Nigeria’s N10 trillion debt – Hallmark
So soon after negotiating its exit from the Paris and London clubs of creditors, Nigeria is again amassing both foreign and domestic debt at an alarming rate. As at December 31, 2013, external debt stood at approximately N1.38 trillion or USD 8.8 billion while domestic debt stood at approximately N8.7 trillion or USD 56 billion, totalling more than N10 trillion. The debt stock amounts to about 13 per cent of Nigeria’s re-based Gross Domestic Product (GDP) of about USD 405 Billion as at December 31, 2013 or 20 per cent of the conservative GDP of less than USD300 billion. It is more than double the federal budget for 2014, which is less than N5.0 trillion.
Even though the threshold of up to 30 per cent of GDP might be acceptable for a productive and dynamic economy, Hallmark considers the debt threshold of 20 per cent of GDP already high for Nigeria, particularly when it is noted that debt to local contractors has been excluded from these figures. Our economy is neither diversified nor productive and dynamic. It has very low revenue elasticity. Nigeria’s sovereign cash flow is still almost entirely dependent on the demand for crude oil. This demand faces serious threats from the unprecedented discovery of new oil and gas fields and the shale oil revolution. Therefore, this newspaper cautions that before Nigeria continues to borrow, the government must take as many of the measures, suggested presently, as possible to diversify and deepen the economy and revenue sources (with particular reference to domestic production) to enhance debt service capacity and assure Nigerians that it has done the best in the conservation and efficient allocation of what is available.
First, loans must, henceforth, be for catalysis of the domestic production of needed goods and services by the private sector. They must be for concrete investment in power, roads, railways and other infrastructural projects that are fundamental to domestic production, employment and income generation for economic growth and development. The Second Niger Bridge and the Lagos - Ibadan Expressway are good examples of justifiable projects. There is hardly any evidence that previous loans have been tangibly invested in self-liquidating projects or in projects capable of spurring economic activity, empowering the people and expanding the tax net for public revenues. In other words, borrowing should be for capital expenditure and should be the last resort for recurrent expenditure.
Tapping into potential revenue streams
Second, a lot of government borrowing can be said to be superfluous. There have been instances in which the ministerial department or agency would be looking for overdraft or advance whereas it has deposits elsewhere in the financial system on which public servants collect commission or brokerage. This laxity can be curbed by the operation of what some experts have referred to as Treasury Single Account (TSA), a virtual deposit accounting system in which credit balances in the financial institutions are under global surveillance and must be exhausted before loans can be incurred. We also suggest that public sector deposits must be invested by the banks only in discountable instruments and never in risk assets. This is to minimize the incidence of banks’ failure to redeem deposits on demand. The alternative would be to place all public sector deposits with the Central Bank of Nigeria, at the expense of the banks’ pools.
Third, government must seriously embark on the exploitation of other revenue sources, in the solid mineral, maritime, tourism and other sectors. Even in the petroleum resources sector, a lot more could be made by checking rampant theft, pipeline vandalism, misappropriation of crude allocations and other forms of product loss. A lot more could also be made by putting the refineries and other processing plants back in business, with the added advantage of employment generation. From the scams in fuel subsidy and from the controversy of short remittance of revenues to the federation account, it is obvious that bookkeeping is in tatters and needs to be straightened out to minimize revenue losses. Government must search for other measures that must be taken to generate and conserve revenues.
Without a vibrant real sector and production base, the liquidity challenges of government borrowing and expenditure could create unbearable pressure on monetary aggregates that would frequently necessitate ‘fire-fighting’ monetary operations by the CBN, in a bid to wedge inflation and stabilize prices. Monetary operations can only provide temporary sanity but cannot take the economy anywhere. But a vibrant real sector can always rise to the occasion to convert the resultant liquidity ultimately to higher output of needed goods and services, to restore the natural demand and supply equilibrium.
The unrestrained government borrowing is inimical to the private sector’s access to credit. Lenders are quick to patronize the government because, theoretically, it cannot be seen to default in the long run. The private sector then loses out in the competition for limited funds. Then, beyond a threshold, government borrowing also drives up money market rates which inevitably translate into high lending rates to the private sector. Government borrowing should shift towards longer-term bonds that do not impact negatively on the money market. Most importantly, government must go on a fiscal diet and curb its appetite for borrowing.