We are borrowing to consume

Prof. Ndubisi Nwokoma, is an Economist at the University of Lagos (UniLag), he is also the institution’s Director, Centre for Economic Policy Analysis and Research, (CEPAR). He told Sustainable Economy’s Managing Editor, Clara Nwachukwu, that the Nigerian Government’s fiscal rascality can be checked through drastic cost cutting measures. Excerpts:

Given the high level of debt that Nigeria currently has, and based on all the indices and prevailing circumstances, is it sustainable?

I think the answer is very obvious because we are borrowing to consume basically. The borrowing is meant to finance the budget, they are not going to finance something that will last long; they are financing the operation of the budget. This year we borrowed to finance the 2021 annual budget, and we are having high levels of deficits and we are trying to fill up the gap in the budget.

The sustainability issue can be determined clearly from two perspectives: one is the present, and two, the future.

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 I am just saying, i.e. if you earn N100 as your new income and you use about 80% or thereabout to pay the debt you have already incurred, 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.

Then, tomorrow; if you transfer this debt to the next generation, the income stream for the next generation is not even determined, and the economy is not diversified, so it’s still the same source of income stream we have today that will be there tomorrow at least the way we see it. How will they pay? So sustainability from the present and future perspective is actually not there.

Looking at the Senate’s approval to borrow an additional $6.18billion or N2.3 trillion at N430/$. You said the sustainability of the borrowing depends on what it will be used for, and we have seen that the majority of the funds are being deployed into personnel costs – paying salaries and consumption. Where does this leave us, even though the government continues to defend that because our debt-to- gross domestic product (GDP) ratio is low at 29% against the 40% benchmark for developing countries?

 You know that the debt-to-GDP ratio argument is faulty because GDP does not pay the debt, it does not repay. The only way GDP can contribute to repaying is when you have a high level of taxation, but our tax-to-GDP ratio is still low. In many African countries it’s about 15%, but Nigeria’s is about 6% or something in that region. But the point is that taxation does not really even help the ordinary man, because even for the taxes that are being paid, you cannot see value for the money.

Also, many people are still outside the tax net, so the same people who have been paying are the same people who are still paying. If you want to increase tax it’s on the same people who are paying, so the sustainable income is actually falling. They need to bring in more people into the tax net; the very rich, do they pay appropriate tax? These are the issues.

Yes, they can get more money by enhancing the tax rate, and then GDP will help because GDP is talking about the level of your economic activities. If you have a high value for your GDP, it means that if you tax at every level of the value chain you will be able to generate income that will help you pay for any debt. If you say you have a healthy debt-to-GDP ratio and you don’t tax along all the value chain across the economy, you now have to review your tax system or structure to ensure appropriate taxes are paid not only by a small proportion of the population but everyone who should pay. The informal sector, how many of them pay tax? These are the areas they can make money, and it is from that argument they can say, yes, the GDP can help. 

But the way it is now, the same people who are paying are the same people that they want to kill with more taxes, which is very bad, because they are those on fixed income. They are getting battered from two ends – taxation as well as inflation. If you are on a fixed income, the real income will be declining and the disposable income after tax will also drop. I think this is an issue and definitely there is a problem because the economy is being mismanaged.

Mismanagement brings us to the issue of governance. We have constantly heard the Accountant General of the Federation accuse the Ministries, Departments and Agencies (MDAs) of not remitting funds, especially the revenue generating agencies. How can we ensure transparency and accountability for all the debt that we are borrowing if the income streams are not assured?

The issue is that there are leakages and they are systemic, because when they say ‘the fish gets rotten from the head’, when you talk about corruption, there is no structure if you are not deploying technology to be able to receive your income as a country. You need to deploy technology when you have income receipts coming in; once you are still operating analogue, trying to do manual collection of income, and there is no transparency in the process then there will be a lot of leakages. People just report what they want to report. But if you should deploy technology and there is transparency, even if there is corruption, the deployment of technology will minimise those leakages.

If you have a toll gate and you want to collect money, you should deploy technology so that all the money coming in would be accounted for. Even if there is any manipulation it would be minimal than somebody doing it manually, and saying: “Oga, today; we collected only N100.”

First, is the issue of lack of transparency by the MDAs. Second, is the lack of deployment of technology so that all receipts can actually be accounted for, it will help to minimise corruption. The seriousness of the fight against corruption should come from the top, because people look at what is happening at the top, and then they say everybody has his own kingdom and wants to maximise his own small territory. Go and apply for a passport and you will see how much money you are being charged for an International passport, or for any particular service that the government agencies offer. There is a lot of money moving around, and they are not accounted for by the system, and they are not remitted to the centres, so there are so many leakages and it is from the top. Everybody wants to get his own money in his own area, and it is really a sad situation.

Still on the debt, apart from the external there is also the domestic, even more so, borrowing from the CBN through ways and means, which now stand at about $25billion or N10.3trillion. Do you think this is helping Nigeria?

I will actually commend the Central Bank for that because if not the country would have collapsed from fiscal rascality, which is actually fuelling these ways and means advances. The Central Bank is always bailing out the government; each time they need money they will say give us money. It is just the fiscal operation of the government that has actually been mismanaged; reckless expenditure and spending programmes and refusing to cut the cost of governance.

For instance, I don’t know why the President should keep going abroad for medical tourism, and maintaining a large number of jets in the presidential fleet; so the cost of governance is very high, and this affects the government’s expenditure profile. They have to then go to the Central Bank to bail 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. Finally, in these ways and means, let them cut the cost of governance and enforce it, and that will help us to see how much can be saved so we don’t resort to borrowing. We also borrow from the financial markets, and the government is not actually thinking about tomorrow really, and whoever becomes president in 2023, may not achieve much because his first job will be to start clearing the mess if the person is well-intentioned. As it is, even the Economic Recovery and Growth Plan (ERGP) has failed, and they’re planning for a new one.

..Also, the Federal Executive Council (FEC) approved a new Medium Term Expenditure Framework 2022-2024, in which they also plan to borrow an additional N15trillion within the three-year band?

Like I said, they are not planning for tomorrow. For how long would you keep running the economy on a high level of leverage and borrowing from everywhere?

The sustainability is zero; it’s not there at all. A number of the major projects are in certain parts of the country, and so there are many issues in terms of equity, distribution, and development as well as issues around how they can pay back. Borrowing is not the solution, you don’t say because the debt-to-GDP ratio is low and you keep on borrowing without any plans. Soon, we will go back to asking the whole world to forgive us our debt again, and I don’t think they will listen to us this time around.

Finally, if you were to advise the government based on all the issues you raised, what would you tell them about how to make the debt and budget sustainable?

They will have to start by cutting the cost of governance that is the starting point. Take a look at your budget and take a look at how much you are borrowing. Further borrowing may not even be bad if they are project-tied and these projects can yield return in a short time. You need to now begin to invest in projects that can actually pay back on their own.

Secondly, for projects that have significant value, involve the private sector through public-private-partnership (PPP) arrangements, they will be able to help because people are willing to pay some little token to get value. Let there be enhanced PPP arrangements such that even roads can be built, which is basically what they are doing now by trying to concession the roads by tolling. Let me go to Berger or go to Abeokuta on a good road and just pay N200 somewhere to go and come back. I’ll prefer that than spending three hours and not paying anything.

Finally, the Government itself should be more transparent on their own; they need to focus on growing the economy and think of tomorrow.

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