Examining options for weaning Nigeria from debt risk

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Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed

The violation of section 38 of the Central Bank of Nigeria (CBN) Act, which restricts the amount the bank can lend to the Federal Government to five per cent cap of real revenues of the previous accounting year, could trigger exchange rate-induced inflation. If this happens, Nigeria might experience the Lebanon Liquidity Crisis of 2020, which led to the sporadic devaluation and depreciation of the Lebanese pounds, triggering exchange rate-induced inflation while worsening the purchasing power crisis, experts have warned.The Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, warned that the Senate must amend the CBN Act as a precondition for securitization of the advances, which will now attract 21 per cent interest rate (that is MPR plus 300 basis points), or the country would face a more serious crisis.

His argued that it required a constitutional amendment of the CBN Act. As quid pro quo for the Senate ignoring the constitutional illegality of asking the CBN that is owed to act as guarantor or underwriter of the debt for which it is owed, the CBN for all future advances above the five per cent cap, must get a vote of 2/3 majority of the Senate for such waiver to be granted. “It requires that the Central Bank and fiscal authority to provide an audited statement of accounts on how 74 per cent of developments finance loans was spent. Considering that the Anchor Borrowers’ Programme took N1.4 trillion or 5.7 per cent of the total pool, there is a loan impairment of 75.6 per cent. Anti-corruption agencies should pursue recoveries.”

Indeed, experts have insisted that the next administration must amend the 2023 Appropriation Act to raise the revenue targets of the MDAs and reduce the deficit financing to avoid the trap of raising $20 billion in non-recurrent debt in an environment of junk credit rating. 

Interestingly, the Chinese Government through the China EXIM Bank recently rejected the rolling debt request of $22.8 billion from the Federal Government. There is also the question of reducing the debt-to-GDP ratio to 18-20 per cent band to avoid negative consequences of expanding an already-fractured fiscal position. The next administration is expected to consider avoiding a medium-term expenditure framework in its fiscal strategy that relies primarily on debt as a means of funding budget deficits.

Experts have equally blamed Nigeria’s over-dependence on oil revenue and fiscal irresponsibility on the part of the government as major reasons for the rising public debt. Nigeria over the years depended heavily on oil revenue to run the economy resulting in the neglect of other sectors such as agriculture and manufacturing.

But with dwindling oil revenues, Nigeria has struggled with budget deficits in the last eight years resulting in heavy borrowings which have now put the country’s public debt at N46.25 trillion as at December 31, 2022.

Minister of Finance, Budget and National Planning, Zainab Ahmed, while seeking approval from the National Assembly for a loan to finance a ₦4.97 trillion deficit in the 2020 budget acknowledged that Nigeria had a revenue problem.

The government has consistently maintained that Nigeria does not have a debt problem, noting that the debt-to-GDP ratio of 23.2 per cent as at December 31, 2022, is within the 40 per cent limit self-imposed by Nigeria and the 55 per cent limit recommended by the World Bank/International Monetary Fund (IMF) as well as the 70 per cent ceiling recommended by the Economic Community of West African States (ECOWAS).

Some experts have argued that the minister’s statement was a denial of the huge debt problem the government is grappling with and that it was only meant to play down the unhealthy loan habits and wasteful spending of the government while others identified with the minister’s position.

While the government consistently speaks of reforms to halt the country’s over-dependence on oil revenue, the budgets show the government has its eyes fixated still on oil revenue for survival. The federal government indicated in its budgets from 2010 to 2014 that it expects over 60 per cent of the revenue that will fund its spending to come from oil sales. While it budgeted lower in 2015 and 2016, it has since resumed an increasing reliance on oil to fund its budgets, from 51 per cent in 2017 to 66 per cent in 2019.

Nigeria’s budget records over the year show that the federal government has been running all its budgets on deficits. However, in recent times, due to decreasing revenue from NNPC’s inefficient management of oil proceeds, and shortfalls from other non-oil revenue sources, the government experienced a deficit more than it planned in the budget, and the government was borrowing much more than it planned.

Taiwo Oyedele 

Fiscal Policy Partner and Africa Tax Leader at PwC Nigeria, Taiwo Oyedele, said Nigeria’s rising debt is due to several factors including but not limited to low revenue generation. He said the critical issues regarding low revenue generation include fragmented tax administration with various agencies jostling for collection of various taxes and levies, which is not only ineffective but also creates huge leakages for the government and excessive burden, on the other hand, for individuals and businesses.

The expert said: “Government needs to harmonize taxes and revenue agencies to address this problem while leveraging data for tax intelligence to widen the tax net. Another issue contributing to rising debt is the inefficiency of government spending and questionable priorities. Rather than prioritise basic infrastructure and human capital development, we often incur expenses on white elephant projects and even when the projects are desirable, the costs are often inflated and completion time unduly protracted leading to cost escalation and lower public value.”

He pointed out that there are also issues concerning debt optimization, especially regarding terms such as interest rates and tax breaks. “Ways & Means financing for instance attracts interest at the monetary policy rate amounting to almost N2 trillion in 2022. Yet the amount was not declared as dividends to the Federal Government by the CBN. The rising interest rate is further compounding the debt problem.

Eze Onyekpere 

“The other major issue is poor assets and resource management especially crude oil theft, wasteful subsidy regime, and political interference in the management of key government business entities such as the NNPC which if well run could generate tens of billions of dollars for the government across all levels,” Oyedele noted.

According to the Lead Director, Centre for Social Justice, Eze Onyekpere, the argument that Nigeria is not generating enough revenue is a complicated expression. His argument: “We are also not being imaginative and creative about enhancing domestic resource mobilization as well as simply not putting on our thinking caps in terms of what we should borrow money for and what not to borrow money for. The law is clear that you only borrow for capital expenditure, but we are borrowing money for recurrent expenditure when we shouldn’t borrow.”

He said there are a lot of projects that the government should have brought in the private sector to do but which it insists on doing so. “An example is the rail project. Even if government lays the tracks, it does not have to run the wagons; it is just like building a road while people buy buses to ply on it. So, by the time you take away the little that comes in and refuse to be creative, that is why the debt is rising. Again even the loans are not used to invest in what it was meant for. The logic is that you invest in infrastructure, education and health so that it will help you improve the ease of doing business, produce the human resources that can aid development, as you are doing these things your manufacturing sector will improve, your service sector will improve and your GDP will grow and you earn more money which will help you to repay the loans. But that is not happening because most of the projects they are doing with borrowed money are also overinflated,” he said.

Prof. Oyebanji Oyelaran-Oyeyinka     

On its part, Prof. Oyebanji Oyelaran-Oyeyinka of the African Development Bank said the excess crude account (ECA), which would have served as a reserve during hard times had been depleted. He said the depletion of the ECA and refusal to replenish it even when oil prices exceeded the benchmark price was evidence of fiscal irresponsibility and mismanagement. “It shows a poor understanding of the dynamics of fiscal governance and that is why our debt is rising,” he stressed. He noted that over the years Nigeria had been drawing from the ECA, which was supposed to be a savings account for the government without replenishing even when the price rises above the predetermined level. ECA was a rainy day account to provide a cushion, soft landing and elbow room in lean periods from the savings of periods of boom in consideration of the boom bust cycle of oil prices,” he noted.

 

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