Economic Issues
The National Debt Profile and Management Under President Buhari -By Jide Ayobolu
Jide Ayobolu
Every country in the world aims at achieving economic growth and development, however this is only possible if a country has adequate resources. In developing countries, especially those in Sub-Saharan Africa, the resources to finance the optimal level of economic growth and development are in short supply. This is as a result of the economies being plagued with problems of low domestic savings, low tax revenues, low productivity and meagre foreign exchange earnings.
Basically, for these reasons, many developing countries yearning for economic growth inevitably resort to external financing to bridge the gap between their savings and investments. In the process of obtaining finance from abroad, a country may consider several options: grants, foreign investment and loans (concessional and non-concessional) in that order.
However, an admixture of these capitals in-flow in varying proportion could be obtained depending on the socio-economic and political situation in a country. Nigeria, like most developing countries, borrowed from external sources mainly for investment purposes. The country’s external debt was sustainable up to the mid-1970s. From the late 1970s, because of poor macro-economic management and declining prices of crude oil, the country’s external debt began its upward movement. Thus from an external debt of US $557.74 million in 1975, Nigeria’s debt peaked at US $33.1 billion in 1990 before declining to US $27.1 billion in 1997 and rose to US $28.8 billion in 1998.
Nigeria is a typical example of an African state that suffers under the crushing weight of a debt overhang, which means that the country currently has a huge external debt that constitutes a significant proportion of the GDP. It must be further noted that from a figure of $17.37 billion in 1983, Nigeria’s external debt rose speedily to $18.904 billion in 1985, $33.730 billion in 1991, and $32.58 billion in 1995. The debt stock declined marginally to $28.733 in 1998, while the total debt of Nigeria in 2002 was put at $31 billion.
According to the Debt Management Office, Abuja, the position of Nigeria’s external debt as at the end of December 2009 was US $3.947 billion. Out of the amount, the federal government owes $2.093 billion, while state governments owe $1.85 billion, and one can see that Nigeria has two major categories of external creditors – the official and private creditors. Her official creditors are: International Fund for Agricultural Development (IFAD), African Development Fund (ADF), European Development Fund (EDF), International Bank for Reconstruction and Development (IBRD), African Development Bank (ADB), Economic Community of West African States (ECOWAS) Fund, and European Investment Bank. These official lists of international funders are Nigeria’s multilateral creditors. In the bilateral league are the Paris Club Creditors and Non-Paris Club Creditors. Also, Nigeria is indebted to private creditors which consist of Promissory Note Holders and The London Club Group. Initially, Nigeria borrowed concessionally only from the World Bank, a multilateral institution.
Nigeria’s debt crisis could also be traced to the misdirection of economic policies pursued since the buoyancy of the oil market which resulted in an outright neglect of the non-oil sector of the economy, especially agriculture. Owing to this neglect, the oil sector provided over 92 percent of the government’s national revenue, as such fluctuations that occurred in the oil market in 1978 and 1980s distorted the projected revenue estimates of the Federal Government. Hence, the government had to borrow to fill the gaps created by the fluctuation and to also meet increasing expenditures. The debt situation was equally intensified by large public deficit relatively free capital in-flows, inefficient control over private capital outflows and real over-valuation of the exchange rate of the naira to other world currencies.
For these reasons and others, the debt problem has become one of the most pressing issues in the world’s political and economic relationship with a Less Developing Countries (LDC) like Nigeria. In essence, what matters most is not the amount of the foreign loans taken, but the ways and manner the loans are used in the developmental process. If these loans are used for current consumption, they will have minimal impact on future economic growth but if invested rationally in productive ventures, they will contribute positively to real growth and enhance the productive capacity of the economy.
The fact is that development depends purely on a sustained increase in real income, which can only be achieved or accumulated through economic growth. Economic growth, however, emphasises the changes in an economy’s productivity over time. Growth tends to occur when total production increases more rapidly than the population. Thus, it is the country’s ability to maintain a strong defence or to pay for some other national project. As a matter of fact, economic growth is an ever increasing quantity of goods and services available to meet the economy’s need over time. As a result, therefore, the higher the ratio of debt servicing payments, the lower the level of economic growth. The primary burden of Nigeria’s public debt is indeed shifted to the future, thereby retarding economic growth. And, the rate of investment tends to be low, while the unemployment rate becomes high because of our huge public debt.
Furthermore, our reputation is tarnished and the developed nations are no longer confident in our economy. This has led to the reduction in the flow of foreign investments to Nigeria, which could have profound consequences for the economic development prospect of the nation. With the oil glut and reduced revenue, it is expected that our external debt liabilities will increase and our economy will be unstable. The debt crisis, if not well managed, will lead to liquidity crisis and foreign exchange challenges, which would retard the rate of economic growth and development in Nigeria.
The causes of Nigeria’s external debt burden over the years could be grouped into six areas and these are: Inefficient trade and exchange rate policies, adverse exchange rate movements, adverse interest rate movements, poor lending and inefficient loan utilisation, poor debt management practices, as well as an accumulation of arrears and penalties.
In a related vein, reckless and inefficient external borrowings took place in the 1980s, largely to offset the collapse in oil prices; crucially, borrowing was not linked to future growth or exports, insufficient regard was given to economic viability of projects, there was poor implementation due to weak absorptive capacity and governance problems, mismatch between loan terms and project profiles, interest rate risk as LIBOR rates escalated, as well as leakages associated with governance problems.
The Debt Management Office (DMO) has disclosed that the country’s external debt which stood at $9.46 billion on March 31, 2015, has increased to $10.32 billion (N2.03 trillion) at the end of June. The report, by implication, shows that the external debt profile has increased by $860 million (9.09 percent) within the period of three months since Buhari took over. According to the DMO report, Nigeria’s total debt stock now stands at N12.12 trillion ($63.81 billion). When compared a year ago as at June 30, 2014, the country’s total debt stock stood at N10.43 trillion, which implies that within a 12-month period, the country’s debt stock had increased by 16.2 percent, adding N1.69 trillion.
Statistics obtained showed that the domestic debt stock of the Federal Government as at June 30, 2015 stood at N8.39 trillion or $42.63 billion, against last year’s figure, which stood at N7.42 trillion. By implication, within a one year period, the domestic debt of the Federal Government rose by N970 billion or 13.07 percent. The country’s domestic debts of the 36 States of the federation and the Federal Capital Territory Administration stood at N1.69 trillion ($10.86 billion) at the end of June 2015. The report disclosed that Federal Government Bonds accounted for N5,300,418,821,000 or 63.13 percent of its domestic debt. The Nigerian Treasury Bills accounted for N2, 824,952,245,000 or 33.64 percent of the Federal Government’s total domestic bill, while Treasury bonds accounted for N271,220,500,000 or 3.23 percent of the Federal Government’s domestic bill. In the external sector, multilateral donors accounted for 70.11 percent of the country’s external debt, while bilateral sources accounted for 15.35 percent. Commercial debts accounted for 14.54 percent of the nation’s external debt. In line with the nation’s dwindling resources as a result of falling oil prices, there are indications that borrowing will continue to play a major role in the funding of both the Federal and State governments.
During his recent visit to the United States, President Muhammadu Buhari sealed a deal providing $2.1 billion funding from the World Bank for the rebuilding of the North-East devastated by Boko Haram insurgents. As the DMO continues to borrow for the government on monthly basis through the instrument of the FGN Bonds, experts have advised the government not to borrow to pay salaries or any other recurrent expense. Meanwhile the Federal Government had earlier disclosed that it was planning to borrow between N180 billion and N240 billion through the sale of government bonds in the third quarter, the Debt Management Office has said. According to the DMO, the amount will be borrowed through the issuance of five and 20-year bonds. It had raised N210.22 billion ($1.1 billion) through government bond sales in the second quarter. It is also planning to sell the 15.54 percent 2020 bond at auctions in July, August and September, with N35 billion to N45 billion on offer each month. It said it would also offer the 12.1493 percent 2034 bond in July, August and September with N25 billion to N35 billion on offer each month.
President Muhammadu Buhari recently in Abuja expressed concern over the enormous debt profile of Nigeria’s aviation sector, saying that his administration will act quickly to redress the situation. “I am concerned about the enormous debt profile in the aviation sector. The Federal Government has to do something quickly because safety, security and international respectability are involved here. Our airports are the windows through which people see our country. Anybody coming into the country will likely come through the airports. If we cannot secure and maintain our infrastructure, it will reflect very badly on us”, President Buhari said after receiving a briefing from the Federal Ministry of Aviation. The president directed the Ministry to speed up all processes and projects relating to the safety and security of Nigeria’s air transportation system.
President Buhari further directed that counterpart funding for the upgrading of the international airports in Lagos, Abuja, Kano, Port Harcourt and Enugu, should be captured in the 2016 budget. The Permanent Secretary of the Ministry, Mrs. Binta Bello told the president that the five new international airport terminal buildings were designed to meet the best international standards. The five international terminals, she said, could cater for 62 million passengers annually when completed in the first quarter of 2016, with Lagos moving from a seven million passenger capacity to a 25 million one, Abuja moving from five million to 16 million, while Kano, Port Harcourt and Enugu, will have the capacity for seven million passengers each.
The reasons for increasing public debt on the part of the Nigerian government are attributable to the following reasons: (1) Borrowing to finance emergencies such as natural disasters and economic depression. (2) To finance important capital projects, such as water dams, agricultural development projects, road development projects. And, (3) To finance current expenditure in anticipation of reasonable revenue collection.
The present government appears very cautious and extremely careful in its spending; and it seems highly reluctant to accumulate more debts, but with the reckless and frivolous spending of the past administration, the lack of necessary savings and dwindling oil revenue, borrowing remains inevitable for the time being. There is the exigency of paying salaries, the categorical imperative of bridging diverse infrastructural gaps and need to embark upon germane development for nation building, and servicing debts obligations. However, in all of these, one thing appears quite clear: Under the present administration of President Muhammadu Buhari (PMB), funds are very likely to be well managed and not stolen by public officials; which is why the Federal Government has stepped up the war against corruption in the country, while showing exemplary leadership, putting a ceiling on the amount of money other tiers of government can borrow, as it seeks to drastically reduce the debt burden in the country.
Jide Ayobolu writes from Lagos.
