President Muhammadu Buhari’s assurance that his administration will redress the debt service imbalance ratio in the 2018 budget through improved non-oil revenue generation drive and restructuring of the existing debt portfolio, does not seem to have quelled critics’ fears. TONY CHUKWUNYEM writes.
Presenting the 2018 Budget proposal to the National Assembly last Tuesday, President Muhammadu Buhari said the administration was concerned that domestic debt currently accounted for about 79 per cent of the country’s total debt portfolio, adding that the government’s medium-term strategy was to reduce the domestic debt proportion to about 60 per cent by the end of 2019, while increasing external debt to 40 per cent.
Specifically, the President said : “We are closely monitoring our debt service to revenue ratio. Rebalancing our debt portfolio will enhance private sector access to domestic credit. In addition, annual debt service costs will reduce as external debts are serviced at lower rates and repaid over a longer period than domestic debt.” Key highlights of the appropriation bill unveiled by Mr. Buhari showed that total expenditure for 2018 is projected at N8.61 trillion (a 16 per cent increase over the 2017 budget estimate of N7.44 trillion) with expected revenue of N6.61 trillion resulting in a deficit of N2.0 trillion.
An analysis of the bill also shows that the 2018 deficit of N2.0 trillion represents 1.77per cent of Gross Domestic Product (GDP), a reduction by approximately 20per cent from the 2017 deficit of N2.4 trillion (2.18 per cent of GDP). The administration also disclosed that it was planning to fund the 2018 deficit largely by net borrowings sourced locally and internationally, estimated at N1.70 trillion and proceeds from sale/restructuring of the government non-oil assets estimated at N306 billion. Furthermore, the government revealed that it allocated the sum of N2.014trillion to service debts next year, a figure that is clearly a lot more than the N1.66 trillion it allocated for the same purpose in the 2017 budget.
Interestingly, despite President Buhari’s pledge while presenting the appropriation bill to the National Assembly last week that his administration will redress the debt service imbalance ratio in the 2018 budget, it is the N2.014trillion allocated for debt servicing in the budget that seems to have attracted the most negative reactions from financial analysts and industry stakeholders.
For instance, while saying that it appreciated the efforts of the government to rebalance the debt portfolio in the light of increasing burden of debt service on its finances and the crowding-out effect of its borrowing on the private sector, the Lagos Chamber of Commerce and Industry (LCCI) described as “unsustainable” the debt service provision of N2.014 trillion in the 2018 budget proposal submitted by the President. In a statement by its Director- General, Mr. Muda Yusuf, the LCCI, said:“ The debt service provision of N2.014 trillion is 82.6 per cent of total capital allocation and 30 per cent of total revenue.
This is clearly on the high side and not sustainable.” Similarly, the well-known Development Economist and international finance specialist, Odilim Enwegbara, argued that while he is a consistent supporter of borrowing, especially, external borrowing that is targeted at boosting investment, he was worried about the 2018 budget because government was, like its predecessors, planning to borrow for consumption.
He stated: “Even when the law states that government can never borrow either externally or domestically for recurrent (consumption) or for paying down the domestic debts, or go ahead borrowing without the full cost-benefit analysis and debt repayment plans, this government has gone ahead with such a dangerous borrowing spree.
“Why our debt is a problem is because we are loading the economy with huge consumption debt. It is unfortunate that within the two years of the Buhari administration, Nigeria has borrowed for consumption more than we did the entire Jonathan’s five years and double more than Obasanjo’s eight years. As a result, the cost of debt service has escalated dangerously that we now borrow to service debt.
” Besides, he said: “The danger of accumulating consumption debts is that it will overburden the economy to the extent of undermining all growth efforts and most dangerously keeping genuine private sector firms away from the economy. That is already manifesting in Nigeria where debt service obligations at N2.014 trillion ($6.603 billion) is only smaller to N2.428 trillion ($7.960billion) capital expenditure, and the real growth engine of the economy by mere N414 billion ($1.357billion).
Since the economy is not growing fast enough to absolve the huge debt service obligations, government is dangerously forced to go as far as borrowing not only for the usual consumption but for meeting its debt service obligations. So, we borrow to service earlier debts.” In the same vein, Lead Partner, BudgIT, a leading budget advocacy organisation in the country, Mr. Oluseun Onigbinde, warned that the danger of the government acquiring more foreign loans is that it would find it difficult paying back in foreign currency if the world experiences yet another oil price slump.
Significantly, in a statement made available to journalists shortly after President Buhari’s presentation of the 2018 budget proposals, Budgit said: “Nigeria cannot continue to borrow to buy cars, computers, retrofit office buildings at the detriment of the critical mass needed to end the cycle of poverty and improve the economy. We hope the biggest proportion of capital allocation will go into improving infrastructure, expanding access to education, health among others.
“Also, we believe the revenue projection of N6.6trillion is very optimistic considering the total retained revenue of the federal government including non-oil and oil-related revenue in 2015 and 2016 was N2.8trillion and N2.6trillion respectively. Federal government nonrevenue in the first six months of 2017 stood at N587billion and no significant facts suggesting the figure would double or triple in approaching the new fiscal year.
” Also, commenting on the issue, the Principal Consultant, Henates and Associates, Mr. Henry Atenaga, said his worry is that “when you add the amount proposed for debt servicing to the allocations for recurrent expenditure, you will realise that it constitutes more than 65 per cent of the budget leaving just 30 per cent for capital expenditure. “This means that the government is still continuing with the old problem of allocating more funds for recurrent expenditure.
What is needed now is for the government to focus more on capital spending; that is what the economy requires at this time. Instead it seems the government is more interested in spending more on social welfare programmes because of the 2019 elections. My concern is that this does not augur well for the future of the country.
” $5.5bn external loans request
Analysts also point out that concern over Nigeria’s debt servicing costs have been fuelled by President Buhari’s letter to both chambers of the National Assembly early last month seeking approval for $5.5billion external loans to finance the 2017 appropriation act. While critics continue to urge the government to shelve the plan because it would increase the country’s debt burden, Minister of Finance, Mrs. Kemi Adeosun, has repeatedly argued that the move was in line with Nigeria’s debt management strategy, which aims at increasing external financing with a view to rebalancing the country’s public debt portfolio in favour of long-term external financing.
She stated: “Nigeria’s debt to Gross Domestic Product (GDP) ratio is still within a reasonable threshold. This administration will continue to pursue a prudent debt strategy that is tied to gross capital formation. This will be attained by driving capital expenditure in our ailing infrastructure, which will in turn, unlock productivity and create the much needed jobs and growth.
” The Debt Management Office (DMO) had on June 20, 2016, unveiled a new four-year borrowing plan Debt Management Strategy (2016-2019), that it said was appropriate for managing the country’s debt. Under the new strategy, the DMO said the country will have a ratio of 60:40 domestic to external loans borrowing template, which is aimed at ensuring that the private sector is not crowded out by heavy government borrowing from the domestic debt market. Commenting on this strategy when she represented the Finance Minister at a defence session organised by the Senate Committee on Local and Foreign Debts in Abuja recently, Director-General, DMO, Ms Patience Oniha, disclosed that out of Nigeria’s current debt stock of N19trillion, 77 per cent was from the domestic market through the various products issued, including treasury bills, the Federal Government of Nigeria Bonds, the Federal Government Savings Bonds and the FGN Sukuk.
She explained: “The implication of having that large amount in domestic debt is high debt service because the costs of – meaning interest rates – are high. If the government is so visible and prominent in the local market, it means that we have taken some of the money that should go to the private sector. “Banks should be able to have large amounts of money to extend to the real sector. If we are not too prominent in the domestic market, there should be more room for banks and other financial institutions to lend to the private sector and, thereby, contributing to economic growth.”
However, as several analysts have argued, an even more important than the issue of the high cost of servicing debts should be about what percentage of 2018 budget will eventually be implemented. As one of the leading auditing and tax firms, Deloitte, stated in a report last week, “the 2018 budget is geared towards building on economic recovery accomplishments and achieving sustainable economic growth in the medium term, while ensuring increase in non-oil revenues and capital expenditure. However, taking a cue from the underperformance of the 2017 budget implementation, the Federal Government will need to take steps that will ensure full implementation of the budget in 2018 to facilitate the achievement of FGN’s set goals for the year.”
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