Debt Overhang and Related Fiscal Issues

Postscript by Waziri Adio

Last week, the National Assembly finally approved President Muhammadu Buhari’s request to convert to more favourable terms the N22.7 trillion owed by the Federal Government to the Central Bank of Nigeria (CBN). The legislators approved for the overdrafts, which accumulated overtime and spiralled in recent years, to be converted to securities of 40-year tenor at 9% interest rate and with a three-year moratorium on the principal. This approval will expand the fiscal headroom for the outgoing and the incoming governments. But it also thrusts to the fore critical issues about the state and the management of Nigeria’s finances. These are issues in need of serious interrogation and attention.

First, the good part. The approval means that the Federal Government will now pay lower interests on Ways and Means, the technical name for the overdrafts that it has binged on lately to finance budget shortfalls, especially for payment of salaries. The interest rate will plunge from the 21.5% currently charged by CBN to 9%. This is as good as it gets because the FG borrows from the domestic market at between 11% and 14%. The high interest rate and the repayment on overdrafts are parts of the reasons that debt servicing has hit the roof lately. According to the World Bank, debt service alone gulped 96.3% of FG’s revenue in 2022. 

Thus, this is likely to reduce the portion of revenue swallowed by debt and, by extension, lessen the need to take on new debts, and free up additional resources. The Debt Management Office (DMO) stated late last week that the securitisation of the loan will lead to some savings and reduce budget deficit. On a related note, this also means that Nigeria’s public debt, especially the domestic component, will now be fully accounted for. The DMO used a nice spin: improved debt transparency. The fact of the matter is that without legislative approval, the DMO could not include the Ways and Means (basically a private arrangement between the FG and its banker, CBN) as part of the public debt stock. With legislative approval, it will now be fully accounted for.

From DMO’s data, the total domestic debt incurred by the FG, states and the FCT as at 31^st December 2022 was N27.55 trillion. The incorporation of Ways and Means will push domestic debt to N50.2 trillion and the total public debt (domestic and foreign) to N68.9 trillion. This means that Ways and Means alone, when included, will constitute 45.2% of domestic debt and 32.95% of the total debt. (It should be noted that this calculation is yet to take account of the loan for the 2022 supplementary budget and for the first four months of 2023.) Another way of putting it is that both domestic and total public debt had been previously understated by that magnitude. This was pointed out in a policy paper published by Agora Policy in October 2022 and before the president sent the request to the parliament in December 2022.

Publicly accounting for FG’s indebtedness to CBN gives a full and proper picture of Nigeria’s debt.  This “improved transparency” will also change Nigeria’s debt-to-GDP ratio, which, by extension, has also been grossly understated. Nigeria’s public debt was 23% of GDP as at end of 2022. With the inclusion of Ways and Means, it will shoot to about 35%. This is still within manageable threshold of 60% for developing economies and is covered by the revised Medium Term Debt Strategy (MTDS). In 2021, the national debt limit was raised from 25% of GDP to 40%, possibly to accommodate the eventual incorporate of the CBN overdrafts. While debt-to-GDP is a useful metric, it is however more useful to always remember that debts and interests are paid from government revenue, not from GDP.

The Ways and Means matter has thrown up some issues about the management of Nigeria’s finances and economy in recent years and there is the need to draw appropriate lessons and make necessary adjustments. I will highlight a few. The first is that Ways and Means ballooned from N265.7 billion in 2014 to N22.7 trillion in 2022, an increase of 8,443%. Relatedly, debt as a ratio of GDP bumped from 12.6% in 2014 to 23.3% in 2022 (which in reality should have been 35%). It is also interesting to note that total public debt was N12.6 trillion in 2015 and it leapt to N46.25 trillion (without Ways and Means) or N68.95 trillion (with Ways and Means) by 31^st December 2022, an increase of 267% and 447% respectively.

Clearly, there has been a growing and uncontrollable appetite for debt as a way of financing the budget. This should be a serious cause for concern. FG’s overdrafts from CBN are also a major contributor to inflation, which negatively impacts households and businesses.

The second issue is that though the Ways and Means are now being regularised and were probably used to forestall other crises (such as being unable to pay salaries), they were done in violation of the CBN Act. The law allows the central bank to give advances to government to meet budget shortfalls. But the law also sets limits, and clearly for good reasons. Section 38 (2) of the CBN Act 2007 states that the advances cannot be more than 5% of FG’s actual revenue for the previous year. Section 38 (3) stipulates that the advances shall be fully repaid by the end of the financial year, failing which new advances cannot be granted.

Clearly, this was observed in the breach, otherwise we would not have arrived at a N22.7 trillion unpaid debt. The CBN failed to exercise fidelity to its own enabling law, despite its vaunted independence. Also, both the executive and the legislative arms were complicit in disobeying an extant law or in failing to seek or insist on an amendment to allow for possible exigencies. Governments cannot be choosing and picking what laws they want to obey. While passing the request, the Senate asked that the National Assembly be carried along in seeking subsequent advances and that the executive should seek amendment of the 5% threshold in the future. But this is self-indictment. If the legislators had taken their oversight and appropriation responsibilities more seriously, they would have seen what was in plain sight all along, and should have insisted that the proper thing be done.

The flexibility offered by the approval by the National Assembly to restructure the Ways and Means sure offers some relief. But it may distract us from the fact that our public finance is in dire straits. It could induce the temptation to borrow more or the eagerness to continue to press the CBN to keep the tap running. We cannot borrow our way out of this fiscal bind. Revenue from oil sales has virtually vanished, sadly at a time of high oil prices and when other oil-producing countries are making the bank. Diminished production and oil theft are hugely implicated here. But the major culprit is Nigeria’s beloved petrol subsidy, which is likely to burn N6.72 trillion if retained for the whole of 2023. When our 8% tax-to-GDP ratio, about the lowest in the world, is layered on this, then the case for urgent adjustments has made itself.

We are clearly living beyond our means, as most of these overdrafts were for personnel and overhead items, and not for capital. There are many areas of leakages and wastes. Revenue-generating agencies are mini-governments in themselves. We are not spending smartly enough, as we burn scarce resources on subsidies that are mostly captured by the rich. And we are not generating enough revenue for our size and needs, or to conveniently absorb the mounting debts. Our work is clearly cut out. We can choose to do it, or we can continue to choose work avoidance.