In Agenda Setting, Economists Warn Tinubu against Falling into Debt Trap
As the new administration settles down for business, it is given that efforts would be made to deliver on the campaign promises of President Bola Tinubu, who has vowed to make a big difference. Economists, however, warned that the administration will be chasing the shadows if it follows the path of its predecessor, who continued with excessive indulgence in debt to finance its expenditure till the last day in office, writes Festus Akanbi
Two weeks after a new government was ushered in, the reality today is that the euphoria that came with its inauguration has elapsed. By now, a clearer picture of the state of the economy should be available to the new president which may not exactly be in sync with his expectations before the general election where he rolled out many promises to retool the nation’s economy.
Economic analysts therefore, maintained that as he settles down on the exalted seat, President Bola Tinubu’s priorities should include what to make out of the lean resources available to him in the face of mounting demand for better standards of living without plunging the nation into a deeper abyss of debt.
Burden of Debts
Apart from assets which he handed over to the new president on May 29, former President, Muhammadu Buhari also handed over a N46.25 billion ($103.11 billion) domestic and foreign debt stock as well as N22.7 trillion debt which the government owes the Central Bank of Nigeria (CBN) and which was incurred through the Ways and Means Advances. The Debt Management Office (DMO) said the total public debt stock of the country consisted of the domestic and external debts of the federal government and the sub-national governments.
A report by Partner and Chief Economist, KPMG Nigeria, Dr. Yemi Kale, published last week indicated that the Nigerian government will need to consider reforms in its expenditure in the face of the pressure on its revenue and the rising demand for infrastructure spending to move the economy forward.
This, according to him is because, with the recent OPEC cuts which have caused a rise in crude oil prices, the government might even need a lot more than budgeted.
But the question is, will the Tinubu administration resist the temptation to follow the footstep of his predecessor by falling into the death trap, which is considered to be a shortcut?
Avoiding High Debt Ratio
According to Yemi Kale’s report, the only way not to join the list of countries with a high debt ratio is to reform the expenditure framework as failure to do will make nonsense of the desire of the current administration to build the economy in a way to attract the needed foreign investments. This is against the backdrop of the fact that Moody’s has downgraded the country’s fiscal and debt position stating it expects it to keep deteriorating, while Standards and Poor’s affirmed Nigeria’s credit rating, but turned negative on its outlook citing similar issues with debt serving capacity.
Kale said that while Nigeria’s debt to GDP ranges at a healthy 30-35 per cent, its tax and revenue to GDP fall between 6-8 per cent, contributing to the debt service to revenue ratio that has risen as high as 80 per cent at some point. He argued that the government would need to consider reforms in its expenditure framework, adding that with the recent OPEC cuts which have caused a rise in crude oil prices, the government might even need a lot more than budgeted. The report explained that without substantial fiscal reforms aimed at reducing deficit financing and improving revenue generation to increase its revenue/tax to GDP ratio to at least 15 per cent and/or grow the economy from the current three per cent to at least 10-15 per cent, Nigeria will continue to face enormous challenges from debt.
Loss of Foreign Investors’ Confidence
The report also warned that falling into the temptation of a quick fix to Nigeria’s revenue challenges would lead to a loss of investors’ confidence which is usually the experience in a country with a high debt-to-GDP ratio and high revenue-to-debt ratio. Already, Moody’s has downgraded Nigeria’s fiscal and debt position stating it expects it to keep deteriorating, while Standards and Poor’s affirmed Nigeria’s credit rating, but turned negative on its outlook citing similar issues with debt serving capacity.
It stated further that the immediate fall out of foreign investors’ apathy to the Nigerian environment is low foreign exchange reserves accretion because of reduced capital inflows and foreign investment which can make it more strenuous for Nigeria to finance imports, put pressure on its exchange rate and worsen Cost Push Inflation. “Capital importation figures from CBN, for example, already show a persistent decline in capital imported into Nigeria from $23.9 billion in 2019, $9.65 billion in 2020, $6.70 billion in 2021, and $5.32 billion in 2023,” the report stated. It added that the attendant higher inflation may in turn instigate higher interest rates and slower economic and employment growth.
Kale believed the time has come for Nigeria to begin to boost consumer purchasing power, enhance ease of doing business, provide the right infrastructure, increase public investment and enact fund usage transparency.
Ways and Means
Already, there are fears that the practice of printing money to fund federal government expenditure is expected to continue under the new administration following the upward review of the amount the government can borrow from the Central Bank.
The Senate recently amended the Central Bank of Nigeria (CBN) Act 2004, to increase the borrowing threshold for the federal government from five per cent to 15 per cent, under the Ways and Means borrowing plan.
Analysts say the move will encourage more printing of currency by Tinubu’s administration which faces tough challenges, including low revenues, and multiple exchange rates among others.
According to the co-founder of BudgIT, a Nigerian civic startup, Oluseun Onigbinde, ‘Ways and Means’ financing has been converted to a budget funding instrument as opposed to the liquidity support it was intended to be.
“We might continue on this irrecoverable slope where the apex bank is fully degraded to a mere federal government parastatal,” Onigbinde said.
Many economic experts and institutions consider boosting revenue generation as one of the key ways to avoid falling into the debt trap. The International Monetary Fund (IMF) has urged Tinubu to take steps to increase the country’s revenue base.
Resident Representative, IMF Nigeria Office, Ari Aisen, who said this during a virtual forum on the Nigerian debt situation, also advised the government to drastically reduce dependence on borrowing to fund expenditure.
According to Aisen, to resolve the debt issues of Nigeria the country needs to concentrate on its revenue and expenditure. He said that the debt situation had deteriorated because the federal government spent more than it was actually getting in revenues.
Analysts also urged the new administration to address the distortion between fiscal and monetary authorities, saying there is a lot of money being pumped into the economy, and this has its impact.
Experts also stressed the need to beam searchlights on state government and their fiscal behaviour. They pointed out that the federal system allows the centre to provide monies for the states. According to them, the question is, how prudent are these monies expended when they are given to the states?
Options for Tinubu Administration
Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, in his response to THISDAY inquiries on revenue options for the new administration, said there is a need to reform the tax regime to ensure efficiency in tax administration, reduce tax evasion and tax avoidance and eliminate multiple taxation. Other measures listed include the elimination of foreign exchange subsidy to unlock a minimum of N3 trillion in revenue annually from the sale of CBN forex at the official foreign exchange window and the need to unlock more income from revenue-generating agencies through enhanced efficiency of their operations.
Yusuf advised the new government to initiate budget reforms to ensure fiscal discipline, curb budget padding, curb duplication of projects and review the service-wide votes to ensure transparency and to commit to a reduction in the cost of governance.
In his submission, A professor of Economics, Stephen Onyeiwu, stressed that the surest way out of the debt problem is for the new administration to reduce the high cost of governance cost, eliminate wasteful spending and rein in corruption. He warned that perennial borrowing to solve economic problems could plunge the borrower into unsustainable and destructive indebtedness.
“Given low revenue and the many projects needed to promote economic growth, employment generation and poverty reduction, the Tinubu administration will have to continue with the policy of deficit spending, financed mainly by domestic and external borrowing.”
Saying that the question will not be whether to borrow, but how much, the professor maintained that drastically reducing the cost of governance will be difficult if political patronage continues.
