With Rising Debt, Nigeria on the Razor’s Edge

With its ever-rising debt profile, Nigeria is walking on the razor’s edge, writes Obinna Chima

Nigeria’s total public debt which the Debt Management Office (DMO) last week revealed had risen from N35.465 trillion at the end of the second quarter of 2021, to N38.005 trillion ($92.626 billion) at the end of third quarter, remains a source of concern to every right-thinking citizen.

Statistics from the debt office showed that the amount being owed by the country which is largely seen as unsustainable, comprised total external and domestic debts of the federal government, 36 state governments, and the Federal Capital Territory (FCT).

According to the DMO, the increase of N2.540 trillion, when compared to the corresponding figure of N35.465 trillion at the end of Q2 2021, largely accounted for by the $4 billion Eurobonds issued by the federal government in September.

This revelation came as the National Assembly same week approved fresh $5.803 billion and a grant component of N10 million external borrowing for the federal government, which would further elevate the debt level.

With reduced inflows and the government’s weak revenue generating profile, analysts are worried that further indebtedness would not be sustainable and could lead to a debt crisis, especially if there is another plunge in crude oil prices, which is the country’s major source of forex exchange earning.

In addition, the latest Central Bank of Nigeria’s economic report for August 2021, showed that non-oil revenue has not been impressive as the country recorded declines in corporate income tax (CIT) and non-tax revenue of the federal government.

“At N903.63 billion, accrued federation revenue was 17.1 per cent and 11.8 per cent below earnings in July and the budget benchmark, respectively Movements in the Federation Account was dictated, largely, by shortfalls in non-oil revenue.

“At N480.56 billion, non-oil earnings in August was 29.2 per cent below its level in the preceding month, following declines in all its components.

“However, the largest declines were recorded in receipts from CIT and FGN independent revenue sources, both of which dropped by 42.5 per cent and 52.2 per cent, respectively,” the report added.

The World Bank recently sounded the alarm bells to Nigeria, saying further delay in removing the fuel subsidy which had been described as a major drain and waste on the economy could see the federal and state governments unable to pay salaries from 2022.

The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy.

Hernandez urged Nigeria to remove subsidy on petroleum motor spirit (PMS) in February 2022, as prescribed by the Petroleum Industry Act (PIA), warning that further delay could worsen the precarious revenue situation confronting the country.

According to him, the present fiscal condition of the sub-national governments would take a turn for the worse in 2022 with 35 of the 36 states unable to meet their financial obligations.

Hernandez stated that a situation where N250 billion goes into fuel subsidy monthly was unsustainable as the paucity of revenue confronts the country, especially the sub-national governments.

Similarly, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, had lamented the huge burden the continuous retention of the subsidy on petrol had been to the corporation, warning that going forward, “the NNPC may have to start invoicing the federation to be able to maintain subsidy.”

In the same vein, the Governor of Kaduna State, Mallam Nasir El-Rufai wondered why the country would continue to allocate more monies to fuel subsidy compared with the allocations to education, roads and the health sectors.

“Is subsidising petrol more important than our health as even in a year we spent significant amount on health due to the pandemic, the budget for subsidy was still higher? Does it make sense?

“Is subsidising petrol about thrice as educating our children and preparing them for the future more important? The capital budget for roads is five times less than our budget for subsidy. We have to ask ourselves as Nigerians whether this makes sense at all,” he added.

According to El-Rufai, “this is the first time in Nigeria that oil prices are rising globally, yet, there is no windfall. In fact, we are getting less. Why? Because according to Kyari, subsidy is taking N250 billion per month.”

He disclosed that this month, what the NNPC paid to the federation account, as part of its contribution to the amount to be shared by the Federation Account Allocation Committee (FAAC), was only N14 billion as against the N120 billion stipulated in the budget, and, “with the threat that next month they would ask the federation account to give them a cheque to cover subsidy.”

“So, we have to ask ourselves if this subsidy still makes sense. Who is benefiting from it other than the smugglers and neighbouring African countries and some rich people? We have to stop this thing that will bring Nigeria to its knees,” the state governor added.

Debt Sustainability Concern

Clearly, Nigeria is facing a balance of payment challenge which is made more difficult by its high debt level. The country is also feeling the strain of high debt service cost with only a small fraction of its financial receipts always available for the much-needed investment in infrastructure.

The Chairman of President Muhammadu Buhari’s Economic Advisory Council (EAC), Dr. Doyin Salami, recently pointed out that the country’s current public debt stock is unsustainable even though the country’s debt-to-Gross Domestic Product (GDP) ratio at 35 per cent seems comfortable.

Salami had also lamented that with debt service-to-revenue ratio at 97.7 per cent (January to May 2021), the country’s public debt profile was unmaintainable.

According to Salami, the country’s debt stock was estimated to hit about N54 trillion when Ways and Means as well as the Asset Management Corporation of Nigeria (AMCON) liabilities and projected fiscal deficit for 2021 are put into consideration.

Also, the Executive Vice Chairman, H. Pierson Associates Limited, Eileen Shaiyen, had warned that Nigeria’s debt level has become a major course for concern locally and abroad.

She added that the country’s debt situation would best be appreciated against three key indices. These she listed to include the country’s debt-to-GDP ratio, and of more importance in this context, debt service to revenue ratio and debt to revenue ratio.

According to her, while debt-to-GDP ratio had trended up from levels in 2016 at 23.41 per cent, 2017 at 25.34 per cent, 2018 at 27.26 per cent and 2019 and 2020 estimates were put at 29.78 per cent and 31.35 per cent, respectively against an international threshold of 30 per cent. The other two ratios show even greater concern, she stressed.

According to her, the country’s debt service to revenue ratio had also trended upwards from 2011 levels of 21.2 per cent, to 2015 at 51.9 per cent, 2016 at 86.6 per cent, 2017 at 78.6 per cent, 2018 at 67.7 per cent and first quarter (Q1) 2020 at 99 per cent.

These, she pointed out was against the international threshold of 20 per cent to 25 per cent.

“This trend is very worrisome when considering the future of the country’s very youthful population in need of a major boost in economic growth through major fiscal interventions to stimulate education, health, infrastructure, etc., as against putting such expenditure into the service of debt that is perceived to be largely mis-applied,” she emphasised.

Similarly, in terms of debt-to-revenue estimated at 538 per cent in 2020, was against an international threshold of about 250 per cent.

“The implication of this serious situation is the potential of an imminent debt trap in which the country will neither be able to meet its debt service obligations nor will it be able to meet its obligation to its 200 million citizenry through funding of its capital and recurrent expenditure.

“This comes with numerous other socio-economic consequences impacting on some of the key Sustainable Development Goals of poverty, hunger, health, education, as well as issues of social unrest, crime.”

The Socio-Economic Rights and Accountability Project (SERAP) has also advised President Muhammadu Buhari to issue an immediate moratorium on borrowing by the federal government and the 36 states, in order to address a systemic debt crisis, prevent retrogressive economic measures and the disproportionately negative impact of unsustainable debt on the poor Nigerians.

In the open letter dated 18 December 2021 and signed by SERAP’s Deputy Director Kolawole, Oluwadare, the organisation said a moratorium on borrowing would create a temporary debt standstill, and free up fiscal space for investment in Nigerians’ needs, as well as ensure sustainable economic and social recovery from the COVID-19 pandemic.

SERAP said long-term unsustainable debt could be a barrier to the government’s ability to mobilise resources for human rights, and may lead to taxes and user fees that impact negatively on vulnerable and marginalised Nigerians.

The letter, read in part: “SERAP is concerned about the lack of transparency and accountability in the spending of the loans so far obtained, and opacity around the terms and conditions, including repayment details of these loans. While the National Assembly has asked for these details in future loan requests, it ought to have seen and assessed the terms and conditions of these loans before approving them, in line with its oversight responsibility under the Nigerian Constitution of 1999 (as amended).”

Despite yesterday’s explanation by the Director General of the DMO, Patience Oniha, that loans from China to Nigeria, which presently stood at $3.59billion were largely concessional as no national asset was tagged as collateral, the major concern for many Nigerians is that the increasing borrowing has mortgaged the future of this country and if care is not taken, as the DMO continues to advise the government to take more and more debts, the Nigeria may be plunged into insolvency by the huge repayment obligations.

Way Out

In order for Nigeria to come out of its perilous situation, the World Bank in its latest Nigeria Development Update had prescribed policy options for Nigeria, including addressing fiscal pressures.

According to multilateral institution, urgent priorities for the country over the next three to six months should include reducing inflation, improving exchange-rate management, mobilising additional oil and nonoil revenues, eliminating petrol subsidy and redirecting expenditures towards targeted cash transfers and other priority investments, fostering competitive markets, and improving infrastructure.

To Salami, in order to improve revenue, the government must block leakages, unlock opportunities at state level, improve tax efficiency and coverage, and sell-off dead assets, which are estimated at $900 billion.

Salami, pointed out that the federal government’s expenditure had been on the increase, and at a faster pace than its revenue. He added that public debt had continued to expand on the back of growing fiscal deficit.

Salami stated: “This subdued government revenue is as a result of constraints around domestic production/investment; low tax base, as tax revenue to GDP still revolves around seven per cent; limited effort to explore and unlock opportunities for revenue generation at state level; over-centralisation and issues relating to efficiency in revenue collection.”

The economist pointed out that macroeconomic stability, consistency of policy and regulation, sectoral reforms, human capital development, and resolution of the security crisis were key to the economy’s ability to rebound. He also stated that the investment climate in the country currently faced major headwinds, as total foreign investment inflows into Nigeria remained low.

Salami said FDI inflow into Nigeria had revolved around $1 billion in the last five years, adding that FDI inflow in the second quarter of 2021 was $78 million, even lower than Q2 2020.

He said the country’s investment climate was being constrained by macroeconomic instability, policy inconsistency, inadequate infrastructure, insecurity, as well as tough business climate.

Salami said the way forward for the country was for the state Houses of Assembly to help in improving state competitiveness by reallocating spending priorities.

He said more emphasis should be given to human capital development and the provision of social amenities for the populace. Among other things, Salami said they serve as champions of Ease of Doing Business, adding that the legislative bodies can review existing legal impediments to doing business in the states.

The steps, according to him, would include amending tax laws; reforming procurement laws to support indigenous private sector; improving access to construction permits; and making it easier to register properties.

Also, analysts at CGF Advisory had advised governments at all levels to adopt fiscal prudence to avoid a debt trap. The research and investment firm stressed the need for the federal government to determine its financing needs, set its borrowing limit and then comply with Fiscal Responsibility Act

As part of its recommendations to reset the Nigerian economy, the firm stated that a major policy overhaul to reduce revenue vulnerabilities and budget deficits that jeopardise the economy, was needed.

It pointed out that key policy reforms would be imperative to support and sustain macroeconomic stability. These, it listed to include, among others, a foreign exchange management framework that reflects the market fundamentals, the acceleration of the country’s economic diversification agenda, and the oil and gas sector reform, among others.

In addition, it advised the federal government to cut overhead and recurrent expenditure, while increasing capital expenditure to total budget ratio.

“There is an urgent need to reduce debt service to revenue ratio and also urgently raise non-oil revenue through programs such as initiatives to drive more people into the tax net and increase tax to GDP ratio.

“Lending policy needs be revisited given concerns about deteriorating asset quality, tightening monetary policy to counter the rising inflation, each state government must pass a Fiscal Responsibility Act, and the Ministry of Finance, Budget and National Planning and other relevant bodies need to draft a successor medium-term development plan to succeed the Economic Recovery and Growth Plan (ERGP),” it stated.

On her part, Shaiyen noted that having wasted numerous opportunities to proactively and decisively confront the issues responsible for this poor state of financial affairs, there is now an urgent call to leadership at the federal and state levels to embark on fundamental and structural changes to address this debt crisis.

“A first good move is the plugging of all major revenue leakages and therefore reduce the governments’ dependence on debt financing. This makes the current decision to remove subsidies on electricity tariffs commendable if it can be committedly executed.

“The great double advantage here includes the increase in available government revenues from the subsidy removal, as well as the resulting attractiveness of the two sectors to much-needed foreign direct Investment. The long-term impact for the power sector is the increased availability of power and the huge multiplier effect of that on the productive sector and overall GDP,” she added.

Commenting further on revenues, the H. Pierson boss further noted that beyond plugging the leakages, ramping up revenues through initiatives that would attract private capital into optimising the natural resources in each of the 36 states was fundamental, while the government mainly takes a regulatory role.

According to Shaiyen, each of the 36 states has massive natural resources that remain relatively docile, stressing that the government must fast-track initiatives that would unlock the private-sector-driven potentials in this sector, provide enhanced tax revenues to government and drive up overall GDP.

Clearly, if debt service cost continues to claim an increasingly large proportion of government revenue, fewer resources would be available to the government to meet its other obligation and fund infrastructure, a situation which could see the government deploying borrowed funds to meet recurrent expenditure as had been alleged. This could result to adverse economic and social conditions.

The government must therefore adopt arrangements such as public-private partnership and other creative financing strategies so as to reduce its debt burden.