Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry is worried that Nigeria is gradually walking back to the debt trap. He speaks to Dike Onwuamaeze, Associate Editor on the implications of Nigeria’s rising debt profile and why the cost of borrowing in the country should be reduced. Excerpts:
What is the implication of Nigeria’s rising debt profile which currently is more than N16 trillion?
The implications are very ominous because what this means is that a huge proportion of the nation’s resources will be used in servicing debt, which is a major cause for concern. Even if you look at the structure of Nigeria’s annual budget, you will be shocked to see the proportion of the budget that is used for debt servicing. In the current budget, which is a little above N4 trillion, over N900 billion is earmarked for debt payment. It means that almost 25 percent of the budget is being set aside to service debt. You know what N900 billion can do for the growth of the nation. It would have been a different thing if the debt has been incurred for particular projects such as power, rail lines, road networks etc, which will ultimately help to cushion the effects of its repayment. The productivity gains that will arise from such projects at the macro level will put the country’s economy in a position that will enable it to take care of the debts. But the truth is that there is nothing to show for the debts that have mortgaged the entire economy. So, it is a cause for concern. But unfortunately, those in authority don’t seem to appreciate the enormity of the problem. We keep looking at the academic issues of debt to Gross Domestic Product (GDP) ratio. There is an even the argument that we are under borrowed. But the difference between Nigeria’s economy and advanced economies that rely on that ratio is that the components of their GDP have elements that can support the repayment of their debts. This is not so for Nigeria. How much can agriculture, which accounts for about 25 percent of our GDP, contributes to debt servicing? Is it the peasant farmers that will be taxed or the few commercial farmers that do not have any reasonable margin? In real terms we are even subsidizing these commercial farmers. Also, the distributive sector that accounts for about 15 percent of Nigeria’s GDP is dominated by the informal sector that is hard to tax. How much revenue can the government get from there? The bulk of government’s revenue is still coming from import duties, company tax and oil royalties. So, when we start relating the GDP to debt, we should realize that a large component of the GDP cannot support the servicing of the debt. That is why it is always good to relate your debt to revenue. The expected revenue in the proposed 2015 budget is about N3.5 trillion. When you relate this to the amount earmarked for debt servicing, which is N900 billion, then we are talking of about 30 percent of Nigeria’s revenue being used to service debt. This is a more realistic picture of the GPD/debt ratio argument. Then we have to look at the opportunity cost of the amount used to servicing debt.
This debt servicing is a first line charge. Unlike the capital budget, it cannot be differed. It must be provisioned for. So, it is a big issue. The domestic component that consists of treasury bills and federal government bonds is the biggest part of the debt. Apart from the quantity of debt, the cost of its borrowing is also worrisome. Must we borrow at the rate we are borrowing at 12 percent, 13 percent and sometime 16 percent for debt instruments that have almost no risk? I do not know whose interest is being served by pegging the borrowing rate at such high level. Government’s borrowing should not be above single digit.
In 2006 when the Paris Club wrote off the multi-billion dollar debt owed it by the Federal Government, Nigerians felt relieved but it seems we are walking back into the debt trap. What is your take on this?
It is very unfortunate that we have to find ourselves in this situation. For me, it is basically a governance issue. We have not managed the macro economy well to shield us from going back to the debt trap because this is another trap as far as I’m concerned. The only difference is that unlike 2006, the bigger chunk of the debt now is domestic. The totality of all the allocations for infrastructure in the proposed 2015 budget is about N633 billion and in the same budget over N900 billion is being spent to service debt. What logic does this make? Does it make sense in a budget that is almost 85 percent recurrent? It means that all the money borrowed is to service consumption. Look at the crisis we had with the fuel shortage, it was the Debt Management Office that was issuing debit notes to fuel marketers so that banks will give them letters of credit. So, we have made the debt instrument a ready source of funding government’s operation.
You said the country have failed in its macroeconomic management, what alternative can you suggest?
The alternative is to ensure that we reduce the cost at which the country borrows. The high cost of current borrowings is unpardonable. We need to re-examine the revenue structure. The bulk of revenue that should be accruing to the government is leaking away due to corruption and lack of discipline. If the country can firm up its revenue base it will not have any reason to go borrowing. Imagine 400 million barrel per day lost to oil theft. We have several Ministries, Departments and Agencies (MDAs) that are supposed to be remitting funds to the Federation Accounts, but they are spending money recklessly. Some of these agencies are even richer than the ministries that supervise them. What they remit is just like peanuts. These are leakages. And we still have the issue of corruption. Look at the claims by the finance minister that billions of Naira have been saved from salaries paid to ghost workers. Yet no one has been prosecuted for that. Look at how much we are spending on subsidy.