Income streams not high enough to support debt

Victor Ndukauba is an Investment Banker, and the Deputy Managing Director, Afrinvest West Africa. In this interview with Sustainable Economy’s Managing Editor, Clara Nwachukwu, he insists that Nigeria’s debt service-to-revenue ratio is approaching a danger zone. Excerpts:

Following the Senate’s approval for Nigeria to borrow additional $6.18billion, do you think the level of debt the country currently is exposed to is sustainable?

Clearly there are concerns around sustainability. We have heard comments from officials of the government, specifically the Minister of Finance at some public presentation where she essentially alluded to the debt-to-GDP ratio still being very much within acceptable limits and the DG DMO also suggesting similar things.

However, between the IMF/World Bank and even the former Minister of Finance, Dr Ngozi Okonjo-Iweala, all recently expressed concerns around our level of debt on the one hand, warning that we were essentially getting into dangerous zone because of the debt service-to-revenue ratio and that’s where the concern is for the private sector.

In 2019, we struggled but it wasn’t as bad as last year’s, which combined with the COVID-19, the numbers suggest that perhaps nine of every 10 or N90 of every N100 of income was used to service debt in the full year.

On the one hand, there is the aggregate national debt, and on the other is the foreign debt versus local dwindling revenue on account of the recession. Debt service-to-revenue is the one that really calls for concern and when you put it side by side that we struggled with revenues last year, especially on account of the pandemic, which also affected businesses because of the forced lockdowns and all the measures taken to keep people at home and safe through social distancing. There was also the impact of COVID on the global manufacturing and exchange, and the consequential impact on demand for commodities, especially oil prices which came crashing down.

Africa struggled very, very badly and Nigeria no less because aside from the contribution that oil makes for  foreign exchange (FX), income for companies was lower, coupled with the border closure, which further constrained local manufacturing, where goods that would have been exported to West Africa were stuck, which further exacerbated the situation. Also, businesses could not earn because they were constrained by the lockdowns, and banking capacity was shattered, so income for the corporate was lower and therefore taxes from profitability also declined. Then the oil prices fell on account of lack of low demand as the global economy shut down, manufacturing and supply chain as well as logistics. That hit Nigeria very badly in revenue terms. Put alongside the fact that the government had a very ambitious plan to spend N13trillion focused largely on infrastructure, you can then understand the imbalance.

Year 2021 started a bit slow, and we managed to get out of recession and things began to pick up. But for me, the important thing is that the government is almost fixated on driving public spending through debt. When I look at the 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. What this means is that about four, five years ago, we spent about 60% of our income on food alone, so you can imagine what the figures are today. Added to this challenge are also the high energy costs; as tariffs were revised late last year as well as in 2021. So consumer spending has shrunk drastically.

Businesses have also been forced to constrain their investments for two key reasons. One is the diminishing purchasing power and also the challenge with FX and therefore long term investments. These two areas are constrained and the government really has to keep things going. Unfortunately, this impacted negatively on the FX situation, so it’s almost a cocktail of adverse headwinds.

Now that things have picked up somewhat in the last couple of months, including an increase in oil prices to above $70/barrel, for Nigeria that should mean the budget would balance. Unfortunately, there is the challenge of subsidies, which ostensibly was removed in the past year, but which continues to be funded by the Nigerian National Petroleum Corporation (NNPC).

This has also placed a strain on national income. This is where the concern really lies, because all of the monies that are being borrowed are coming onto the government’s balance sheet already. Therefore, the country is obliged to repay those loans.

Even if we say they are concessionary loans, the concern is: you are borrowing for a future that is still largely dependent on crude and oil derivatives, yet the world is now decidedly entering into renewables and energy transition. Now, that is the biggest worry. If we were doing all of these on a balance sheet, and funding it on the back of assets from only the hydrocarbon industry, while the rest of the world is deliberately shifting away from hydrocarbons, there is a reason to be worried.

How long will this hydrocarbon stay; and yes, it may never disappear, but the question is: what sort of competition is it for the future? Is there a future in which crude oil continues to play a fundamental or pivotal role in the manufacturing value chain and also in the transportation and personal mobility space? Would we see more slush kicking in in the energy and storage space similar to what we’ve seen in the mobile phone, where progressively with each incremental lead in the ability to reduce the size of processing power and to shrink the space for chips; we’ve seen prices of handsets crashing?

A recent research suggested that the average smartphone today carries processed and competing power about 60,000 times the competing power that landed the space shuttle on the moon. If we now have such and yet it’s at the fraction of the cost, then I wonder what will happen when they bring in new technologies in battery design, storage and production and people are able to charge their cars on the streets? Then what happens to the oil, which is already in the ground? Coal too is in the ground but they said even with the best of technology, they don’t want it, so that is my biggest worry.

Some will argue that there has to be a better way to fund infrastructure because clearly that’s the one thing that can really unlock this economy. It’s not just about attracting investment into the sector; it’s also about prioritising the right infrastructure project ahead of the other.

Again, another criticism that this government has faced is in terms of infrastructure spend like the Abuja/Kaduna railway, which was good. But then the question is: was that the most critical segment of that corridor that should have been done? They’ve also done the Lagos/Ibadan and from Ibadan to Abuja, there is nothing. Then there is the Itakpe to Warri because they want to take iron ore from Itapke to Ajaokuta, which in itself is a white elephant, is that the most important in that route? Is there sufficient trade in that area to drive the cargo segment?

Usually, you subsidise passenger rail and by virtue of goods conveyed on those tracks. Have we prioritised investment for that? Should we not have done Lagos to Onitsha and Calabar and use that corridor to move goods up north?

Another issue is: how do you attract private capital to infrastructure in a way that is sustainable to free up the government’s balance sheet?

For example, if government is budgeting N13trillion and you reduce it even at N400/$ to $12billion, this is sub-optimal because when you look at the requirements of the country, from education to healthcare, to defence to housing to other sectors, there is just so much that amount can do.

However, if the government were to concentrate on infrastructure, there is power, rail, and if somehow they were able to prioritise things like the Lagos/Ibadan, which has been under construction for almost 20 years now, and every year they go to the National Assembly and appropriation will be made. But the road that requires N155billion to build will be allocated N10billion, which is less than 10% of the capital requirement. Then a stretch is fixed and we go back in waiting, and the next year they appropriate another N10billion or N12billion, by which time what was done the previous year would have worn out and we then need another revaluation, and for 20 years we never got there.

Perhaps if the government provides that N10billion, which was about 5% of that project and then ensures another 5%, it becomes an equity holder in a private-public-partnership (PPP), and this will deliver the project and toll the road and you recover the investment over 20 years. If we do that, we will get the benefit of private capital to come into delivering the infrastructure, the efficiencies in procurement will be much better than public procurement. If we continue that way for up to about N150 billion, we will deploy the monies to efficient energy and cost-saving and value engineering and deliver some efficiencies in project-costing and deliver them in good time. This will be better for them because with a 25-year concession, they might be able to recover within two to three years. The benefit of that is, once they deliver, they have reduced your debts so you have a lot more money to put into other areas.

The strategy is to keep identifying projects like that and over time things will take better shape. These are the kinds of things we should be thinking about to deliver the most infrastructure. Clearly, there are things that can’t be funded under such a construct and the most critical infrastructure will be health and education.

Projects like rail, road transport can be funded through a market-led approach and then the government can focus on that soft infrastructure that essentially improves the competitiveness of the country through investments in education and healthcare. For example they can subsidise schools and fund them by giving smart kids scholarships so they can get the best education possible and healthcare is within the reach of the citizens so that people can work and be productive.

In your narrative you talked about bringing in private capital. But how do you do that in an environment of lack of trust, where there is so much distrust between the government and the people. How would they be able to convince the investors to bring in their money with guarantee of return?

That is a million dollar question. You’re correct, the private sector would normally respond to the queues of a sector. And it’s not so much a question of what the government says but more of what the government does. On the one hand, there was a lot of talk about private capital, private enterprise and private-sector-led growth.

But instead, we saw actions that spoke to the business community quite badly. Of course the FX restrictions and CBN’s action on the 41 items and subsequently slowing down their corporate exit even where they had the right documentation in case of capital importation and all. Some of the actions of the administration were very injurious to the fortunes of the country vis-à-vis the need to attract capital.

One of such was the decision to clamp down on MTN. while the fine on the issue of the subscriber identification module (SIM) registration. For all intent and purpose, it was well-deserved but the actions very shortly afterwards by the Central Bank to allege that they illegally repatriated monies to the tune of $8.5billion and then forcing them to begin to submit to documentation and going ahead to fine even some banks that helped both the custody and remittances – Standard Chartered, Stanbic IBTC did not do us any favours at all.

Shortly after that we had the tax inquest, which was again a rather strange development considering that usually such tax audits would be initiated by the Federal Inland Revenue Services (FIRS), so it became like a witch-hunt against them after the post-privatisation of the telecom sector. It was almost as though the company was being punished for being a success.

That sent a lot of very scary and wrong signals, because shortly afterward, most of the corporate were forced to review their equity, calling round to understand the nature of their equity position and whether or not they brought in capital in form of debt or shareholder loan and they took them out.  

We then saw the move by the government to rewrite the laws governing corporate actions through the revamp of the CAMA. That was a decent one, and there were quite a number of very positive moves to it.

Unfortunately, just today again (Thursday), there was a fine on MultiChoice of about $4billion, which is not too savoury because they are struggling and losing customers. Meanwhile, it’s in an environment where it is unable to re-price even though it is being faced with the double challenge of escalating cost in dollars thereby dampening their ability to even pay for content. Also, the technology itself is an issue because it is a cyber-technology so there are licence fees and spectrum fees in dollars.

So it’s frightening on every front, and over time, what we see is that the government says one thing and then does the other; it rattles investors and everyone just recoils. As a result, the corporate community just stays back and are unwilling to take up any terms because they are unsure of how policy will swing if they go ahead to make commitments.

Bringing out the structure and investment dollars, foreign direct investments (FDIs) have literally dried up, and are coming in trickles now compared to five or six years ago. The biggest challenge with this is that we’re unable to attract the investment we require; remittances have also declined, not because of just COVID, also diaspora Nigerians are not able to get as much as they would. For an economy that used to have a sizable chunk of remittances of about $20billion to $25billion, now sees about $10billion to $12billion as yearly inflows, and then oil prices take the heat, when you put them together creates a very challenging front. When things are winding down and you suddenly see an escalation in politics and all the debate about 2023 also compounds the challenges.

In terms of governance, do you think the government is being transparent and accountable enough to swing interest in their favour to attract more FDIs?

Personally, one of the things that I find the most challenging about Nigeria today is the level of invasion and rancour. The country is so much more divided than I can ever remember. Now, we have these very fiercely divided camps. On the one hand you have the pro-government, who will go to any length to argue with those who criticise the government in any way, and there is no middle ground and no one in the centre anymore and herein is the biggest danger.

Suddenly, people are now so fixated on the differences and we no longer look at what we can do together to keep this country afloat. Also, the ability to inspire, which is perhaps the single biggest job of the administration, unfortunately, I don’t see that this administration recognises it as critical, or that it even commits the right resources to this and by this I mean the President.

One of the things former President Obasanjo did in his time was to sell hope, saying: “yes, we’ve come out of the slumps; yes, it’s been a very tough history, and we’re sunk in debt.” But he was able to galvanise the country as it were to rally round him. Everybody decided that you know what, we will get going. Somehow, the momentum of all of these – his journey and preaching got people hopeful once again. We saw what happened – the Africa rising narrative from 2007, and we saw a progression in a long time. There was more capital inflow, Nigerians began to return to the country bringing their capital, but this is lacking in this administration.

Even when they do certain things that are so landmark and so well-intentioned, like the Finance Act and how that revamped the CAMA, which provided a lot of positives, they still haven’t received the initiatives from that. The President is almost a recluse in a sense, and quite reticent about speaking to the country, so they haven’t done well. There should be better narration and communication about the government and to come out and speak to the concerns and yearnings of the people. They should give people the hope that something good can come out, rather than just seeming to be, as it were, trying to muscle-up people that are speaking up, which are essentially criticisms and dissenting voices.

A case in point is the ban on Twitter, a platform that is beyond the ability to interrogate the positions of government and to hold people to account, which I can understand the resistance by politicians. It’s a platform that has given a lot of young people a chance to try and build something and create a job for themselves in an economy where unemployment is above 30%, since we’re not creating jobs; people are losing the ones they have. So the platform helped them to create commerce and to trade services and goods to keep body and soul together, and they then shut down the platform without a proper legal framework.

Every day, you see young people leaving this country and we’re losing that crop that can make the economy productive, and seeing them go out to build other climes, so it’s a bleak outlook.

Do you think CBN’s ways and means have helped in any way, which has seen the government borrow about $25billion?

Sometimes, I don’t envy the CBN Governor because he has had an extremely turbulent time. He came in 2014 during the first oil price crash, which continued for almost three years to 2017, and just when things began to look up, there was the second oil price crash. Amidst all this, you have an ambitious executive that is intent on spending its way out of recession, so ways and means are exactly the right thing to do; it’s just a question of how and where you channel the spend.

Under the current situation, CBN has to provide support and find creative ways to do it because by law it cannot lend to the government more than 5% of the preceding year’s aggregate revenue. That is the challenge, and when you think about how much is required to meet the cost of running the state from the government expenditure to overheads and just keeping the government going, it’s hard.

… Over time, what we see is that the government says one thing and then does the other; it rattles investors and everyone just recoils. As a result, the corporate community just stays back and are unwilling to take up any terms because they are unsure of how policy will swing if they go ahead to make commitments

Ultimately, where almost all our revenues now go into paying debt, CBN has to find a way to fund the activities of the government, which was what put it in a very bizarre situation to resort to ways and means. Now, it has become a big concern as well and it’s one of the things that held up the plans to tap from the Eurobond market because even when they tried to get the rescue or bailout fund (RBF) facility from the IMF, the question arose as to what they intended to do with all of that outstanding, which is now estimated at about $25billion.

So there is the monetisation of that and the securitisation of the outstanding to receive some kind of debt notes that will be paid in the future, which forces some kind of rein back.

But the banks are feeling the pinch because of the excessive debits and liquidity has become so highly-squeezed in the financial services sector, so a lot of banks are really crying. It’s a tough place to be.

The Medium Term Expenditure Framework (MTEF) was also approved by the Senate, given the scenarios you painted, and the fact that previous frameworks failed to meet set targets, is there a chance that this would work?

It’s easy to write plans on paper, and I don’t think we have lacked any decent plan for a while, several development plans have been written in the past, but where the worry is the seeming disconnect between the theories that are propounded or plans that are put on paper and the language of the government when it comes to executing those plans.

The MTEF is laudable, as it has always been because it articulates a decent idea of what to look at and what we should be doing in terms of infrastructure – healthcare, education, housing, internal security efficiency. But how do we fund them?

When you look at the things that need to be done in terms of re-purposing the country’s balance sheet and expenditure profile, those are the real issues, and all that is required is just a change in attitude to have a major impact in the small little things, but which have very huge political consequences, and then questions whether anybody can do anything. For example, there is the Federal Economic Advisory Council that was set up with some of the best minds that we all know, and they continue to meet to rub minds and all that. But at some point, people began to wonder whether they are actually active, and there is a lot that could be done; again, it’s whether we really want to do them.           

Finally, if you were in a position to advise the government on how to wriggle out of this vicious cycle as it were, what would you say to them?

I think the single most important thing really is even just to recognise the reality of the situation and how bad things really are. If they did, the decisions to be taken will become an easier pill to swallow.

We talked about the challenge with the cost of governance and what it takes to run the country; there is austerity out there and people are cutting back because the cost of living and surviving is difficult. But in the same breath, you see the National Assembly trying to spend over N30billion to renovate the building and appropriating all sorts of monies and for things that you quite frankly wonder: is it that these guys are living outside this country or are they somewhat insulated from the things that are happening?

The most difficult thing we have to do is to rein in costs in the civil service and consequentially adjusting salaries upward to attract much more talented people, although it’s not a decision to take easily because it would be seen as being political. But I don’t know of any government that would be willing to take such a gamble because of the impact on their fortunes, and the one person who has tried, Governor el Rufai, is not finding it easy in Kaduna.

Also, when you look at removing energy subsidies – petroleum and power, it is one of those areas that might be politically suicidal, but the reality is that it can be treated with capacity such that it minimises disruptions and adverse impact on the people. Again, it depends on the exchange rate that you use whether it is the official or the black market rate, which is the true value anyway at N480+/$, before you can determine the true cost to the economy of subsidies.

For example, what do they really spend subsidising petrol in neighbouring countries and finding substitutes that allow the impact to become blunted. It could be through is intra-city transport, which people use to commute to and from work and subsidise the cost of the capital expenditure required to convert the engines from petrol to compressed natural gas (CNG), or through inter-city in the cost of moving goods from one place to another using diesel vehicles, and diesel has been deregulated a long time ago and won’t have that much impact. But for schools, being able to power them by putting some gas in place to power their generators and leveraging the infrastructure for broadband to address healthcare and education where you can channel some of those spending and achieve some immediate and long term impact of those adjustments.

There is the question of the political will and the capacity to take this hard decision, and we’ve had two opportunities to do it, first in 2015 decline in oil prices and the 2019 to 2020, but that didn’t happen. Now, it has become a tough nut to crack despite the high oil prices. But the reality of that getting done is not really great.   

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