Till Debt Do Us Part

“I sincerely believe that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity under the name of funding (debt) is but swindling futurity on a large scale” Thomas Jefferson (1743-1826).

Close to a year ago, I had drawn attention to the challenges of government’s attempt to borrow about $30billion in the next couple of years ostensibly for infrastructural development across the country. Though my intervention did not go down well with the Debt Management Office (DMO) at that time, I was convinced that the danger in plunging the nation into such a huge debt was clear and real. Close to 12 months after, we are back to the same issue as the debt debate seems not to be receding.

Following the conclusion of the World Bank/IMF meetings in Washington, the Minister of Finance, Mrs Kemi Adeosun, at a press conference on Sunday, October 15, 2017 stated that the country will have to borrow more money to deliver on critical, but lacking infrastructure. According to her, “Nigeria’s debt to GDP ratio is one of the lowest. We are at 19%, but most advanced countries have over 100%. I am not saying we need to move to 100%, but I am saying we need to tolerate a little more debt in the short-term to deliver the rails, the roads and power so as to generate economic activities, jobs, revenue, which would be used to pay back the debt”. She also noted that the government adopted an expansionary fiscal policy with an enlarged budget in order to deliver a fundamental structural change to the economy, thereby reducing the country’s exposure to crude oil.

She explained that the government was borrowing because mobilizing revenue aggressively was not advisable, nor indeed possible, given the economic challenges recorded in the last two years. With the positive growth witnessed in the last quarter, and subject to continued growth, the government’s revenue strategy would be accelerated. You must please, permit me to quote the Honourable Minister quite extensively, as this is crucial. In her own words, “This is being complemented by a medium-term debt strategy that is focusing more on external borrowings to avoid crowding out the private sector. “This would also reduce the cost of debt servicing and shift the balance of our debt portfolio from short-term to longer-term instruments. This Government will be very prudent around debt. We won’t borrow irresponsibly”. According to her, one of the advantages of foreign borrowing is that the cost is low and therefore is a veritable way to avert job losses. “With Nigeria’s source of revenue dropping by nearly 85 per cent, the country had no option but to borrow. The option before the country was to either cut public services massively, which should have led to massive job losses, or borrow in the short-term, until it begins to generate sufficient revenues”.

“We felt that laying-off thousands of persons was not the best way to stimulate growth. Also, when we came into office, about 27 states could not pay salary. If we had allowed that situation to persist, we would have been in depression by now. So, we took the view as a government that the best thing to do was to stimulate growth and spend our way out of trouble, get the state governments to pay salaries, making sure that the federal government pays and invests in capital infrastructure,” Mrs. Adeosun concluded.

However, a day later, the Word Bank came out with a starkly different position from that of the Honourable Minister. Gloria Joseph-Raji, Senior Economist at the Word Bank insisted that Nigeria’s cost of borrowing was no longer sustainable. Her argument was that the country did not have the capacity for more loans in the light of dwindling revenues. She further explained that in one year, Nigeria’s debt to revenue ratio had increased by an alarming 25%. In 2015, the country’s debt to revenue ratio stood at 35%. This figure jumped to 60% by 2016. The only way this could have happened was that either the debt went up astronomically or that revenue plummeted sharply or both. While agreeing that Nigeria’s debt to GDP ratio was low at less than 20%, she maintained that what was worrying was the sustainability of the debt represented by the debt to revenue ratio. She also pointed out that a chunk of the debt denominated in local currency had put more pressure on sustainability as these debts were contracted at very high interest rates. She supported the view taken by the DMO to rebalance the government debt portfolio in favour of foreign loans. The strategy is to switch the ratio from the then 80% domestic and 20% foreign debt to a more comfortable 60% and 40% domestic to foreign debt components, respectively.

Before we delve deeper in this discourse, it will not be out of place to highlight some important statistics. According to the DMO, the Federal Government has total external debt stock of $15.05b and domestic debt of $39.34b. In addition, states have domestic debt of almost $10b. This brings the total debt for both the Federal and State governments to circa $64.2b as at June 2017. At the current CBN official rate of N305 per dollar, the Naira equivalent would be about N19.6t. The external debt stock is broken down as follows: Multilateral Debts, $9.67b (64.29%), Non-Paris Club Bilateral Debts, $2.07b (13.78%) and commercial (Eurobond), $3.3b (21.93%)

Considering that we completely exited the Paris and London club of creditors barely 10 years ago with a write off of about $18b after we had paid down $12.4b, we cannot be said to have been of good behaviour in the way we manage our debts. At the time of our celebrated exit in 2006, our outstanding debt reduced from over $30b to about $3b and a little above N1t. So, we are basically on our way back to where we were in 2005. Sadly, in 2005, patriots were worried that there was nothing on ground to justify such large amount of borrowing by successive governments and that the debt service obligations were crippling the economy. It is in this context that the new debate on borrowing should be understood.

In the first place, I sympathize with the government as it is faced with a situation that looks like, “damned if you do, damned if you don’t”. Unfortunately, that is the nature of challenges in economics. What is required in the circumstance, is to delicately execute trade offs. If there is any where that trade offs are required, this is it. Readers would recall that in analyzing the 2017 budget this column had described the budget as being “between the rock and a very hard place” (Outside the Box of May 29, 2017). As highlighted in the column, the budget stands the risk of partial implementation if government was unable to sustainably fund the deficit of N2.35t which represents almost 32% of the budget and constitutes 46% of projected revenues. At the current exchange rate, the deficit works out to about $7.7b. Given that the government has sent a request to the Senate to approve external borrowing of $5.5b, out of which, about $3b would be used to refinance existing maturing domestic debt obligations, the calls for the Senate to withhold consent, even if understandable, is misplaced as the same Senate approved the budget in the first place. There are, however, more serious concerns that border on sustainability.

Listening to the argument made by the Honourable Minister, there is no dispute over the fact that she made sense. However, it is important that we move away from the justification of more loans merely on the basis of the Debt to GDP ratio. That argument is unhelpful like we had argued in the write up under reference in May. We had opined thus, “there is this misleading argument made by “experts” about Nigeria’s debt profile. The argument goes this way: “Nigeria has a lot of room to borrow more and more to the extent that our debt to GDP ratio is lower than the average of 42% for developing countries and 56% benchmark for developed countries as per the IMF/World Bank Debt Sustainability Framework”. The problem with this argument is that it does not take into account the revenue earning capacity of the country. It also doesn’t account for the low Tax to GDP ratios of the country. While Nigeria’s Tax to GDP ratio is a meagre 6%, the global average is about 15%, leaving the country with oil as the major financier of the budget. Given the heavy drop in oil prices, the ability of the country to generate revenue is therefore impaired. … The Federal Government is said to have ramped up its debt “at a compounded annual growth rate of 16.2% over the last 5years to about USD42.1b (N13.8t) in 2016. Going by the borrowing plans for 2017, the debt stock could increase by as much as 20% year on year to USD54.4b (N16.6t) with debt to GDP rising to 17% from 15% in 2015.

You cannot isolate the issue of debt to GDP ratio from debt service capacity. If at 15% debt to GDP ratio, we are using up to 50% of revenues to service debt, it follows that doubling the debt would still leave us below the debt to GDP ratio threshold while we may use all our revenue to service debt annually. This does not work and is the problem with the argument of the experts”.

I guess it was this same position that the World Bank Senior Economist had taken a week ago.  It is instructive that some of the estimated numbers I posted have already been exceeded as total debt is now about $64b (N19.6t). The point being made is that debt cannot be repaid by GDP but by revenue. So, while it may be helpful for purposes of analysis, comparing debt to GDP, tend to mask the real danger. A more useful and realistic tool is the debt to revenue numbers. To drive the point closer home, there is a better measure which relates debt service to revenue. In 2015, the debt service to revenue ratio was 33%, by 2016, it had worsened to 59%. This number is sure to get even worse by the end of this year if the government adds close to $8b to the national debt. What this means in simple English language is that while 33% of our revenue went into payment of interest in 2015, we spent close to three fifth of our revenue to pay interest in 2016. Professional lenders would most times only lend when they are convinced of capacity to repay. As we get to the point where we use virtually all we earn in servicing debts, we will become more and more unattractive to serious and well-meaning lenders.

Beyond all these, there are a few other concerns that discerning citizens have. One of them is the use of the funds borrowed. This concern becomes more serious given the intrinsic inefficiency in public sector operations worsened by our penchant for mismanaging resources. Who would believe that with oil prices as high as they had been in the recent past, we could not put appropriate infrastructure in place. On the contrary, we were borrowing to pay salaries. So, government must continue to pay attention to the possibility of the borrowed funds disappearing into private accounts. Citizens are also concerned about the impact of the loan on the domestic economy, quite unlike the government’s theoretically correct argument that the loan would stimulate the economy. We say “theoretically correct” because if the funds are spent on goods and services imported from China, the full impact of the spending would be felt in China and not in Nigeria.

The latest suggestion of switching more of our loans from Naira to Dollar, even though sounds logical because of assumed lower interest rate of the Dollar has some hidden danger. With devaluation, the more dollar we are exposed to, the more the Naira we have to cough up to pay back the loan at maturity. Not long ago, exchange rate was at N150 per dollar and now it is at least N305 to the dollar. This means that you require over twice the Naira you required before now to pay back a dollar loan. Besides, dollar loans expose the country to external shocks. For instance, if like it happened recently, the US economy has to borrow dollars, interest rates will immediately go up.

All said and done, there is a need for the government to pay attention to a few critical issues. First, given the already high debt service to revenue ratio, there is a limit to how much it can borrow, no matter how bitting the needs are. Secondly, government needs to prioritize in such a manner that its new borrowing should not only be closely tied to need, but should also be tilted towards self-liquidating projects. Borrowing to build hospitals may be necessary, but given our present debt profile, such a project may not self- liquidate in the short to medium term. Thirdly, government would need to do everything to harness private capital as some of the projects with proper conceptualization and incentives may become attractive to the private sector. Fourthly, government should continue to engage the public with a view to improving the revenue profile of the country. The economy needs to run predominantly on taxes and like I had argued before, taxes can only be understood in the context of government’s share of the prosperity of the populace. An economically emasculated and anemic populace cannot pay tax. Fifthly, the drive towards the diversification of the economy should remain on the front burner of government policies. We must engage our universities and research institutes in a very dynamic manner if we must make progress with industrialisation of this economy. That is how it is done elsewhere. We should not be different. Finally, government must be seen to eradicate all the fat around it by reducing waste and reigning in cost. It must continue in the recovery of stolen funds and transparently sell to the private sector, underperforming and inefficient national assets to make money from the sales and turn them around for maximum contribution to the economy.