Anxiety as debt service burden stokes bankruptcy
• External loans hit $33.18b, 91.4 per cent of forex reserves
• Currency depreciation affects capacity to service debts, says OPS
With the fall in oil revenues and the huge infrastructural deficit needed to propel economic growth, Nigeria’s capacity to service its huge loans amid low productivity and earnings is unsettling stakeholders.
The recent Senate’s approval of President Muhammadu Buhari’s $5.513 billion loan request bumped the country’s external debt profile to $33.18 billion, representing 91.4 per cent of the country’s foreign reserves of $36.31 billion at the close of transactions at the weekend.
According to the Organised Private Sector (OPS), rather than exploring fiscal reforms that would aid productivity, diversification, and stimulate private sector contribution to the economy, the government continues to explore the easy approach to financing its budget.
The Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) report recently released by the Federal Ministry of Finance, Budget, and National Planning shows that in Q1 2020, Nigeria incurred a total sum of N943.12 billion in debt service while the Federal Government’s retained revenue was put at N950.56 billion.
Consequently, the stakeholders warned that a drop in the country’s foreign reserves spells doom for debts servicing. Also, beyond fiscal reforms, the private sector argued that the tenor of any loan repayment by any administration should be limited to the span of that administration to check debt accumulation for future generation.
Their argument stems from the fact that Nigeria’s external debt level of $27.68 billion, as at 2019, is about 75 per cent of external reserves, the highest since 2005. Without an uptick in crude oil prices and sales, reserves may fall below $30 billion, reducing the cover to external debt to below 100 per cent. Reserves are currently at $36.31 billion.
According to the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries released earlier, a country’s debt service to revenue threshold should not exceed 23 per cent. With debts remaining unsustainable, the government might have no choice but increase its revenue or face further spending cuts.
Plausible reasons for the increase in the external debts include lower oil prices, disproportionate spending, and defence of the exchange rate. The categories of the debt owed fall under Multilateral, Bilateral and Commercial loans (European and Diaspora bonds). State governments owe 15 per cent of the country’s foreign debts. While Nigeria’s external debt to GDP remains under 10 per cent and well below global benchmarks, the debt service commitment of about $1.5 billion at the current debt levels remains worrisome.
Unlike previous economic crises in 2009 and 2016, Nigeria’s external reserves may not provide the buffer required in 2020. Though the Central Bank of Nigeria (CBN) has expressed commitment to billions of dollars in forex forward sales, foreign demand for its bills continues to dwindle.
Reacting, the Lagos Chamber of Commerce and Industry (LCCI) stated that the country’s capacity to service the current stock of debt raises serious sustainability concerns.
LCCI’s Director-General, Dr. Muda Yusuf, said the looming plunge in revenue, will challenge the capacity to fund both the recurrent and debt service, thus putting capital project funding at a great risk.
“The opportunity cost of high debt service commitment for the economy and citizens is very high, as the economy is denied funding for critical infrastructure projects needed to build a globally competitive economy. There is also the exchange rate risk inherent in the exposure to mounting foreign debt, which we need to worry about,” Yusuf said.
He added: “As the currency depreciates, the burden of servicing foreign debt would intensify, especially when productivity in the economy remains low. This is a major problem with increasing the stock of foreign debt.
“All these concerns underscore the imperative of reforms to reduce recurrent expenditure, especially the cost of governance. It is critical also to ensure appropriate policy choices to attract equity domestic and foreign private sector capital for economic and social infrastructure financing.”
On his part, Director General of the Nigeria Employers’ Consultative Association (NECA), Dr Timothy Olawale, expressed worry that if the trend of rising debt is not checked, especially with reducing revenue from crude oil, Nigeria could go the way of Greece.
He said: “It is instructive to note that the nation of Greece in 2015 was almost declared bankrupt because it failed to pay the sum of €1.5 billion to the International Monetary Fund when it was due. The long-running debt debacle left Greece on the brink of financial collapse.
“Some of the drivers that exacerbated the problem of Greece were budget and trade deficits. Both trade and budget deficit grew from below five per cent of Gross Domestic Product by 1999 to about 15 per cent of GDP by 2009. While Nigeria’s situation is currently not as bad, the nation could, in few years, be on the path navigated by Greece.
“The continuous non-creative practice of borrowing to finance recurrent expenditures does not portray managers of the economy in good light as this is setting the nation on a long-term economic chaos. Quite unfortunately, with all the borrowings from successive governments, there seems to be insignificant impact on national life, as there is still widespread unemployment, uninspiring educational system, high poverty levels, poor infrastructure and poor health system, among others.
Olawale said further: “When you are in a hole, the first thing you do to get out is stop digging. For the nation to stop the gradual decent into economic conundrum and bankruptcy in few years’ time, the first thing to do is stop borrowing and then do a critical analysis of past borrowings purportedly for infrastructural development. While borrowing for infrastructural development is not an anathema, the nation’s capacity to service and pay the debt should take precedence.”
Team Lead, Centre for Social Justice (CSJ) and Developmental Law, Eze Onyekpere, stated that the present situation offers the Federal Government an opportunity to implement certain reforms and review the activities of revenue generating agencies.
According to him, many revenue agencies are not declaring their earnings to the Federal Government, despite the resources available to them, while burdening the budget with overhead expenses.
But Minister of Information and Culture Lai Mohammed in a statement disagreed that Nigeria’s debt-to-GDP ratio is one of the lowest in the world. He assured that government was making concerted efforts to increase revenue to bring down the ratio of debt service-to-revenue.
He said: “One of the reasons debt service to revenue is high is because revenue generation in Nigeria has been low, with over-dependence on the oil sector.
“This is corroborated by the fact that the ratio of Nigeria’s tax revenue-to-GDP is one of the lowest in the world at about six per cent. We have said that in the face of massive infrastructural decay, no responsible government will sit by and do nothing.”
Meanwhile, a professor of Capital Market and Head of Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke, explained that the concern over rising public debt stems from the burden it imposes on the economy.
According to him, while the Federal Government plans to spend N10.52 trillion this year, and targets N5.6 trillion in revenue, it has never collected this much even when oil prices were higher.
He pointed out that only 58 per cent of the revenue target was met in 2019, even when crude oil price averaged $61 a barrel, with earnings from oil contributing half of the revenue. As such, government would rely heavily on loans to finance the spending plan against the backdrop of growing public debt stock.
Uwaleke said: “There is also the issue of the country’s inability to mobilise sufficient non-oil tax revenue. In the case of company income tax for example, a major source of revenue into the federation account, active taxpayers represented only 5.6 per cent of the registered taxpayers in 2016.
“Rising debt squeezes government’s ability to fund critical sectors of the economy. For instance, the 2020 revised budget allocated circa N2.6 trillion to debt service and only N706 billion and N464 billion to the education and health sectors respectively.
“Except the country gets a relief from creditors, debt service could take up over 90 per cent of government’s revenue in 2020, according to the IMF, leaving no fiscal room for intervention in job-elastic sectors.
“It is worrisome that capital expenditure (CAPEX) is sacrificed whenever there is shortfall in government’s revenue, and emphasis on recurrent spending does not grow the stock market, given the correlation between CAPEX and stock market performance.”
Consequently, he said another wave of high interest rate environment is imminent and will crowd out the private sector, following the massive borrowing occasioned by the 2020 budget deficit.
He suggested that government should consider rebalancing the tax mix in favour of indirect taxes by lowering Company Income Tax (CIT) to 25 per cent, while increasing the Value Added Tax (VAT) to 10 per cent.
An economist, Johnson Chukwu, said to manage Nigeria’s increasing national debt burden, particularly debt servicing, which is now at over 90 per cent of government revenue in Q1 2020, government must adopt a multi-prong approach.
This approach, according to him, will include minimising further government borrowing especially non-project tied loans, pruning the cost of governance, increasing tax revenue through effective tax management, and getting the private sector involved in the funding of physical infrastructure.
Chukwu noted that although the nation’s debt-to-GDP ratio is still within acceptable limit, the current debt service-to-revenue has made the national debt unsustainable.
He urged government to minimise further borrowings. “Rather, all additional borrowings should be project-tied, like the Sukuk bonds, so that the impact of such loans will be an increase in the country’s stock of capital goods, which in turn will enhance productivity and increase GDP.
“Again, government needs to prune its current over-bloated cost of governance, which is exerting demand on financial resources. It is heart-warming that the President, in his Democracy Day broadcast, made reference to his directive for the rationalisation of overlapping ministries, departments and agencies of the Federal Government.
Hopefully, this rationalisation will lead to significant reduction in the cost of governance.”
Chukwu also stressed the need for a more effective tax system, which will increase government’s revenue without necessarily increasing the tax burden on taxpayers.
To this effect, he suggested that government should expand the tax net and ensure that corporate organisations pay the appropriate taxes.
A former President, the Chartered Institute of Bankers of Nigeria (CIBN), Prof. Joseph Ajibola, said Nigeria’s debt profile has increased so much in recent times because of the challenges that have crippled its ability to generate revenue.
According to him, “The woes of the global oil market have been compounded by the devastation occasioned by COVID-19. Oil accounts for about 60 per cent of government’s total revenue, and about 90 per cent of total foreign exchange earnings.
“The fall in the price of crude oil from about $60/barrel to around $30 has badly affected the country’s ability to drive sufficient revenue to meet its critical expenditure profile. The government has to, therefore, resort to both local and foreign borrowings to finance both capital and recurrent expenditure.”
He cited the recently revised 2020 budget, which is relying on borrowings of over N5 trillion of the N10.8 trillion total budget, causing debt service obligation to rise to about N3 trillion, above the projected capital expenditure of N2.4 trillion.
Describing the situation as worrisome, as the trend may not abate too soon, he noted that borrowing may not be a bad idea if the purpose is clearly defined and the borrowed funds can be traced to specified projects.
“Borrowings that are project-tied and are revenue-yielding are explainable. We have seen examples in borrowings for rail projects, road construction, and other industrial or infrastructural projects.
“But when such loans go into the pool for undefined purposes or to finance just recurrent needs, it tends to compound the debt service burden of the country without assessable add-ons to the life of the country. This has been the area most critics of the nation’s rising debt profile hinge their fears over the rising national debt figure.”