Rising Debt Profile: Securitised bond to the rescue
It is customary for countries across the world to borrow to finance development projects and important programmes, but experts regularly caution that this must not be taken to the extent that the burden of debt repayment puts a nation’s finances in jeopardy, leading to default. CHIJIOKE IREMEKA writes on the worry about the country’s rising debt profile, Federal Government’s plan to borrow additional N11.3 trillion to fund 2023 budget which does not provide for any capital project, and experts’ advice on how to save Nigeria from being overwhelmed by debt burden.
A major apprehension about Nigeria’s economy today is the country’s debt profile, which is considered to have risen beyond its means of repayment, even as the Federal Government is proposing to borrow additional N11.3 trillion next year to fund the deficit in the 2023 budget.
Recently, some stakeholders have expressed worry about the level of government’s borrowing to fund budget deficit and service debts, a situation now negatively affecting the economy.
Though experts are of the opinion that borrowing to finance capital projects could be decent due to ability to offset the loan, they want the Federal Government to turn to facilities with less burdensome requirements as against the issuance of promissory notes and IOUs.
More worrisome is the fact that the President Muhammadu Buhari-led administration is billed to increase the country’s debt profile by taking another loan of over N11 trillion to finance next year’s budget that does not provide for a capital project from January 1 to December 31, 2023.
The Federal Government is proposing an aggregate expenditure of N19.76 trillion for the 2023 financial year, a 15.37 per cent increase from the amount earmarked in the 2022 budget, with a projected deficit of N11.30 trillion, 54 per cent higher than the previous budget’s estimated deficit.
However, an IOU is a phonetic acronym of the words ‘I owe you.’ It is a document that acknowledges the existence of a debt. It is different from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment, while a promissory note is a written promise by one party to effect a payment of money at a date in the future.
Disturbed by the country’s rising debt, some financial experts, economists and other stakeholders constantly brainstorm on the possible ways of reducing the profile, which has risen beyond the nation’s expected revenues in three years. Among their resolutions is that for the country to still borrow amid high interest regime, securitised debts or investment grade debts should be preferred to issuance of promissory notes and IOUs which are the most expensive debts in the world.
Financial experts advised the government to turn to its idle resources and convert them into value assets to which the country’s borrowing should be tied, in form of Sukuk, instead of running to the pungent burden of principal and interest servicing. To the experts, the solution to the declining revenue is to stop taxing anybody, or talking about expected revenue from oil, but turn to her idle assets and extract non-oil and non-tax revenues from them.
The Director General of the Debt Management Office (DMO), Mrs. Patience Oniha, put the nation’s debt profile as at March 2022 at N41.60 trillion.
Oniha, who was at the engagement on the 2023 – 2025 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) held in Abuja by the House of Representatives Committee on Finance, attributed the rising debt profile to paucity of revenue and approval of the yearly budget with a deficit by the National Assembly.
She lamented that Nigeria has been running a deficit budget for many years with increasing level of borrowing, especially since the outbreak of the COVID-19 pandemic.
“The way out of the problem is improved revenue generation. 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 jumped to N39.556 trillion. We publish quarterly, and as at March of this year, it was N41.6 trillion,” she said.
She explained that on the average, the Federal Government owes about 85 per cent of the total sum.
“We have been running deficit budget for many years and each time you approve a budget with a deficit, we have the mandate to borrow and this will reflect in the debt stock. So the debt stock keeps increasing. Also, note that states are also borrowing. We add theirs to the debt stock (which increases the stock). Until the issues of personnel, overhead and capital expenditure are properly addressed in the budget, borrowing would not stop,” she said.
Recently, the Minister of Finance, Budget and National Planning, Zainab Ahmed, laid before the lawmakers the 2023-2025 MTEF/FSP, where she disclosed that the Federal Government would borrow over N11 trillion and sell some national assets to finance the 2023 budget deficit.
The Guardian learnt that last year’s total deficit (fiscal and project-tied loans) stood at N7.35 trillion. The figure is expected to jump by 53.7 per cent to N11.3 trillion next year. Under subsidy removal conditions, it will hit N12.4 trillion.
Oniha further said: “A World Bank report showed that in terms of debt to Gross Domestic Product (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, Yemen and Afghanistan. I don’t think we want to be like those places.
“You must look at revenues very closely for funding our activities as opposed to deficit. We talk about N11 trillion deficit and borrowing for 2023, how much is revenue there? The responsibilities, I think, are on both sides. Query the various expenditure lines and see what it is we can handle. If the deficit is lower, the borrowing will be lower and that’s how to grow on a slower pace.”
It was learnt that the finance ministry also reduced the estimated revenue projection for 2022 from N10. 74 trillion to N9. 97 trillion, which is 7.18 per cent downward revision, increasing the budget deficit by 12.07 per cent from the original N6.18 per cent.
Speaking on the need to securitise the country’s debts as a way out, the Chief Executive Officer of Economic Associates, Dr. Ayo Teriba, said it would be extremely difficult to achieve a balanced budget under the prevailing fiscal condition.
Teriba is also the Coordinator, Technical Working Group (TWG) on Financial Sector and Capital Markets on National Development Plans MTNDP 2021-25, MTNDP 2026-30 and Nigeria Agenda 2050.
He said: “Between January and April, we spent N4.7 trillion but made only N1.6 trillion in revenue. The deficit was more than N3 trillion. If you want to limit spending to revenue, you would spend only N1.6 trillion. And that would not cover interest payment, which was N1.94 trillion. So, there is no question of doing a cash budget.”
Lamenting that the government has, in the past seven years, ignored the suggestion to turn moribund national assets into revenue, Teriba said that nine months to the end of its second tenure, the current administration had hit the brick wall in its hardline position on debt funding.
According to him, it is a tough one to expect the government to make a u-turn nine months to the end of its tenure after over seven years of holding tenaciously to a less sustainable funding option.
“I think we would have to take it as the legacy of the administration, that it was an administration that handed over more or less 100 per cent deficit. The next regime would have to pay the debts accumulated by this regime and find the revenue to cover its expenditure.”
To him, Nigeria has options that the current administration has failed to explore.
“Asset lease option is a win-win that has been leveraged by Saudi Arabia, India and Brazil to unlock stable and sustainable cash flow, which triggered growth. Attract foreign investments to idle assets to generate revenue for the government. We have idle assets, underutilised infrastructure and companies whose market value we don’t know.
“Nigeria can borrow securitised debts. The nation is walking out by listing the Nigeria National Petroleum Company (NNPC) in the market. That is what Saudi and Malaysia are enjoying today. They are borrowing more than Nigeria, but it is not interest-burden for them because they are issuing Sukuks. You don’t pay interest on Sukuks. The investors have to patiently wait for dividends or profits.
“The way towards the government revenue sustainability is to turn to assets, determine the market value of your assets, like we are trying to do with NNPC. That is what I urge the states to do with any asset that they have. And the way to debt sustainability is to tie debts to assets.
“Our debts have been tied to our revenue expectation. The only type of debt that Nigerian government issues are promissory notes or IOUs against revenue expectations, and when the revenue collapses, that becomes junk bonds. The people doubt your ability to service it and, therefore, would ask you for the highest possible rates before they can lend you money.
“That’s the issue with the country currently. Interest on the principal is high and our expected revenue cannot match it. The alternative way of borrowing is what is referred to as investment grade bonds, which is independent of the ability of the borrower to repay. It is dependent on the ability of the underlying asset to repay.
“Nigeria currently does not have any investment grade bond and any bond that is below the investment grade is called junk bond. So, you can see that Nigeria debt portfolio is 100 per cent junk, it is just promise to pay without being sure whether the revenue prospects will be realised.
“Unfortunately, we started from promissory. The interest rate you promised to be paying is small fraction of your revenue but the revenue has been declining over time and interest commitment has been rising over time, and the interest commitments are now raised above revenue expectations in 2022. That tells you to stop issuing promissory note against the declining income; stop writing IOUs. You have written more IOUs than your salary can carry. That doesn’t mean that you can’t raise debts, it means that you can only raise investment grade debts.”
Teriba explained further: “You can say, look, I have this idle asset, come and invest in it for a period of time. It is like you have a land that you want to lease or you have a building that you want to lease. They will give you money and use the asset in return for the money.
“When they are giving the money, it’s debt but it is securitised. You are releasing the land or the house for them to use for the next five years and that is like renting your house out, and they will never come back to you and say give us back the money. He will use his money value and your assets remain for you.”
Professor of Applied Economics and a debt management expert, Godwin Owoh, wondered why government keeps incurring debts that wouldn’t increase the future cash flow of the Federal Government, saying it is insensitive to contemplate borrowing next year to fund a budget that would not make provision for capital projects.
Prof. Owoh, who is also a World Bank consultant, compared the government borrowing to a vehicle moving at top speed despite having a flat tyre, warning that the government is dangerously driving at top speed while the tyres are flat. According to the expert, it’s time to apply the break on borrowing and review the framework.
“This government is supposed to have adopted the stance that is normally applied when a state and the market have failed. You cannot be driving a car on a flat tyre and doing 120km per hour at the same time. The market has failed, the state itself has failed as well,” he said.
Warning that ‘exclusionary’ policies of the current administration would eventually kill the economy, he recollected an incident in Rwanda where 12 out of the 18 experts facilitating in a workshop were Nigerians and some foreigners were wondering what Nigerian experts were doing while their country’s economy is being mismanaged,
A development lawyer and activist, Eze Onyekwere of the Centre for Social Justice (CSJ) described borrowing to finance current expenditures as illegality as the law does not permit such.
“Fiscal responsibility is that you borrow for capital project and not for recurrent expenditure. This goes to show the irresponsibility of our leaders and their quest to remain in office even when they do not have anything to offer,” he quipped.
According to him, the Fiscal Responsibility Act (FRA) 2007, in Section 41, lays down the conditions for incurring debts.
“The section states that government at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonably long amortisation period subject to the approval of the appropriate legislative body where necessary. Buhari and the Minister of Finance should have resigned long ago for running this country broke. It’s a shame that Nigeria is broke,” he added.
The Human Rights Writers Association of Nigeria (HURIWA) criticised Buhari’s govt over failure to provide for treasury-funded capital projects for 2023 despite the humongous debts incurred by the All Progressives Congress (APC)-led administration to fund expenditure in next year’s budget.
HURIWA’s National Coordinator, Comrade Emmanuel Onwubiko, in a statement, said the government must not increase the cost of governance at the detriment of the social wellbeing and security of the citizens, but must positively impact the lives of the citizens.
“It is perplexing that there is no break to the borrowing spree embarked upon by the regime of President Buhari since 2015. It is more astonishing that the nation can go a whole year with no capital projects despite that government keeps ballooning recurrent expenditures and increasing costs of governance at the detriment of the social wellbeing and security of citizens.
“The 2023 budget projection of the government is not acceptable. We call for amendments to reflect the popular will of the people, especially to reinforce the fight against insecurity, reduce costs of governance, increase social welfare for the disadvantaged, battle systemic corruption at its peak within government circles at all levels and build up the badly destroyed strategic sectors of roads, schools and hospitals,” HURIWA said in its statement.