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Dr Bright Okogu, D-G, Budget Office of the Federation
Dr Bright Okogu, D-G, Budget Office of the Federation
Dr Abraham Nwankwo, D-G, Debt Management Office
Dr Abraham Nwankwo, D-G, Debt Management Office

Barely nine years after the Paris Club wrote off the multi-billion dollar debt owed it by the Federal Government, Nigeria’s debt profile is increasing astronomically once again and this has become a major source of concern, especially with the crash in the international price of crude oil, the country’s cash cow

There is growing discontent over the burgeoning public debt profile of Nigeria. Stakeholders, worried over the long-term health of the nation’s public finances, have been trading accusations and barbs over the desirability and, indeed, the sustainability of the huge loans. More worrisome to observers is the socio-economic benefits of the loans as there are no adequate projects on ground to justify the existing loans even as more borrowing is in the pipeline.

What the figures say

Statistics from the Debt Management Office (DMO) put total national debt at about $67.7 billion (N11.243 trillion), which is about 13 percent of GDP as at end-December 2014, but significantly below the internationally agreed distress threshold of 40 percent of GDP. However, an independent source has estimated the totality of the country’s foreign and local debt obligation at N16.625 trillion, which is $83.544 billion as at January 2015. The source claimed that Nigeria has committed itself to debt repayment up to July 18, 2034. And based on the recent recommendation of the DMO, the country is expected to add $12.4 billion (about N2.5 trillion) to its sovereign debt stock in 2015.

The total external debt stock stands at $9.7 billion or N1.63 trillion, which is about 14 percent of the total debt stock. However, this figure is about the combined amount (N1.75 trillion) budgeted for capital expenditure in the 2014 budget and that proposed under the yet-to-be passed 2015 budget by the Federal Government. The domestic debt stock of the Federal Government, which stands at $47 billion or N7.9 trillion, almost doubled the (N8.716 trillion) Federal Government’s proposed budget of 2015 and a little shy of the total proposed budget (N10.6 trillion) of the states and federal government in 2015.

The data also shows the indebtedness of states. Lagos State leads the chart with about $1.169 billion in external debt followed by Kaduna State with $234.41million. Cross River owes $131.46million; Edo $123.128 million; and Ogun State $109.15 million. Lagos State debt accounts for about 35.8 percent of the sub-national debt stock of $3.265 billion. These figures have been enlivened by the fall in crude oil price and the debate fuelled by the elections.

Surprisingly, the Federal Government feels no qualms about the rising debt and paints a tranquil picture of the country’s public finance, but observers see trouble ahead given the sharp fall in crude oil price.

Dr Ngozi Okonjo-Iweala, the Coordinating Minister for the Economy and Minister of Finance traces the recent increase to the staggering rise in wage bill following the minimum wage legislation.  The total wage bill, she argues, rose from N857 billion in 2009 to about N1.4 trillion in 2010, and as a result, domestic borrowing increased from N200 billion in 2007 to about N1.1 trillion in 2010 to meet the wage payment. “It is noteworthy that since 2011, the administration of President Goodluck Jonathan has been prudent with the issue of debt and borrowing,” she says.

The Finance Minister is quick to add that government’s approach has helped to drive down domestic borrowing from N1.1 trillion in 2010 to N642 billion in 2014. The government, in her view, does not plan to go on a borrowing spree following the recent experience of the huge debt overhang which had to be negotiated with the Paris Club of creditors.

Despite her assurances, the Federal Government is planning to secure a $2 billion loan from the World Bank and the African Development Bank (AfDB) to assist in the implementation of its policies and programmes for the year. Dr Okonjo-Iweala, said the loan was part of the approved 2012-2015 external borrowing plan of the Federal Government and was in line with its efforts to strengthen the Naira. “We have entered negotiations with international financial institutions, specifically, the African Development Bank and World Bank. You know they have some resources for us already programmed, which is in the borrowing plan. We have asked them to turn these resources into budget support for us. We are negotiating for $2 billion that will come in foreign exchange,” she said.

Okonjo Iweala explained that it is a concessionary loan that would not be a burden on the economy. Rather, it would help the private sector to have access to foreign exchange.

The resort to borrowing by the Federal Government appears to have been propelled by the DMO’s Debt Sustainability Analysis (DSA), which claimed that Nigeria is at a very low risk of debt distress. It claimed that the country is currently under borrowing. Nevertheless, the debt office warned that any shock in revenue would lead to debt distress in the medium-term with a high probability of being sustained in the long-term if other sources of revenue are not developed to bridge the revenue gap.

Reactions of economic experts

But not many economic experts are satisfied with the claim that Nigeria is at a low risk of debt distress. Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry (LCCI) told TheEconomy that the implications of Nigeria’s rising debt are ominous. “It means that a huge proportion of the nation’s resources will be used in servicing debt. If you look at the structure of Nigeria’s annual budget, you will be shocked by the proportion of the budget that is used for debts servicing,” Yusuf said.

Indeed, the debt obligations will have negative impact on the country’s economy. Nigeria will spend more on debt repayment than it will on infrastructure and capital budget in 2015. The amount set aside for debt service grew from N712 billion in 2014 to N943 billion in 2015 while budgetary appropriation for infrastructure and capital projects in 2015 proposed budget were N93.66 billion and N633 billion respectively.

Another source of concern regarding the country’s rising debt is the fact that Nigeria is borrowing to support consumption rather than productivity by investing the proceeds from the loans on infrastructure. “It would have been a different thing if the debt has been incurred for particular projects like power, rail lines, road networks etc. The productivity gains that will arise from such projects at the macro level will put the country’s economy in a better position 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,” Yusuf said.

Experts are worried that the government is underestimating the debt implication by the misleading claim that Nigeria’s debt to GDP ratio is quite sound. This may not be true. Greater part of the GDP does not make significant contribution to government’s revenue. “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 N943 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 GDP/debt ratio argument,” Yusuf said.

Indeed, analysts have continued to wonder over the rising debt considering the windfall from high crude oil price in the last five years before its recent crash. For Professor Chukwuma Soludo, former CBN governor, “the rate of public debt accumulation at a time of unprecedented oil boom had no parallel in the world…the budgets of the last five years can be described as ‘consumption budgets’, with new borrowing by the Federal Government exceeding actual expenditure on critical infrastructure”.

Mr Elbert Ogbeide, an economist, says the explanation by the Finance Minister that the Federal Government borrowed to meet wage payment is tenuous. “The government had no business incurring loans to pay wage bills given the high crude oil price,” he said.

With the fall in crude oil price spelling doom for the country, alas, the government has resorted to austerity measures even as observers ridicule the policy as not going far enough. The huge recurrent expenditure, which has averaged 70 percent in the last few years, has not helped the government position. It is the view of many analysts that the government reviews the recurrent expenditure in line with the Presidential Advisory Committee (PAC) set up by President Goodluck Jonathan early in his administration. Though the President had earlier deflected the decision of the PAC to streamline ministries, department and agencies of government on the grounds that the constitution provides for a minister to represent every state, following the precipitous fall in oil price, observers are saying such assertions could not hold any longer.

Partisan debate over rising debt

Expectedly, while the debate over the sustainability of the country’s rising debt took on a partisan tone, few analysts took time to probe the data even as the government repeatedly assured on the sustainability of the loans. Opposition politicians in various states have cashed in on the states’ indebtedness to score cheap political points. For example, nervous glances have been cast in the direction of the external debts of Lagos and Edo state governments with Governors Babatunde Fashola and Adams Oshiomhole respectively coming under constant barracking for “mortgaging the future” of the states with no projects to show for the loans. However, officials of some of the state governments have lashed out at ‘desperate’ politicians for misrepresenting the financial status of their states. An information officer with the Edo State government laughed off suggestions that the Oshiomhole administration has frittered away borrowed money on frivolities. According to the official who pleaded for anonymity, “there are several projects going on in the state. Just walk around and you will see for yourself. The Benin Storm Water Project alone will gulp N150 billion when completed, which is higher than what they claim the state owes which is about N221 billion at current official exchange rate”.

The storm water project is seen as the cure-all solution for the perennial flooding of Benin City. He lists other projects as the reconstructed airport road, expansion of the Ugbowo-Lagos road, reconstruction of Ring Road and several urban roads in the state and the provision of street lightings among others.

The Lagos State government has also debunked insinuations by opposition politicians that it has borrowed money to enrich political godfathers and buy patronage through award of contracts to cronies. Indeed, the Lagos government is regarded as one of the few administrations which have made infrastructural renewal its cornerstone. Several projects embarked upon by the government have been applauded by experts as world-class such as the reconstruction and expansion of the Lagos-Badagry expressway, a World Bank-assisted project.  It is projected to gulp about N220 billion; that was before the recent depreciation of the naira. The Lekki Free Trade Zone, a joint-venture project between the Lagos State government and China, will host a financial centre, a deep sea port and an airport which is estimated to cost billions of dollars. Several other projects across the state which have justified the investment, according to officials, include rebuilding and refurbishing of schools, improving healthcare delivery and kitting the police for adequate security.

Ogun State, which has one of the highest external debts, has embarked on large-scale infrastructural renewal. This mostly involves construction of roads into the hinterland as well as reconstruction of urban roads. Rural and infrastructural revitalization has been the signature achievement of Governor Ibikunle Amosun of Ogun State.

However, the case of Cross River State, which has a huge outstanding external debt, is quite the contrary as investigation has shown that there are no notable projects to justify the huge debt. The state government owes salaries even as the Accountant General of the state, Mr Henry Ojugo confirmed before the state House of Assembly during the 2015 budget defence that the state is going through financial difficulties. With no notable developmental projects ongoing, many wonder the justification for the huge loans. Interestingly, some states claim to have inherited debt owed since the military era. This is the position of Kaduna State. According to the state Governor, Mukhtar Yero, his administration inherited debts incurred as far back as 1965 as the state did not enjoy the debt relief negotiated with the Paris and London Club because it never borrowed from the creditors.

Diversifying the revenue base

For all the fuss about states’ indebtedness, some progressive states have actually reformed their public finances to embrace transparency and innovation as dictated by investors. Take for example, Lagos and Edo states with meagre allocation from the Federation Account, which have looked beyond allocation from the centre to finance development. These state governments have devised models of mobilising revenue internally even as they publish their financial status. Lagos State, which leads in revenue generation diversification, has generated hundreds of billions of naira since the reintroduction of democratic governance in 1999. In 1999, the state generated N15 billion in taxes while it jumped to N384.2 billion in 2013, 90 percent of which were paid by the organized private sector and civil servants. “Now that the allocation from the Federation Account is dwindling due to the fall in oil price, we must look elsewhere to meet up with our budget,” says Mr Babatunde Fowler, Chairman of Lagos Inland Revenue Service (LIRS). The success of the Lagos State government has inspired other states wishing to diversify their revenue base.

Hitherto neglected taxes have become the cornerstone of increasing revenues. Taxes such as signage fees, branding fees, property tax and toll fees among others, have witnessed resurgence. In some states, for example, haulage fees/road tax, vehicle registration fees and property taxes among others, have swelled the coffers. This ensured that Lagos emerge tops in Internally Generated Revenue ranking of states. Lagos accounts for 43 percent of the N508.2 billion states generated internally in 2012, according to the National Bureau of Statistics. In 2013, Lagos grossed N384.2 billion, Rivers earned N87.9 billion, and Delta State generated N50.2 billion while Edo State came fourth with N18.8billon. In Edo State, property tax accounts for a substantial part of the internally generated revenue.

However, the precipitous decline in crude oil revenue is still a major source of worry to investors who are apprehensive about the ability of the states to meet their bond requirements. Several states in the course of sourcing funds for projects approached the capital market where they raised money through bond issuance. At the time, crude oil price was sailing high as there was no cause for worry. With states grappling to meet their financial obligations, including payment of salaries as at when due, investors fear the worst. Even the Securities and Exchange Commission (SEC) has expressed concern over the financial health of the states following plummeting crude oil price.

“It is an issue we need to look at closely especially with the view of protecting investors which is ultimately our major responsibility,” says Mr Mounir Gwarzo, Acting Director General of SEC. The situation could affect the ability of the states to meet the repayment terms under the Irrevocable Standing Payment Order (ISPO) required for state bond approvals. The ISPO gives investors comfort, as funds are deducted from source from the Federation Account Allocation and transferred to a sinking fund, from where investors are paid their coupons.

Experts reckon that as long as crude oil price stay low, the status of public finance will continue to generate heated debate. Nigeria’s debt has grown astronomically between 2006, when the country was granted debt relief by the Paris Club, and January 2015. In 2006, 2007 and 2008, Nigeria’s debt stocks were $17.34 billion, $22.23 billion and $21.39 billion respectively. The debt profile grew to $25.81 billion and $40.1 billion in 2009 and 2010 respectively. It increased to $44 billion in March 2012 from where it galloped to $67.276 billion at the end of 2014.

By Dike Onwuamaeze and Osaze Omoragbon




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