The debt conundrum once again? -By Henry Boyo

Filed under: Economic Issues |

Henry Boyo

Barely 11 years ago, Nigeria was compelled by pressure, from international creditors, particularly the London and Paris clubs, to “voluntarily” part with almost $12.4bn allegedly owed, so that another $18bn debt could be written off, from the country’s total external debt of about $30bn.

Notably, the debt write-off was, primarily, the product of pressure from civil society groups, such as the Jubilee Debt Campaign, committedly led by one Trishia Rogers. Regrettably, while countries like Ghana and Zambia with similar debt overhang got 100 per cent debt relief, Nigeria, with a more formidable array of celebrated negotiators received 60 per cent of the so-called “debt forgiveness”.

However, by 2005, the cost of refinancing and servicing the Federal Government’s $30bn existing external debt, was generally considered as unsustainable. Thus, after “debt exit” in 2006, Nigeria’s debt profile became lighter, with barely $3bn as external debt, while domestic debt, excluding debts owed contractors, was just over N1tn.

Nonetheless, such a light debt profile may not be a good indicator of good economic governance, especially, where overwhelming social infrastructural deficit still exists. The public’s concern is that there was nothing to show, as the positive product of the nation’s earlier oppressive debt accretion, which precipitated the controversial 2006 “reprieve”!

It would be expected therefore that government’s fiscal plans after 2006 would be more circumspect and efficient with regard to debt sustainability, especially where foreign creditors are involved. Consequently, in order to effectively address such issues, the Debt Management Office was created with a mandate to also deepen the evidently shallow existing domestic market for government borrowings. Instructively, the National Bureau of Statistics’ September 2017 report on Nigeria’s debt profile, which evidently portrays a disturbingly bloated, federal and state governments’ debt burden, probably suggests that the DMO has been very active in driving its mission to deepen the market for government debt.

The latest NBS data, however, surprisingly indicates that the Federal Government has already chalked up over $15bn in foreign debt and N14tn (about $45bn) in domestic debt as of June 30, 2017, (compare this with below $3bn and N1tn respectively after the debt exit 11 years ago).

According to the NBS, the Federal Government presently accounts for 74 per cent of the nation’s total foreign debt, while all states, including the Federal Capital Territory account for the remaining 26 per cent. Similarly, the Federal Government presently accounts for 78.66 per cent of the country’s total domestic debt, while the balance is held by the 36 states and the FCT.

Curiously, the NBS report failed to comment on the clearly important issue of sustainability of the related debt service charges, and the arrangements made, if any, for a viable liquidation schedule for these loans. The report may suggest that we have once again come full circle to where we were before the 2006 debt exit. Alarmingly, the Federal Government now owes twice the $30bn that was earlier considered a crisis level, to ultimately compel the plea for inevitable debt relief. The glaring reality gleaned from the latest NBS study, however, is that our debt profile is probably now in a worse situation than it was before morally driven One World International activists came to our rescue in 2006.

Furthermore, the NBS report also indicated that while the DMO had borrowed N7.5tn (or 68.5 per cent of total debts) from the domestic market on behalf of the Federal Government to fund the FGN fiscal deficits, the CBN had in turn borrowed N3.2tn or 29.64 per cent of total domestic debt, by offering to pay juicy, interest rates on the billions of naira Treasury bills it sells bi-weekly, to remove perceived excess money supply from the financial system in order to breach the smoldering inflationary embers that could inflict devastating consequences on mass welfare, if not caged.

Regrettably, nonetheless, the much anticipated social impact of the N7.5tn borrowed from the domestic market by the DMO on behalf of government to fund annual fiscal plans since 2006, still remains superficial, as in the past. Similarly, the impact of the present $15bn+ external debt, (from $3bn in 2006) and over $15bn reportedly expended on power infrastructure, has inexplicably so far, not also trickled down to the masses.

Sadly, after the heavy scars from debt exit in 2006, our national debt burden may have unexpectedly again, become another albatross. For example, Catherine Pattillo, IMF Chief of Fiscal Policy, observed at a monetary briefing in Washington on October 14, 2016 that two-thirds of all Nigeria’s tax revenue is presently applied to just servicing debt annually. Indeed, earlier in January 2016, the IMF boss, Christine Lagarde, had warned during her visit to Nigeria, on the danger of spending over 45 per cent of government’s aggregate revenue just to service debts.

Worse still, total domestic debt would invariably further expand, if the accumulated debt arrears, owed over many years, by government to contractors, pensioners, oil marketers and staff are also factored.

It is clearly unlikely that the debt level will recede in the foreseeable future; for example, the DMO is expected to borrow about N500bn fresh loans before December 31, 2017, to fund the apparent shortfalls in revenue projections in this year’s budget. Furthermore, realistically conservative revenue projections from crude oil may also compel increase in the projected deficit in budget 2018 and beyond. In such an event, the Federal Government’s debt burden would become, clearly, unsustainable, particularly when over 50 per cent of aggregate government revenue would be required, annually, just for debt service alone, even when basic recurrent expenditure continues to gulp well over 60 per cent of annual budgets. Ultimately, additional debt required to fund revenue shortfalls, well in excess of N2.36tn in the current 2017 budget, would sadly be piled on to an already fragile Federal Government debt base.

Worse still, the increasing debt accretion, consolidated to fund annual budget deficits, will also become additionally compounded by over N6tn, which the CBN will also be compelled to borrow, with the usual oppressive interest rates, to reduce the related inflationary threat from perceived excess money supply in the system. The odious rape of the treasury with such borrowings, which regrettably have no direct positive social impact, is unfortunately generally reported benignly by the media as the fee the CBN pays to “help the banks manage their surplus cash”. In practice however, it is very unusual for anyone to continuously, knowingly, incur an increasingly huge debt, in order to help another party manage its surplus cash efficiently! Curiously, in more successful economies elsewhere, the money deposit banks pay a token one per cent to the Central Bank to warehouse their surplus funds from time to time.

The Minister of Finance, Kemi Adeosun, has unexpectedly, on several occasions, expressed concern and surprise at the extremely high cost of loans, sourced by government from the domestic market. Adeosun, has therefore suggested that government would shift preference to cheaper external loans which carry single digit interest rates, in place of rates nearer 20 per cent paid to borrow locally.

However, we must be very cautious of the attraction of cheaper foreign loans. For example, a $1bn loan at seven per cent would require N150bn + seven per cent to service and repay when naira exchanged for N150=$1. Government would, however, require N300bn of taxpayers’ funds + seven per cent to service and repay the same loan when the naira exchange rate is N300=$1.

Clearly, so long as the persistent, inexplicable surplus naira liquidity challenge subsists, and the CBN’s forex auction system remains skewed against the naira, it is not a matter of if, but when the naira will tumble beyond N500=$1. When this ultimately happens, government would have to raise over N450bn+ seven per cent to service and repay the same $1bn loan. Failure to meet service and repayment obligations would lead once again to the oppressive return of our foreign creditors, with another noose around our necks! Will the Nigerian government ever learn?