Nigeria: The Debt Bomb!

The humongous debt figures released few days ago by the National Bureau of Statistics show that Nigeria is in a precarious condition, raising concerns that the situation may plunge the economy into another recession, especially with unexpected revenue shortfall.  Besides, the deplorable fiscal position only buttresses the need to look away from oil revenue as the lifeblood of the economy. Kunle Aderinokun and James Emejo report

It is appalling that few years after exiting the quagmire of the Paris Club of creditors, Nigeria is back in the trap. Following shrewd negotiation by the team led by the former Finance Minister, Dr. Ngozi Okonjo-Iweala, in the administration of former President Olusegun Obasanjo, which earned the nation a reprieve, literally described as a lucky escape, no one would have thought any administration would go on a borrowing spree to raise the debt position to an astronomical level.

Essentially, it is a reversal of fortune that Nigeria’s external borrowing level has risen to a total of $22.08 billion as at June 30, 2018, particularly considering the debt relief it secured from the Paris Club of creditors in 2005. 

In the latest statistics provided by the National Bureau of Statistics (NBS), Nigeria’s total domestic and foreign debt stock stood at N15.63 trillion and $22.08 billion respectively by the second quarter of the year. 

Out of the N3.48 trillion total domestic debts borrowing by states, Lagos accounted for 14.88 per cent, while Anambra had the least debt in the category with a contribution of 0.08 per cent to the total domestic debt stock.

Lagos State had the highest foreign debt profile among the 36 states and the FCT accounting for 34.17 per cent and 6.57 per cent in national share. Its external and domestic debts were recorded at $1.45 billion and N517.36 billion or 14.88 per cent of share in state total. 

Edo accounted for 6.57 per cent of external loans at $279.02 million; Kaduna, 5.48 per cent or $232.96 million; Cross River, 4.56 per cent or $193.79 million and Bauchi, 3.18 per cent or $134.90 million. 

The foreign debt profile of Bayelsa, Benue and Borno stood at $57.25 million, $34.75 million and $22.29 million respectively. 

According to the Debt Management Office (DMO), the country’s first loan from the Paris Club of creditor nations was US$13.1 million loan taken from the Italian government in 1964 for the building of the Niger Dam.

Subsequently, from that time till the end of the decade, Nigeria’s borrowing from foreign lenders was generally insignificant. 

“However, the oil boom of 1971-1981 introduced the era of big borrowing in Nigeria. Loans were acquired by various tiers of government as Nigeria embarked on major development and reconstruction projects in the wake of the civil war.  

“The borrowing continued well into the civilian era, as the federal government embarked on the guaranteeing of many unviable loans taken by private banks, state governments and parastatals. 

“In 1982, when oil prices crashed, Nigeria was unable to pay off the loans, it borrowed. Interest payments spiked, penalties rose, the crisis had begun.  

“This pattern continued well into the military regimes of 1985-1993 and 1993-1998, when Nigeria stopped paying its debts to the Paris Club altogether, after the Paris Club refused to substantially reduce Nigeria’s debt.

“With the return to civilian rule in 1999, Nigeria embarked on a relentless campaign for debt relief.  Nigeria’s debt, which stood at US$36 billion in December 2004 was unsustainable, President Obasanjo campaigned.

“Nigeria spends more on interest payments than it does health care and education. Given this debt level, Nigeria cannot achieve the Millennium Development Goals,” said DMO.

Nevertheless, the debt relief campaign finally paid off on June 29, 2005, when the Paris Club and the administration of Obasanjo with the efforts of then Minister of Finance, Dr. Ngozi Okonjo-Iweala, agreed on an $18 billion debt relief package,” DMO explained

Nigeria’s total domestic and foreign debt stocks as at June 30, 2017 stood at about $15.1 billion and N14.1 trillion respectively, according to NBS. 

Foreign debt rose from $10.71 billion in 2015 under the immediate past administration to $11.406 billion in 2016 and $15.047 billion in 2017 and now $22.08 billion under President Buhari’s government. 

There has been increasing worry by commentators over the rising external borrowing especially in view of the Paris Club relief. 

This is particularly because rather than use borrowed funds for the purpose for which they were secured, politicians misappropriate the resources to satisfy their selfish desire.

A couple of former governors have recently been imprisoned over such misapplication of public funds for personal gains, while in office as others are still being investigated. 

The failure to commit these funds to developmental objectives has continued to impoverish the people as well as cause great setback in efforts to reduce poverty and inequality in the country. 

Although prices of oil are currently rising at the international market, there are concerns that the reversal of the rising fortunes of  the oil, which is the major revenue earner, portends danger for the economy.  Analysts fear that  with the increasing level of debt the country may be back in recession, if  oil prices start falling and a downward streak is maintained.    

Besides, going by BudgIT’s exposition on the state of fiscal health of all the states of the federation, it could be summarised that the reluctance or inability to pursue true diversification of the economy, away from the current lip-service attached to it and reliance on oil receipts for survival could prove to be costly going forward.

The report, ‘State of States’,  had listed Rivers, Bayelsa, Delta, Akwa Ibom, Lagos, Edo and Ondo as the only states which are currently fiscally sustainable, largely because of their robust revenue profile and manageable recurrent expenditure obligation. 

However, states like Osun, Ekiti and Cross River were adjudged as being in a precarious economic situation.

Little wonder why states, including Benue, Osun, Ekiti, Kogi, etc., have not been able to pay workers’ salaries for months, as well as not meeting their contractual commitment to contractors amongst others. 

According to BudgIT, a civil research group, some of the reasons that could be tied to the pitiable condition of states’ fiscal reality include the indiscriminate accumulation of both domestic and external debts over the years. In effect, the mandatory debt servicing obligation had now eaten deep into their gross revenues, leaving them almost empty-handed. 

Another worrisome feature common among the states is their appetite for the monthly allocation from the Federation Account Allocation Committee (FAAC), which appears to be a major lifeline for their finances. 

Also, the reluctance of states to explore the natural resources at their disposal as a means of diversification remained a challenge. 

According to BudgIT’s Principal Lead, Gabriel Okeowo, “States need to focus on boosting IGR collection and simultaneously slowing down on borrowing.”

Experts have severally raised the alarm over the years on the attitude to borrowing whereby the funds are often siphoned into different purposes- most selfish objective- as debts are continuously piled up for successive governments. 

Also, given that recurrent expenditure far outweighed capital implementation in the annual budget, there have been appeals for re-balancing of the equation.  

“If this is done, states can increase their budget performance as well as pay backlogs of civil servants’ salaries while grappling with a ghost worker problem,” Okeowo added. 

Emphasis is also placed on the need to introduce innovations to boost internally generated revenues (IGRs) in all the states- and rely less on the FAAC handouts. 

According to former Managing Director of Unity Bank Plc, Dr. Mohammed Rislanudeen, states’ dependence on FAAC allocations and over-bloated fiscal deficits resulting from unhealthy borrowing could prove a nightmare for them.

He said: “All the states in Nigeria are blessed with abundant opportunities for enhancing its revenue potential and improve capacity to enhanced living conditions of its people.

“Reliance on monthly federal allocations as well as over bloated fiscal deficits through unhealthy borrowings, help in part towards accentuating fiscal crisis and/ or difficulties in meeting statutory obligations like salaries payment and infrastructural support by the states.”

“This underscores the imperative for an effective fiscal federalism where states get obligated to develop an efficient system that guarantees the ease of doing business allowing agriculture, agribusiness and industries to thrive with the ultimate impact of enhancing revenue generation, employment and general improvement of the misery index across the states,” he added.

Essentially, the report lamented the poor fiscal management in Cross River, “with its bogus budget plan of N1.3 trillion in 2018, which severely weighed it down on the index.”

The state recorded net inflow of N22.40 billion between January and June 2018 from FAAC; N18.10 billion in IGR and VAT of N878.99 million, but domestic and external debts were valued at N25.64 billion and $167.92 million respectively as at 2017. 

It also portrayed Osun as still being in a precarious economic situation, ranking 35 out of the 36 states tested.

Its net allocation from FAAC stood at N15.79 billion from January to June 2018 but had a domestic debt of N138.23 billion and $96.60 million in external borrowing in 2017, as well as a budget size of N176.4 billion and IGR and Value Added Tax (VAT) of N6.48 billion and N924.83 million respectively.

Also, with its domestic and foreign debts at N117.49 billion and $78.05 million respectively as well as net FAAC allocation of N22.91 billion; IGR, N4.96 billion; VAT, N832.87 million, Ekiti was adjudged to have failed the fiscal sustainability index. 

The report, however, observed that states appeared to lack the rigour and foresight to explore the various export opportunities at their behest to boost non- oil receipts.

“It was critical that state governments embrace a high level of transparency and accountability, develop workable economic plans, take haircuts — especially on overheads — expand their internally generated revenue (IGR) base, and cut down on debt accumulation without a concrete repayment plan,” the report noted. 

It further called on the need for states to look beyond the rhetoric and commit to a reduction in their operating costs, including significantly cutting unreasonable overheads, while freeing up more spending for social and economic infrastructure. 

It noted that states needed to link future borrowing to sustainable projects, which could pay back the capital cost of its current loans and improve the overall income profile of the state. 

“Economic planners at the state level are also advised to improve tax collection efficiencies and realign budgeting with state-wide plans. 

“Significant investment is needed to improve the overall economic performance at the state level, which invariably could create jobs that feed into states’ internally generated revenue.

“Improve spending is also critical for value-added tax revenue. Export opportunities in aquaculture, agriculture, manufacturing, trade, logistics and tourism abound across states, but it seems states lack the rigour and foresight to explore them.”

Ondo State’s actual revenue in 2017 was N56.83 billion, far below its recurrent expenditure of N111.7 billion. But, its domestic debt doubled to N58.55 billion within the year from N30.88 billion in 2013, while external debts were $50.25 million. 

These imbalances are particularly common in many states. 

“On the average, IGR uptake is N3,818 per head across the states; it is only in 10 states that collection efficiency is higher than the state-wide average. 

“The least performing states include Bauchi, Katsina, Borno, Kebbi, and Yobe states. It’s crucial for state governments to design innovative policies around tax collection, especially efficiency,” BudgIT noted. 

It regretted that: “With increased inability to meet recurrent expenditure obligations and increased pressure, most states resort to more debt uptake. Total debt portfolio of states rose from the 2014 level of N2.13 trillion to 2017 level of N4.49 trillion.”

“The total debt of Lagos State-the most indebted state- rose from the 2014 level of N456.8 billion to N813.04 billion in 2017, accounting for 18.08 per cent of the total debt stock of state governments.”

BudgIT stated the states would have to adhere to suggested strategies for recovery before their budgets would perform for the people as well as become fiscally sustainable. 

The report, nonetheless, proffered ways through which states could boost their own revenue and cut reliance on federal allocation. 

It stated that, “While growing states’ IGR by widening the personal income tax net is ideally the path for most states, some may use indirect tax through increased value added tax undertaking due to socio-religious norms, political pressure and from the policy front adopted in 1991. 

“States with natural resources like oil and solid minerals should explore those resources given the socio-economic status of most Nigerians at this time as it gets increasingly difficult to tax already heavily taxed people.”

As captured in the BudgIT survey, Abia, Adamawa, Bauchi, Cross River, Ekiti, Gombe, Imo and Jigawa-all lacked the ability to meet their monthly recurrent expenditure obligations between January to June 2018. 

Others in the category include Kogi, Kwara, Nasarawa, Ogun, Osun, Oyo, Plateau, Sokoto, Taraba and Zamfara.

However, apart from Lagos which led the external debt chart as at 2017, Kaduna, Edo, Enugu are also top with $238.27 million, $232.20 million and $133.10 million respectively. 

But, by June 2018,  the foreign borrowing consisted of $10.88 billion from multilateral agencies; $274.98 million from bilateral (AFD) and another $2.12 billion bilateral from the Exim Bank of China, JICA, India and KFW, while $8.80 billion was commercial.

Lagos State still had the highest foreign debt profile among the 36 states and the Federal Capital Territory (FCT) accounting for 34.17 per cent and 6.57 per cent in national share. Its external and domestic debts were recorded at $1.45 billion and N517.36 billion or 14.88 per cent of share in state total.

Edo accounted for 6.57 per cent of external loans at $279.02 million; Kaduna, 5.48 per cent or $232.96 million; Cross River, 4.56 per cent or $193.79 million and Bauchi, 3.18 per cent or $134.90 million.

The foreign debt profile of Bayelsa, Benue and Borno stood at $57.25 million, $34.75 million and $22.29 million respectively in Q2..