Nigeria: Spiraling Debts As Fiscal Woes for Next Administration

Nume Ekeghe and James Emejo writes on the country’s controversial public debt stock that has been on the increase since 2015 and its lack of impact on key macroeconomic indicators

Nigeria’s rising public debt profile has continued to be the subject of national discourse in recent times.

Not that borrowing is bad in itself, especially when it is used for development and creating opportunities for citizens to improve their livelihoods.

With current outstanding public debt recorded at N41.6 trillion as at March 2022, over 83 million Nigerians remain in poverty while the poverty rate is more than 40.1 per cent, according to the 2019 Poverty and Inequality in Nigeria report by the National Bureau of Statistics (NBS).

It is an aberration that while external borrowing had been on the increase since 2015, the living conditions and key macroeconomic fundamentals in the country have deteriorated.

Yet, borrowing, if properly channeled, is supposed to enhance infrastructure, stimulate job creation, and boost the overall growth of the economy thereby leading to improvement in the standard of living.

The government keeps arguing that the borrowing remains under its self-imposed threshold of 40 per cent to Gross Domestic Product (GDP). Debt to GDP is currently stood at 23.27 per cent.

It is, however, difficult to justify the unfettered accumulation of debts in the face of the dire revenue constraints and lack of evidence on the effective use of such borrowings to boost the economy.

A large chunk of oil revenues ends up in subsidy payments and debt serving.

Stockpiling Debt Stock

Highlighting the level of the country’s indebtedness, the Director General of the Debt Management Office (DMO), Mrs. Patience Oniha, during her appearance at the ongoing engagement on the 2023 – 2025 Medium Term Expenditure Framework (MTEF) and Fiscal Policy Paper held by the House of Representatives Committee on Finance had put Nigeria’s debt profile as at March 2022 at N41.60 trillion.

Oniha, who attributed Nigeria’s high debt profile to a lack of revenues and approval of the annual budget with a deficit by the National Assembly, which increased the debt stock of the country, said: “As at December 2020, the debt stock of the federal, state governments and the Federal Capital Territory was N32.92 trillion. By December 2021, it was N39.556 trillion. As of March of this year, when we published quarterly, it was N41.6 trillion. On average, the federal government owes about 85 per cent of the total.

“We have been running a deficit budget for many years and each time you approve a budget with a deficit, by the time we raise that money because when you approve it, it is giving us a mandate, authority to borrow, it will reflect in the debt stock, so debt stock will increase. Also, note that states are also borrowing. They also have laws governing their borrowings and as debt stock increases so does debt service. Until the issues of personnel, overhead, and capital expenditure are properly addressed in the budget, borrowing would not stop.”

Furthermore, she stated that: “A world Bank report showed that in terms of debt to GDP ratio, Nigeria is low but for debt service to revenue ratio, we are very high. So, if you look at tax to GDP ratio of these other countries, they are in multiples of Nigeria.

“The World Bank survey report of about 197 countries revealed that Nigeria is number 195, meaning we beat only two countries and that was Yemen and Afghanistan and I don’t think we want to be like those places.

“When the MTEF for 2021 to 2023 was being prepared, it is to say, let’s begin to look at revenues because as debt is growing, debt services are increasing. So, the language we used was for debt to be sustainable in the medium term. Sustainable means you can service your debt without difficulty, without it consuming all your revenues because you have very little for other projects.

Hard Fiscal Choices Postponed

But Nigeria has refused to make hard choices to reverse the trend. Recently, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed sounded the alarm bells when she revealed that the country’s debt service cost in the first four months of the year was N1.94 trillion, N310 billion higher than the actual revenue received during the period.

According to her, federal government’s retained revenue for the period was only N1.63 trillion, 49 per cent of the pro rata target of N3.32 trillion. This means that the government had spent 118 per cent of its revenue on servicing its debt.

Despite its debt predicament, the government had gone back on its word on cancelling fuel subsidy this year, with a plan of spending not less than N6 trillion on subsidy alone from a budget that is mainly financed by debt.

As the 2023 budget is being considered, the minister had revealed that the country may be running a budget deficit of more than N122 trillion next year.

This is considering the fact that the government had kicked the fuel subsidy down the road and passing the hard choice of ending it to the next government by choosing a June 2023 end date, a time it would definitely have handed over the baton of leadership.

The Minister whilst presenting the 2023-2025 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), had disclosed that the federal government would borrow over N11 trillion and sell national assets to finance the budget deficit in 2023. She also said the government’s budget deficit is expected to exceed N12.42 trillion if it should keep the petroleum subsidy for the entire 2023 fiscal cycle.

Explaining two scenarios of the budget deficit, the minister said the first option involves retaining the petroleum subsidy for the entire 2023 fiscal year. According to her, in the first scenario, the deficit is projected to be N12.41 trillion in 2023, up from N7.35 trillion budgeted in 2022, representing 196 per cent of total revenue or 5.50 per cent of the estimated GDP. In this option, she added, the government would spend N6.72 trillion on subsidy.

She explained that the second option involves keeping the subsidy till June 2023 and that this scenario will take the deficit to N11.30 trillion, which is 5.01 per cent of the estimated GDP. In this option, the PMS subsidy is projected to gulp N3.3 trillion.

She noted that the first option is not likely to be achievable based on the current trend while the second option would require tighter enforcement of the performance management framework for government-owned enterprises that would significantly increase operating surplus in 2023.

Lower oil yields

Meanwhile, while the government is pilling up debts, it is struggling to generate revenues. Recently, the Central Bank of Nigeria (CBN) disclosed that the country generated a total of N799.10 billion in crude oil sales in the first quarter of the year (Q1 2022), far less than the N2.38 billion oil revenue projection for the period, and represented a 28.3 per cent decline from the N1.12 trillion realised in Q4 2021.

Given that oil revenues represent about 80 per cent of the government’s income, the development is particularly worrisome.

According to CBN Economic Report, First Quarter 2022, amidst the current fiscal constraints, the report also noted that debt service obligations in Q1 gulped N897.17 billion compared to N428.60 billion in Q4, due largely to the principal repayments and redemption of matured debt obligations.

The report added, “Though public borrowing was in tandem with the Medium-Term Debt Strategy (2020-2023) of the FGN, debt levels remained elevated in the review period. At N41,604.06 billion at end-March 2022, the total public debt outstanding rose by 5.2 per cent relative to the level at end-December 2021.”

Nonetheless, while infrastructure remains a far cry, unemployment remains at 33.3 per cent amidst rising inflation which had been on an upward trajectory even before the start of the Russia-Ukraine war in February, which had further impacted food and commodity prices across the world.

Even though developed economies including the US, UK, and China among others also have high public debt stock, the fact that resources are being effectively utilised in a transparent manner to build social infrastructure that adds value to the economy – makes their cases different from that of Nigeria.

Borrowing for the wrong reasons

Experts have always canvassed that while borrowing makes economic sense, it must be for productive purposes such as funding capital projects, which would then translate to growth and development.

In fact, the government has attributed the country’s exit from the recent recession to borrowing in order to boost spending.

But in recent times, especially amidst the fiscal crisis occasioned by a huge revenue shortfall for the government as a result of the volatilities in global oil prices and other commodity supply gaps; the Nigerian government had resorted to borrowing to offset recurrent expenditures and other non-productive ventures.

The country’s public debt rose to N41.60 trillion in Q1 2022 from N39.56 trillion in December 2021, exerting enormous pressure on debt servicing.

Although the government has continued to deny allegations that it had been borrowing to offset the salaries of workers amidst the severe revenue constraints, there are reasons to believe that this had been the practice especially to avoid public backlash and avoid humiliation from the opposition parties over its borrowing and economic management.

Earlier in June, the revelation came from the then acting Accountant General of the Federation (AGF), Mr. Chukwuyere Anamekwe, who had admitted that the treasury has had to resort to other sources of revenue including borrowing in order to augment the payment of the federal government public servants.

Anamekwe, at the opening of a 3-day retreat for members of the Technical Sub-Committee on Cash Management, themed, “Enthroning Fiscal Discipline in Nigeria’s Public Financial Management: A Clarion Call to Stakeholders”, pointed out among other things that there had been an increase in government expenditure due to increasing security challenges and social needs of the citizenry – lamenting that government’s revenues were currently under serious attack and called for the articulated deployment of fiscal discipline and strategies to mitigate identified challenges.

His public admission that the present administration may have resorted to borrowing to pay salaries reportedly led to his subsequent removal from the position as acting AGF.

Concerns on borrowing spree

Perhaps only members of the ruling class do not appear to find a problem with the country’s rising debt profile, apart from the monetary authorities, which recognises the negative impact of the increase exposure to external debt to fiscal sustainability.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has on a regular basis raised concerns about the country’s rising debt profile.

Also, in August, the apex bank further expressed worry that budget deficit and public debt could actually exert direct and negative consequences on fiscal sustainability, as these remained essential factors in assessing macroeconomic policies’ credibility.

CBN Director, Monetary Policy Department, Dr. Mahmud Hassan, who made the remarks at the opening of the Regional Course on Medium-Term Budgetary Frameworks (MTBFS), organised by the West African Institute for Financial and Economic Management (WAIFEM), also noted that the ongoing turmoil in the global economy had impacted every policy area, including fiscal policy over the past two years, pointing out that, “member countries have experienced a significant worsening in their fiscal balance and dramatic growth in their public debt, which have put them at risk of debt distress and, in some cases, even debt distress.”

Hassan, a member of the Technical Committee of the Board of Governors of the West African Institute for Financial and Economic Management (WAIFEM), added that for most member nations of WAIFEM, the prospect of growth that would contribute to a substantial reduction in the debt-to-GDP ratio and regaining fiscal equilibrium is not immediately on the horizon.

Also, the Director-General, WAIFEM, Dr. Baba Yusuf Musa, said economic shocks arising from the COVID-19 pandemic, on-going regional conflicts, and the resurgence of domestic health and security issues had complicated fiscal management by disrupting fiscal prioritisation, widening budget deficits, and sharply increasing the public debt of members, adding that, “These difficulties do not appear to be going away anytime soon.”

He said, while there was enormous pressure to increase discretionary and non-discretionary expenditures continuously, revenue growth was not keeping pace with even the anticipated moderate growth rates.

One of the key justifications by the government for its elevated borrowing was the fact that borrowing was still within the self-imposed threshold – which is now about 40 per cent to GDP.

Debt management VS debt sustainability

Writing in his presentation titled, “Public Debt and Accountability: Imperatives for Managing Nigeria’s Rising Debt Burden”, renowned economist/Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke, pointed out that the country’s “current debt management objective which places reliance on Debt-to-GDP ratio is at variance with debt sustainability”.

Uwaleke, a former Imo State Commissioner for Finance, also noted that though the country’s ratio of debt to GDP may be relatively low, “the pre-2005 experience serves as a sober reminder of what can go wrong. As earlier noted, Nigeria’s public debt stock has risen by as much as 238 per cent in just a few years with the external component increasing by over 850 per cent within the same short period”.

Continuing he said, “Can a significant proportion of these loans be traced to executed or ongoing capital projects? In sum, government borrowing is not bad. The key challenge is to ensure that they are put to good use and in ways that enable the needed traction to the country’s economy. This underscores the importance of enhancing accountability and transparency in government borrowing.”

Also speaking to THISDAY on the controversial public debt accumulation, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said while debt is not bad per se, “The majority of the spending is used in recurrent expenditure which includes debt servicing, salaries and overheads.”

He said, “With the government looking to borrow an unprecedented N11 trillion next year with very little allocation to capital expenditure, this is rather worrisome. Capital expenditure spending is positively correlated with GDP growth and any nation that truly wants to develop should be spending a larger chunk of their budget on capital projects. Sadly, in Nigeria, this is the opposite.”

Unjustifiable debts, servicing burden

Also, speaking with THISDAY on the issue, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the government’s continuous borrowing couldn’t be justified especially when debt servicing is gulping almost 100 per cent of its revenues.

He said, “The federal government needs to block the loss of revenue occasioned by crude oil theft and serious corruption in the system”, adding that “growth and development will definitely be hampered and we should not be expecting any meaningful infrastructural developments in 2023”.

Gbolade said, “The wellbeing of Nigerians will not also record any improvement given that food inflation is on the rise, cost of production is increasing, the exchange rate is on an upward trajectory and the unemployment rate is increasing significantly with no end in sight. Nigerians should prepare for serious challenges ahead.”

On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the solution to Nigeria’s debt crisis lies “within our control but we have been adamant”.

He said the country needed to heavily streamline expenditure and spend money only on necessities.

According to him, “We really can reduce our deficit spending by remaining within our revenue threshold and capabilities. We need to increase our revenues by making all revenue-generating MDAs more accountable. Even the DMO office has advocated for a major reduction in our expenditure profile as a country.

“The country will continue to have an uncontrollable debt profile, with all our revenues consumed by debt servicing, if we do not cut down on expenditures.”

Imminent debt overhang

Associate Professor of Agricultural Economics at the University of Port Harcourt, Anthony Onoja, warned of a looming debt overhang. He said with the penchant of the government for running an economy with debts and doing little to promote a production-based revenue generation, “debt overhang is not just looming but very inevitable”.

He said, “This has grave repercussions for the economic growth and development of the country. With the current debt profile of Nigeria, it has assumed an unenviable position as the highest debtor nation in Africa.

“As it is now increasing the country’s debt further by relying on borrowing to run the nation’s economy is pure wickedness, retrogressive and economic theft against the younger generation and the masses.”

Onoja added, “If the borrowed money over the years were utilised for promoting productive ventures and infrastructure growth, we would not have been import-dependent. Further borrowing will result in massive unemployment, hyperinflation, and scarcity of foreign exchange with increased devaluation that comes with a high debt profile of a nation, as our foreign reserves will deplete.

“With a debt to GDP ratio of 23.27 per cent, Nigeria is unarguably on the wrong side of history and economic management. Nigeria needs not wait until it crosses the threshold of the debt-to-GDP ratio before stopping deficit financing.

“This is because a low debt to GDP ratio is always better because it means a country is producing and selling goods and has sufficient ability to pay back its debt by taking any further debt. As the debt to gross domestic product ratio for a country rises the risk of the country becoming a default also rises.

“Nigeria needs to stop borrowing and promote domestic production of goods and services while making greater efforts to reduce cost of governance and increase institutional productivity growth.”

Nonetheless, Shelleng had noted that Nigeria’s debt to GDP ratio of less than 40 per cent remained commendable given that countries such as Cyprus, France, Belgium, Spain, Portugal, Greece, Italy, and Canada, to name a few are all above 100 per cent.

He said Debt-to-GDP has become the measure by which international investors judge a government’s ability to meet up with its obligations, adding that international lenders continuously monitor government spending deficits, “because if they exceed economic growth, the debt mountain will increase”.

“What is more pertinent is the use of the debt, which determines whether it is positive or negative. Investors are more concerned about seeing a clear strategy and seeing spending that will lead to future growth. Sadly, the Nigerian situation is not the case,” he said.


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