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‘FG must urgently restructure existing debts, curb profligacy’

By Geoff Iyatse
22 August 2022   |   2:37 am
David Adonri, an economist and Vice Chairman of Highcap Securities Limited, is a strong advocate of fiscal discipline and a lean government.

David Adonri

David Adonri, an economist and Vice Chairman of Highcap Securities Limited, is a strong advocate of fiscal discipline and a lean government.

In this interview with GEOFF IYATSE, he outlines policy options the Federal Government must urgently take to bail out the ailing economy, stressing the need for fiscal consolidation and debt restructuring.

The government spent N1.94 trillion on debt servicing in the first quarter of the year against dwindling earnings estimated at N1.63 trillion in the same period. Are we on a fiscal cliff already?

This is a dangerous symptom of financial distress. Nigeria’s debt situation is the worst in the world. The country is fast falling off the fiscal cliff. The Nigerian government has fallen into a debt trap. This means that new debt is required to service existing debt.

IMF and financial experts have raised the alarm over the possibility of sovereign default by the Federal Government if existing debts are not rescheduled or restructured. This alarm has caused panic in that investors are extremely wary of investing in new issues of sovereign debt. An example is the almost 50 per cent under subscription of FGN bonds in July 2022 when out of the N225 billion issued, only N124 billion was subscribed.

Nigeria’s financial distress is not just an issue of unsustainable debt burden; dwindling capital inflow, capital flight and forex illiquidity complicate it. Foreign investors and airlines have found it difficult to remit income back home in hard currencies, while many domestic airlines are grounded due to inability to obtain forex for fleet maintenance. Manufacturers are also groaning over their inability to import raw materials due to forex scarcity.

In the same period, CAPEX was N773.6 billion or 16.4 per cent of the total expenditure, which reflects the historical trend. What is the consequence of paltry infrastructure funding for deepening the economic complexity?
The precarious financial situation that government finds itself can only support survival spending just to keep the system afloat. Only recurrent expenditure can suffice for now because of dwindling revenue and constricting avenues for foreign and domestic credits, except, perhaps, the CBN is further raided to secure dangerous ways and means (W&M) advances. The low level of capital expenditure recorded so far in the year is disastrous for an economy tormented by a huge infrastructure gap. A wider implication of low capital expenditure is that it puts the implementation of Nigeria’s National Development Plan (NDP 2021-2025) in jeopardy.

The financial distress the FG is suffering can mess up this laudable strategic plan formulated to address the root causes of Nigeria’s weak fiscal economy (production and trade). Ideally, the government ought to be lean enough to be able to devote over 50 per cent of its budget to capital expenditure.

Another anomaly is that public spending has been misdirected towards financing populist secondary infrastructure like roads, rail and ports using scarce foreign resources. If the country’s foundational infrastructure consisting of technical education, mining, metallurgical Industry, tools and machine-making industries are prioritised, the economy can leverage the country’s abundant natural resources to create the technological capabilities for building industries, secondary and tertiary infrastructures without foreign debts.

With the international market almost closed against us while the domestic capital mobilisation is also narrowing, what options do we have to finance our budgets?
Budget is either surplus, consolidated or deficit. Fiscal consolidation is the target a good economy ought to pursue.

The perennial deficit that underpins Nigeria’s budget has brought her sovereign debt to this unsustainable level. If the government lives within its means and pursues a disciplined strategy of budget consolidation, the risk of financial failure will be eliminated.

A developing country that spends over 80 per cent of its budget to finance consumption or recurrent expenditure is obviously not prudent in financial management. Therefore, balancing the budget by purging it of uneconomical spending is imperative for healing the ailing economy.

In any case, the constricting space for further debt will leave the FG with no alternative than to cut its coat according to its cloth. Although the debt situation is precarious, the FG still needs new credit to avoid bankruptcy. Sudden absence of credit will be a recipe for suffocation hence, the restructuring of existing debt can give breathing space for the adjustment to a balanced budget.

With debt service to revenue currently above 100 per cent, have we exhausted our debt carrying capacity or do you think there is still spare capacity?
The spare capacity for the debt has indeed been exhausted. At over 100 per cent debt service ratio, the government has surpassed its sustainable debt limit. Do not be deceived by the claim that because the debt is less than 40 per cent of GDP, it is below the threat threshold. Unfortunately, debt is repaid from revenue and not GDP. Now, the FG’s entire revenue is lost to debt.

The debt crisis that has befallen the country can lead to financial embarrassment if remedial measures are not taken. Most critical is the component of foreign debt, which has now risen beyond the suffocating level from where President Obasanjo extricated the country.

You may not appreciate the enormity of Nigeria’s dire situation now except if the credit strangulation that followed the debt crises in the 1980s – 1990s is visualised. The possibility of lining up for essential commodities may not be far off.

The intractable inflation now ravaging the economy and crippling production due to forex scarcity, now complicated by rural insecurity, are pointers to a fast deterioration in the era of the credit squeeze and queue for essential commodities.

The Buhari administration seems to be fixated on debt financing as against equity, which the administration of Obasanjo experimented with to an extent. Is it time to look at liquidating our dead national assets through privatisation?
The higher the debt in the financial composition of an organisation, the higher the risk of failure. Therefore, the excessive use of debt as a financing tool is dangerous. There are also projects for which debt finance is an aberration. Nothing stops the government from targeting equities to finance even green field projects. The equity participation of the FG in Dangote mega refinery is a case in point.

In fact, the government can cede the establishment of several critical economic projects and upon completion, offer them for sale to the investing public, the way estate developers do. By this method, the sales generated can be invested by the government to seed other projects repeatedly. The Nigerian government has not demonstrated any competence in managing commercial enterprises. In contrast, many public enterprises in China are success stories.

Considering the Nigerian factor, all state enterprises should be privatised and the economy fully deregulated to enable market mechanisms to shape competition.

The failure of government to fully deregulate and privatise the energy and electric power industries continues to make them inefficient. If the financing strategy of Nigeria’s National Development Plan (NDP 2021-2025), which expects private sector participation to provide lion’s share of N298.3 trillion out of the N348.1 trillion budget plan, is something to go by; it means that equity finance will gradually take central stage in public projects finance.

The government has financing tools like crowd funds and investment trust funds as instruments for use in the mobilisation of project funds.

The state governments are also broke. Is this fallout of our flawed federalism or the governors are simply unenterprising?
Just like their big brother, State governments are profligate, living beyond their means.

Without Federal allocations, they would be overwhelmed by their indebtedness. Many State governments are assuming financial responsibilities beyond their wherewithal to secure political goodwill.

Financial rascality is more prevalent at State levels as incestuous relationship between the executive and legislature makes legislative oversight non-existent. Only federal legislation can curb financial mismanagement by State and Local governments. A fiscal consolidation Act to mandate balanced budgets for all tiers of government to forestall bankruptcy is needed now.

What is the contribution of insecurity to the current fiscal challenges?
Current fiscal challenges arise from dwindling revenue to the government. The two major sources of revenue are crude oil sales and tax. The government’s income from crude oil has fallen below target despite high crude oil prices because of organised theft, which is a form of insecurity.

Tax income has fallen short of expectation because of diminution in taxable personal and corporate incomes.

Insecurity has crippled Nigeria’s agrarian economy and mining and disrupted transportation. This has prevented the flow of feedstocks for production and trade. It has massively increased the cost of sales thereby slowing down economic activities. The rising inflation caused by insecurity is also increasing the cost of governance. While insecurity robs the government of revenue, it also rapidly depletes its coffers.

In the past few years, expenditure for security has risen from about N969 billion in 2015 to over N2 trillion in 2022 yet, insecurity continues to ravage the country with undiminished intensity.

Confidence in the economy appears to be at its lowest point. Where do we start restoration?
Loss of confidence in the economy is a major challenge. Lost confidence takes time to regain. The malady is already manifesting in reduction of capital inflow and exacerbation of capital flight. Investors’ confidence in the FG debt has taken a big hit.

The DMO had to increase the risk premium on its debt by raising the rate on its recently issued savings bond by over 100 bps in a desperate attempt to lure investors. An economy beset with a crisis of confidence finds it difficult to access cheap funds. It must pay a high premium to secure credit thereby, increasing the cost of doing business.

Rebuilding confidence comes from adequately identifying the sources that caused the erosion of confidence, and analysing them so as to address them one by one. There may be more but I can readily finger insecurity as a primary source, consumption subsidy is another, saturation of Naira, reckless borrowing, budget indiscipline and inefficient forex administration are others. When these issues are resolved, stakeholders’ confidence in the economy will be restored.

Is ‘Japa’, which has gained currency in the past few years, a public vice?
If the slang ‘Japa’ means the forced exodus of Nigerian experts and youths abroad to escape the hopelessness at home, nobody can blame them. Notwithstanding what the diaspora community is contributing to Nigeria’s economy, their absence denies the economy of necessary expertise for transformation. When Nigeria is ready to engage the youths, create the enabling environment that rewards skills, expertise and creativity, the brain drain will be minimised.

The rich are fixing their savings in overseas bank accounts while the young ones are exploring opportunities in stablecoins and cryptocurrencies. In-between, the demand for dollar-denominated accounts has ballooned. What are the downsides of these desperate behaviours on individuals and the economy?
Where there is investor confidence in an economy, the domestic investment will flourish. Capital flight is a symbol of the loss of confidence. It has a negative effect on domestic capital formation and gives rise to financial instability.

The safety of assets, liquidity and profitability of investment dictate where depositors and investors domicile their financial holding. I am not sure of the safety of crypto, while I also do not subscribe to keeping funds abroad instead of in domiciliary accounts in Nigeria.

The hard currency domiciled in Nigeria plays an important role as a pool of funds that makes credit in the hard currency available to the economy.