiations with the international creditors.

Ndubisi, who is also the Director, Centre for Economic Policy Analysis and Research, (CEPAR) UniLag, insisted that the country’s debt cannot be sustainable because “we are borrowing to consume basically… therefore, sustainability from the present and future perspectives is actually not there.”  

He said: “Presently, if you take a look at the debt service-to-revenue ratio, it is very high; if you make N100 and you spend N80 to pay debt, you find out that you cannot even survive today. From that point of view, you will actually die before you start talking of paying all the debt. Tomorrow; if you are transferring this debt to the next generation and the income stream is not even determined, and the economy is not diversified; it’s still the same source of income stream we have today that will be there tomorrow. How will they pay?”

Agreeing, Ndukauba, also an investment banker, believes that since the numbers suggest that perhaps nine of every 10 or N90 of every N100 of income was used to service debt, then “debt service-to-revenue is the one that really calls for concern.”

He added, “For me, the important thing is that the government is almost fixated on driving public spending through debt. When I look at the gross domestic product (GDP) ratio for example, the consumer spending is low and really, really struggling and the additional challenge is that this is buffeted by very high levels of inflation, particularly food inflation.”

He argued that besides weak spending and very high food inflation, the consumer’s situation is compounded by high energy costs (fuel and power) despite prevailing subsidies, forcing businesses to constrain their investments which are further exacerbated by scarcity of foreign exchange (forex).     

Before now, some international institutions had also raised an alarm that Africa countries risk being plunged into the “debt trap” and called for caution especially where the governments were using scarce forex to fund debt repayment rather than on capital investment.

Specifically, the Director-General, World Trade Organisation (WTO), Dr. Ngozi Okonjo-Iweala, had, during the 2021 Annual Meetings of the African Development Bank (AfDB), in June, expressed concern that African countries growth prospects were further compromised by the debt burden.

Okonjo-Iweala, also Nigeria’s former Minister of Finance, had warned that higher debt carriage translates to higher risk of distress even as most African governments find it convenient to ignore the debt sustainability threshold.

Indeed, AfDB President, Dr. Akinwunmi Adesina, citing continent-wide research, had said only one out of 38 African countries was free from sustainability challenges, while the rest had issues ranging from moderate to high risks.

Okonjo-Iweala had revealed that since the COVID-19 pandemic, “Middle-income African countries have also seen their debt burdens increase sharply. Amid falling prices and demand for oil worldwide, Nigeria’s debt-to-GDP ratio rose from 29 to 35 per cent; Algeria from 46 to 53 per cent, Egypt from 84 to 90 per cent, and Angola from 107 to 127 per cent.”

But her evaluation was immediately contested by Nigeria’s incumbent Finance Minister, Zainab Ahmed, who had insisted that: “In terms of level of debt, we are still very healthy, and sustainable.”

She based her assessment on the first quarter numbers, saying: “As of Q1 2021, we have about a 29 per cent debt-to-Gross Domestic Product ratio.”

Ahmed’s assertion had earlier been echoed by the Patience Oniha-led Debt Management Office (DMO), who also defended that based on the threshold set by the International Monetary Fund ((IMF) and the World Bank, Nigeria’s debt is still sustainable.

The DMO explained that the cap for public debt was raised to 40 percent of GDP from 25 per cent “in order to accommodate new borrowings to fund budget deficits and other obligations of the government,” adding that the IMF/World Bank recommended a threshold of 55 per cent for countries in Nigeria’s peer group. Also, the Economic Community of West African States (ECOWAS) had set the maximum debt limit for member countries at 70 per cent of a nation’s GDP, with Nigeria currently at 21 per cent.

While many countries continue to live in denial of their debt sustainability threshold, youths mostly from the developing countries took their concerns to the 2021 IMF/World Bank Spring Meetings.

In one of the conversations held during the meetings, which transcript was accessed by Sustainable Economy, the youths observed that how governments manage their debt is an issue that affects all in the future.

Nigeria’s Zainab Haruna, a One Young World Ambassador, had argued that sustainability is a growing concern as countries respond to the COVID-19 pandemic, while struggling with urgent financing needs.

Haruna, also the Founder, Decipher Solutions, had asserted that debt sustainability is the difference between economic development and unrealised potential, saying: “When countries can finance the future in a sustainable way and invest in their people, everyone wins. That’s why debt matters for every single one of us.” 

Making debt sustainable

Suggestions for making Nigeria’s debt sustainable are also as varied as there are respondents.

In April last year, the Executive Board of the IMF had approved $3.4 billion in emergency financial assistance under the Rapid Financing Instrument, to support Nigeria’s efforts in addressing the severe economic impact of the COVID-19 shock and the sharp fall in oil prices.

When countries can finance the future in a sustainable way and invest in their people, everyone wins. That’s why debt matters for every single one of us

The approval was based on a number of considerations, ranging from the need for the support to macroeconomic policies analysis to governance issues.

Under the macroeconomic policies, the Fund had expressed the hope that amongst others, “Once the COVID-19 crisis passes, they (Nigeria) intend to resume their revenue-based fiscal consolidation programme—which they started this year by increasing the VAT rate and introducing an automatic fuel pricing mechanism— while creating fiscal space for priority spending and avoiding recourse to central bank financing.”

Unfortunately, the government has been unable “to avoid recourse to central bank financing,” as it had borrowed up to $25billion from the Central Bank of Nigeria (CBN’s) ways and means, which has also become controversial.

Ndukauba believes that due to the bloated recurrent expenditure, the CBN had no choice than to provide support to the government. “Now, it has become a big concern as well, and it’s one of the reasons that held up the plans to tap the Eurobond market when they tried to get the rescue or bailout fund (RBF) facility from the IMF.”

For Nwokoma, “fiscal rascality” is fuelling the ways and means advances. “CBN has kept on bailing them out and each time they will have to print money a number of times to finance these ways and means. It’s an area that the government needs to sit down and cut their cost of governance to help them minimise this borrowing.”

While Okonjo-Iweala had insisted that “Innovation in debt financing is key,” urging the exploration of other funding options and scaling debt management transparency, Ahmed had listed a number of measures being pursued by the President Muhammadu Buhari-led government to tackle prevailing fiscal and sustainability challenges.     

“We have put in place a number of measures to enhance domestic revenue. We are cutting costs; we are improving the ease of doing business, trying to leverage private sector resource capacity to invest in infrastructure to reduce government spending.

“We are working on increased transparency in public financial management; we are enforcing fiscal discipline to expand our fiscal space so that we can continue to service our debt and borrow more to build our infrastructure capacity,” Ahmed said.

But for the trio of Ajibola, Nwokoma and Ndukauba, a lot more still needs to be done (Read the Full Transcripts).

Ajibola has five quick takes, including borrowing for projects, not for consumption to improve the overall capacity of the economy to grow and develop. Prioritise borrowing for the development of infrastructure given current deficits; institute accountability and subject borrowing to serious negotiations in a way that offers maximum benefits at the barest minimum cost to the economy.

To institute accountability templates to ensure return from projects goes directly into the government’s coffers and not individuals pockets; and initiate performance measurement to assess the rate of success of projects three or five years after, the lessons learnt and areas of improvement.

For Ndukauba, the single most important thing is for the Nigerian government to recognise the reality of the situation and how bad things are. “If they did, the decisions to be taken will become an easier pill to swallow.”

Others would be to reduce the cost of governance at all levels, increase salaries to be able to attract much more talented people, and have the political will to remove energy subsidies and focus on renewables and energy transition.

Similarly, Nwokoma also called for cost-cutting measures in the activities of government at all levels, and tying borrowing to projects; actively encouraging private capital through public-private-partnership (PPP) arrangements, while ensuring more transparency and accountability.  

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