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Debt limit and Fiscal Responsibility Act

By Editorial Board
06 September 2022   |   4:11 am
The call for the speedy passage of the proposed amendment to the Fiscal Responsibility Act, 2007 (FRA, 2007) has become very necessary in view of the current dicey state of the country’s economic governance.

Debt. Photo: RTE

The call for the speedy passage of the proposed amendment to the Fiscal Responsibility Act, 2007 (FRA, 2007) has become very necessary in view of the current dicey state of the country’s economic governance. Public debts are mounting, revenues are perpetually below expectation, oil theft is raging and fiscal indiscipline is unabating. This has elicited serious concerns by the general public who are worried about the unending downturn in the country’s economy. Indeed a lot need to change for the better regarding Nigeria’s economic governance particularly in the management of the scarce public resources. This call for a review of FRA, 2007 is coming from no other than the Chairman of the Fiscal Responsibility Commission (FRC), Victor Muruako and it is indeed a step in the right direction. It has become very necessary given the current unwholesome trajectory of public debt accumulation that cut across the three tiers of government in the federation.

Currently, the implementation of the Fiscal Responsibility Act has been fraught with many challenges that need to be addressed. The loopholes in the law have provided some leeway for corruption to thrive in the public sector with the country ripped off of humongous amounts that would have otherwise been available to address development challenges for the enhancement of the human condition. These loopholes in the Act have thus made the various governments vulnerable to massive looting and the unfettered freedom to engage in frivolous domestic and foreign public debt accumulation. This laxity has also spread to the ministries, departments and agencies (MDAs) of government where remittances of generated funds are hardly made as at when due to the Federation Account.

The major shortcoming of the current Fiscal Responsibility Act is the lack of sanctions for non-compliance by public sector operators. Even though the Act identified about 50 offences or violations, it fell short of making provisions for punishments for any default. This lack of mechanisms for enforcement of the law has made it a mere toothless bulldog. Accordingly, it has been unable to check the unbridled abuses in the public financial space. This has thus inadvertently become an instigator of corruption in the three tiers of governments and their respective MDAs. These are the issues the ongoing revision in the 2007 Fiscal Responsibility Act is meant to address.

One of the key areas in this revision is the need to set a debt limit for the Federal Government and the states in view of the fact that public debt accumulation has intergenerational implications. Traditionally, public debt accumulation criteria include, among others, the consideration of the size of total debt to the gross domestic product, GDP, as well as the proportion of total revenue that is deployed to debt service payment. Without the effectiveness of the fiscal responsibility law, policy makers have severally claimed that because the country’s debt to GDP ratio is within the globally acceptable range of below 40 per cent, that Nigeria is largely under borrowed and thus has more room for debt accumulation. This has, however, been faulted severally by economic experts that though the country’s debt to GDP ratio may seem healthy, GDP does not pay debt and that the very important factor in this critical time in the country’s history should be the ability of the country to service its debt from current revenue. This argument would not have been necessary if the Fiscal Responsibility Act was well structured to impose sanctions on defaulting public officials if the level of borrowing becomes unserviceable. Against this background, the call for the setting of a debt limit for the government becomes tenable. This would be necessary in order to entrench fiscal discipline in the management of public resources across all the tiers of government.

Indeed a debt limit would be appropriate for Nigeria, at least in the short time. Current debt service provisions fall short of revenue earnings. Hence the current focus of government should be the enhancement of revenues, at least in the interim. For example, the reported huge loss of about 700,000 barrels of oil per day to oil theft is quite alarming and a great loss to the national treasury. Government should focus on this in particular, instead of resorting to more borrowing. It is sad that Nigeria has not been able to gain maximally from the current high price of crude oil in the global market due to this high level of oil theft. Officially, Nigeria is thus exporting far less than its OPEC quota by this extent of oil theft.

The other area government should focus on is the enhancement of tax revenue given that, compared to other African countries, Nigeria is currently under taxed. This does not necessarily imply the addition of new taxes to overburden those already paying taxes but by taxing the rich in proportion to the size of their wealth. Many rich and wealthy persons as well as a large chunk of the informal sector are not paying their fair share of tax. This will invariably rake in a sizeable sum in the boosting of the quantum of government revenue. Doing these alongside the focus on reducing the cost of governance will be value adding in managing the current level of the country’s public debt.

Finally, all hands should be on deck to enhance the passage of the proposed amendment to the FRA 2007. The ninth Senate and the House of Representatives should as a matter of urgency accelerate the amendment and passage of the new law before the winding down of their activities and before the new administration takes office in May 2023. The setting of the debt limit appears necessary in the short term. With improvements in the country’s economic circumstances, considerations could be made for possible removal of the limit, particularly in the funding of very critical infrastructure that have high potentials to enhance returns for repayment.