Habitual Borrowing: Danger Signals To Nigeria’s Economy

Federal Government’s borrowing to finance budget deficit has become habitual and a huge cause for concern to many Nigerians. In this report, COBHAM NSA and CHIYERE OBIORA dissect the implications of this swelling loans profile on the nation’s economy that experts argue could be telling in the long run

When at a recent Abuja business forum, the Minister of Finance, Kemi Adeosun, stated the obvious that Nigeria cannot continue depending on loans to fund its annual budget, the media was awash with many skewed headlines and reports which clearly misrepresented her position.
With no particular reference to the 2017 budget, her submission hinged on the fact that the nation’s rising debts profile, with the risk of hitting an unsustainable level soon, makes it imperative and urgent to explore domestic as well as other means outside loans to raise funds for budget implementation.
This patriotic forewarning, though twisted by some, could not have come at a better time with Nigeria presently swaddled in its first economic recession in 25 years. Confirmation of this emerging dire situation also comes from the 2016 Debt Sustainability Analysis (DSA) by the Debt Management Office (DMO), which raised growing concerns that for the first time since exiting the Paris and London creditors’ club in 2006, Nigeria’s debt situation is witnessing some descent and slide from a “low-risk of debt distress to a medium risk of debt distress.”
Though the immediate past Director General of DMO, Mr Abraham Nwankwo had persistently maintained that the country’s debt profile remained sustainable, the DMO’ s document, prepared in partnership with relevant stakeholders, shows that Nigeria’s debt gauge may, in the medium-to-long-term, deflate further if adequate steps are not taken to improve the current revenue outlay.
The DMO data indicate that Nigeria’s domestic and external debt profile as at May 2017 stood at N19.159 trillion and $62.159 billion respectively. But some financial doyens insist government’s plan to raise N2.34 trillion from internal and external market for this year’s budget deficit financing indicates Nigeria’s total debt burden should hit N19.39 trillion mark by 2017 ending.
So, with government eyeing extensive foreign borrowing to finance the 2017 budget that proposes heavy spending out of the current economic quagmire, financial experts agree that government must watch its moves to avoid an ugly slide of the economy into another debts ambush.
At present, the worrying voices are up against the borrowing regularity by both federal and state governments with admonition that Nigeria may find itself in another debts’ snare if borrowed funds are not properly channeled for infrastructure development in the country. Alluding to this danger ahead, the Economic Recovery and Growth plan document notes that due to waning revenue, Nigeria public debt has been on the rise, with increasing government borrowing to fund budget deficits.
And drawing potency from the Finance Minister and DMO’s acknowledgement that government must resist over-dependence on loans for future budget funding, some analysts also caution that Nigeria may reflexively be digging its economic grave if the borrowed funds are diverted to overhaul the civil service bureaucracy as witnessed during past administrations in the country.
Known for his constructive critique of economic policies, unbridled Lead Director, Centre for Social Justice (CSJ), Barrister Eze Onyekpere is not cheery that the country’s debt profile is becoming unsustainable. He questions the huge allocation for debt servicing in the 2017 budget, insisting that devoting about 24.73 per cent of the overall budget to debt servicing clearly shows an unsustainable debt profiling and government must therefore be circumspect borrowings more.
The CSJ boss said it is upsetting that, “The capital vote of 29.30 percent is just a little higher than debt service. With a deficit financing of N2.35trn, the debt service is about 36 per cent of our expected revenue. This shows that we may soon be back to the debt situation pre the debt relief period.”
According to Onyekpere, who noted that the capital allocation to 10 key ministries as a percentage of debt service is about 72.99 per cent, government cannot continue on the unhealthy path where the N1.84trn budgeted for debt servicing dwarfs the total sum of N1.34trn meant for the 10 strategic ministries.
Also reacting to the fact that debt servicing is about 84.49 per cent of the overall capital vote in the 2017 budget, an economist, Mr Adebayo Adewale, said though borrowing might be government’s last resort to manage its revenue challenges, there is need for the re-adjustment of government’s position to enable it generate more revenue from taxes.
For him, Nigeria has relied so much on oil revenue in the last 45 years and with crude oil prices’ decline, ‘the time has come now for us to review our fiscal position.’ He said reform of the country’s tax administration system is essential to enable government raise more revenue from capital gains tax, lamenting that the nation’s tax to Gross Domestic Product (GDP) ratio is one of the lowest in the world and the situation need to be addressed urgently.
Though support for Federal Government’s plans to reflate the economy through borrowing come from Chief Consultant, B Adedipe Associates Limited, Dr ‘Biodun Adedipe, he maintains that such borrowed funds should not be used for recurrent expenditure; but focused on financing infrastructure and other development projects to generate adequate resources to repay such loans.
“When an economy is seeking to get out of recession, the typical response is for the government to embark on massive spending, which is referred to as fiscal stimulus. Often times, the government may lack the volume required and will therefore, have to borrow beyond the normal range for an economy that is either in boom or the recovery mode”.
“No professional economist will argue against borrowing to stimulate a recessed economy. But the question will always be to spend on what? If the answer is for infrastructure, my take is to go ahead and borrow as much as you can, but if it is to finance recurrent expenditure the economy will be in trouble,” he advised.
Adedipe further said that keeping the Monetary Policy Rate (MPR) at 14 per cent based on inflation risk argument; stabilizing the exchange value of the Naira; and bond prices are more counter-productive to domestic productive activities than investment in financial instruments.
According to him, “It only extenuates government’s cost of borrowing and makes government’s debt instruments very attractive to astute investors. This long spell of fixed MPR is also gradually making the rate to lose its strategic relevance as a signal rate.”
Corroborating Adedipe’s view, Managing Partner, Matog Consulting, Mr Matthew Ogagavworia posited, “If government borrowed money and used it to service the political bureaucracy or civil service bureaucracy, though it is good for the functioning of government and could be seen as an attempt for government to provide welfare to the citizens; it is grossly unproductive because those borrowed funds are not channeled towards providing infrastructure that would enhance production of goods and services in Nigeria.” He said with such development, “the final product will be cheaper and the quality will be high for manufacturers to offer their goods for sale at competitive rate in the international market to earn the required foreign exchange that will boost the nation’s foreign reserves, and provide employment for Nigerians.”
Ogagavworia also argued that borrowing money to finance infrastructures would have direct impact on production, such that it will boost the GDP with Nigeria effectively positioned to produce goods that can compete favourably on the international market. For him, if government raises loan to finance electricity such that power becomes readily available and also cheaper for consumers, the production cost will drop and products made in Nigeria may become more competitive globally.
In admitting that “Today’s Nigerian businessmen prefer to import goods from China because it is cheaper than made-in-Nigeria goods”, Ogagavworia said another effect of government borrowing can play out in rising inflation rate, even as he said that, “as government continue to borrow, interest rates charged on the borrowed funds will be higher as lenders prize in risk.
“When government borrows at interest rates as high as 15 per cent from the domestic market, it signals that private sector borrowing can only be at higher rates. Such higher interest discourages investment as most businesses can hardly trade profitably at such high interest rates”
On the manifest trait of Nigeria’s debt profile currently overtopped by domestic borrowings and typified by high interest rates, the Matog Consulting’s Managing Partner said with continuous borrowing by government, financial institutions would remain under intense fiscal and monetary pressure while inequality between the rich and poor would also get wider. He said under this situation, it is only the wealthy people that can afford to invest in the government bonds and enjoy expected swell in interest rates paid on deposit with the poor continuing to struggle.
Arguing that today’s borrowing reduces government’s ability to borrow in future, another financial expert, Abdullahi Bako said though the debt profile continues to rise, Nigeria would only be in a good position to repay the loans through improved taxation; blocking all tax leakages; and mounting pressure on citizenry to pay their taxes. Bako maintained that as the rate of interest on taxes increases, people will be discouraged from working more because every additional work an individual does will be taxed by government, adding that with more people discouraged to work hard, government earnings through taxes will be hampered, thereby affecting the country’s capacity to pay off borrowed funds.
To him, aside adding value to the existing mono product, crude oil before its export, government can also improve its revenue profile by exporting other products like coals, tin, bitumen and other exportable solid minerals available in good quality and quantity in the country.
But another financial forecaster, Mr Chukwudi Ikemefuna is not fazed by some arguments on the debt issue. He said for the economy to grow as envisaged in the budget, shortage of revenue resulting from excess expenditure has to be financed by raising funds from other sources available to the government aside from loans.
Listing three ways of financing budget deficit to include taxes, borrowing and monetization, Ikemefuna stated that government can readily source funds for political, economic and social issues, noting that the big challenge in Nigeria today remains a situation where political considerations most times outweigh economic issues in government’s decisions.
He said government requirement will increase the net credit demands in the economy; drive up the interest rate; and crowd out private investments with a resultant cutback in the growth rate of the economy, leading to evident decline in the amount of goods available for a given level of cash balances, hence price level increase.
Going by raging arguments that in the event of borrowing, government must channel the fund raised into productive investments for increased capital formulation, the consensus is that Nigeria can no longer accommodate the impunity of elected or public officials who would convert the borrowed funds into private pockets thereby undermining the objective of the deficit financing
However, one cannot ignore DMO’s report that; “In line with the new debt management strategy, there would be a shift of focus to external borrowing, including the international capital market, as a way of diversifying government’s funding sources, reducing debt service costs and creating opportunities for other domestic economic agents to access external financing.”