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What debt? Spend like there is no tomorrow


SpendingFirst, a note about government spending. Government spending dynamics are similar to the way individuals and businesses spend money. They could spend money on different things. We typically think of government spending in relation to the effect it has on the economy. For example, if an individual chooses to spend money on a new pair of shoes, the impact on that individual is likely to be different compared to if he or she chose to spend the money on a health check-up. Similarly, if a business distributes its profits to shareholders, the impact is likely to be different than if the business reinvested its profits in new technology.

The same kind of dynamics works with the government as well. With government spending, we typically think of it in relation to the effect on the economy. Every naira the government spends has some impact on the economy. We economists call it the fiscal multiplier. And as it is with individuals and businesses, so it is with government spending. Different spending has different impact on the economy. The logic is simple. If a government spends N1bn on roads, the impact on the economy is likely to be larger than if the government spends the same amount on salaries.

If a government spends N1bn on proper education, the impact is likely to be larger than if the government spends the same amount on fuel subsidies. In general, government investment on transport infrastructure, healthcare, education and so on has a much larger impact on economic activity than government consumption through salaries, fuel subsidies and so on. We tend to think of government consumption versus investment dichotomy as the balance between recurrent and capital expenditure, although the reality is a bit more nuanced. In general, though you want to have more spending on investment and capital expenditure than you do on government consumption.

The federal government has not been so good at finding a balance between the two. During the tenure of former President Goodluck Jonathan, capital expenditure, according to the budgets hovered around 30 percent in 2011 and 2012, dropping to about 24 percent in 2014 and 14 percent in 2015. In essence, a larger share of government spending had been going towards less effective consumption, and the situation had been deteriorating, with the consumption share getting larger over time. The budget numbers hide what was perhaps an even more problematic spending pattern. Government revenue, since at least 2014, was not large enough to even cover government consumption. The federal government was essentially taking loans to fund its consumption. “Borrowing money to pay salaries and fuel subsidies”. The collapse in oil revenues made what was already a bad situation worse.

Cue in the Buhari administration. The situation after the handover in May 2015 was dire. The collapse in oil revenue meant that a readjustment of government spending, away from consumption towards investment had to take place. In practice this meant recurrent expenditure had to fall in absolute terms. Instead the federal government opted to rebalance the budget by taking on record levels of debt. The 2016 budget was projected to have the largest deficit in Nigeria’s history. Crucially, recurrent expenditure actually went up in absolute terms. When compared with the actual revenue generated, the federal government has found itself in a position where it is essentially “borrowing money to pay salaries” again. The revenue challenges provided the federal government with the opportunity to seriously change its spending pattern. Despite various stories about ghost workers being uncovered, and leakages being plugged, the overall spending habits have remained.

If we thought the 2016 budget was an anomaly, then the medium term expenditure framework for 2017 to 2019 has put that idea to rest. Capital expenditure at 28 percent of the budget is even lower than the 30% in the 2016 budget. This is in spite of overall spending expanding by 13 percent, and the projected deficit going from N2.2tn to N2.7tn. In essence the federal government plans to continue “borrowing money to pay salaries”.

The consequence of this “borrowing money to pay salaries” spending behaviour is that the financial sustainability of the government is becoming increasingly precarious. The debt to revenue ratio has risen from about 239 percent at the end of 2014 to 337 percent of revenue at the end of 2015. If the debt and revenue trends continue then the federal government will end 2016 with a debt revenue ratio of 319 percent. To put that in proper context, at the height of the Eurozone debt crises in 2014, Greece had a debt to revenue ratio of about 580%, Italy about 312%, Portugal about 345% and Spain about 251%. The MTEF for 2017 – 2019 projects that in 2017, 39 percent of federal government revenues will go to debt servicing. In short, Nigeria is at the cusp of debt problems and the window for “borrowing to pay salaries” will soon be closed.

The FG’s focus so far has been on increasing revenues but that has to go hand in hand with re-balancing spending. A shift in spending, away from recurrent expenditure and government consumption, towards government investment in infrastructure, human capital and health needs to happen. If it does not happen, then we might be back in to the sad days of 1990’s where the government existed to simply repay its debt.
Nonso Obikili is director of applied economics at the African Heritage Institution and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.

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