The debt burden: A future compromised by borrowings

By Joseph ’Afamhe 

About N5.37 trillion (almost 50 percent) deficit to be funded by “domestic and foreign borrowing” is billed into the 2020 national budget. The federal government’s projected expenditure in 2021 is N12.658. The expected revenue is N7.498 trillion, leaving a gaping hole of N5.16 or 41 percent to be sourced from the debt market, external or domestic.

LAST Wednesday, the Debt Management Office (DMO) again reeled out statistics – not just numbers as many people would have thought. The total public debt stock, Nigerians were told, rose to N31 trillion as of June 30.  The figure is larger than the past five-year-national budgets combined. It is about one-fifth of the entire economy of the country; about 350 percent of the 2021 federal government’s revenue projection; bigger than the economies of Senegal, Zambia and Uganda put together. 

The debt burden paints images of the country’s dark past and uncertain future, a legacy of historical failure to channel public resources to where they are needed for optimal performance. Yet, this is but a mere nominal approximation.

It says nothing about generational consequence; the value is not as significant as the content of the mounting obligation and the endless pains in form of deprivation and the opportunity cost this will inflict on the future generations whose wellbeing is a future discounted by the deficiency in infrastructure investment. The utilisation, the abuse of the loans, the ability of the future generation to repay and the commitment to timely-servicing all matter much more than the scaring statistics. 

The current debt management approach is as droopy as ever. Both federal and state governments have continued to incur debts without the slightest regard for sustainability, experts including Prof. Pat Utomi and Godwin Owoh, a professor of Applied Economics, have warned. Whereas concerned stakeholders expect a retreat and gradual reduction of the burden, the figures are increasing at a disturbing rate.

Sadly, the propensity for debt accumulation outweighs the will to pay – a common trait of institutions or entities swallowed by debts, historically. From the status document released last week, the debt stock increased by N2.38 trillion among which was N1.21 trillion “budget support loan” secured from the International Monetary Fund (IMF). On the flip side, the entire external debt repayment and servicing bill within the three months was N103.3 billion or 8.5 percent of the “budget support loan” secured from the IMF.  

For a country whose total external debt profile is currently N11.4 trillion (with July–September obligation yet undisclosed), only N25.3 million was spent on principal pay-off in the entire second quarter. If the pattern continues, Nigeria would have repaid N100 million or 0.000009 percent of its debt bill in the next one year.

What does it look like when one flips the coin? About N5.37 trillion (almost 50 percent) deficit to be funded by “domestic and foreign borrowing” is billed into the 2020 national budget. The federal government’s projected expenditure in 2021 is N12.658. The expected revenue is N7.498 trillion, leaving a gaping hole of N5.16 or 41 percent to be sourced from the debt market, external or domestic. As usual, one only gets to know that less than half of the projected revenue will be realised when the fiscal year is half gone. What happens? Debt, debt and more debt than initially planned!

Basic economic optimisation rules will advise a cut in costs if earnings cannot be increased. Unfortunately, Nigeria has been through the stage it currently is over and over again. Nobody wants to bite the bullet but go borrowing even when revenues go on a downward path. In the 1980s, the country borrowed to survive a revenue shortfall. In the 1990s, history repeated itself. In the past two decades, the country has experienced a boom-and-bust-cycle more than three times. When the revenues are upswing, the authorities squander, and when the cycle bursts, they call the creditors.   

The debt market is a dragnet all around. Whether one borrows from the domestic market or the drying international market, there are sufficient risks that could suffocate the already-bleeding economy to death and mortgage the future of the country. So, the decision on whether to go for an external or local loan is often a stand between the devil and the Red Sea. One only knows the depth of the sea after plunging in.

The Devaluation Factor

CURRENCY volatility is a major concern when a country readily procures foreign loans like supermarket items. For instance, with the naira devalued by over 20 percent this year alone, the cost of the external debt incurred as of March this year has increased by the same proportion. All the dollar-denominated loans procured before the end of 2014 when the exchange rate moved from N150/$1, have ballooned by over 150 percent based on currency revaluation alone. That has increased the burden of repayment.

It is not an easier decision to go for domestic debt either. The crowding-out effect is mainstreaming into applied economics as a red light, especially for developing countries. When the public sectors habitually invade the domestic debt market to finance their activities, they inadvertently muscle out the private sector as the cost of borrowing becomes increasingly unbearable or unaffordable. When that happens, private investments dry up and the job-creating capacity of the economy nosedives.

Today, if you are not into importation and trade, you cannot contemplate approaching the money deposit banks (MDBs) for facilities. Their tenors are opposed to the time required for a production cycle to be completed. If the tenor is tolerable, the cut-throat interests and sundry charges are not. Alternative financing sources such as venture capitals are still not here yet just as the development facilities such as the Bank of Industry (BoI) loans have been politicised.   

Muda Yusuf, the director-general of the Lagos Chamber of Commerce and Industry (LCCI), says the exploitative credit market is one of the reasons Nigerian manufacturers have remained uncompetitive. Yusuf’s organisation has led the campaign for the easing of the business environment through affordable credit facilitation. Unfortunately, the banks that would have tailored their funding programmes to meet the needs of the economy know where to go when they want to make money – the public sector.

In recent times, some economists, including Sheriffdeen Tella, a professor at Olabisi Onabanjo University, says there is another leg of the debt market that is neither as corrosive as the conventional domestic debt nor as debilitating as the external debt. The money that is stored in septic tanks and caskets in different parts of the country! 

Those who invested in the third Sukuk Bond technically paid the federal government to help keep their money as the real interest rate was negative (matching its 11.2 percent interest rate with the current inflation rate which is near 13 percent). Yet, the bond was oversubscribed by 446 percent. 

Tella suggests that the Sukuk experience can happen in economies where there is so much ill-gotten “buried money” that is looking for investment windows to be channeled to. He says this money is outside the conventional intermediation and that it could be called up for public infrastructure development without distorting the credit flow that could crowd-out private sector investment. The aspect the Tella school of thought has not touched is the moral burden of exploring stolen wealth for official purposes. 

States as Culprits

There appears to be a positive correlation between state financial strength and debt accumulation; a situation that seems to suggest that viability is now only a license to go on a borrowing binge. Bayelsa, Cross Rivers, Delta, Imo, Ogun, Kano and Rivers just as FCT and Lagos have all surpassed the N100 billion-debt mark. 

THE challenge of unrestrained desire for easy money by the public sector, which is rarely used for what it is procured for, is the story of Nigeria. The states are not spared. Lagos State, with its enormous revenue mobilisation capacity, is currently indebted to the tune of N493.3 billion, officially. One might think the Federal Capital Territory (FCT) being the first beneficiary of the federal benevolence is not hard-pressed beyond administrative responsibilities. Still, it currently has over N100 billion hanging on its neck. 

Akwa Ibom, Bayelsa, Delta and Rivers – the so-called oil-rich states – seem to be competing for the my-debt-is-bigger-than-yours title. The debt status of the oil-producing states is somewhat curious, and this applies to other states considered to be financially stable. There appears to be a positive correlation between state financial strength and debt accumulation; a situation that seems to suggest that viability is now only a license to go on a borrowing binge. Bayelsa, Cross Rivers, Delta, Imo, Ogun, Kano and Rivers just as FCT and Lagos have all surpassed the N100 billion-debt mark. 

If you are not a former governor, a top banker reveals, you can only guess the debt status of the states as the amount they keep away from prying eyes is far larger than “what they declare.” Some of the deputy governors, it was also learned, do not have the exact amount of debts their bosses have piled up for successive administrations. But whether a loan is declared or not, it has to be paid, which is one of the reasons behind the desperation of incumbents to handpick their successors. 

A litter of unusable monuments

THERE are dozens of abandoned, unviable, or white elephant projects that were funded with debts incurred at huge costs by different state governments. The N60-billion Tinapa Free Trade Zone and Resort is a typical case of how ill-conceived projects left the state government with an unnecessary debt burden. After Donald Duke who initiated the project left office, his successor, Liyel Imoke said he inherited over N40 billion debt bills incurred on the account of the failed project.

State governments have been involved in unhealthy rivalry over airport development even when such facilities are unviable. Akwa Ibom, Delta, Bauchi, Jigawa, Kebbi and Taraba states, for instance, reportedly spent N20 billion, N37.01 billion, N7.9 billion, N15.5 billion, N17 billion and N17 billion respectively on airport projects which have little or nothing to add to their economies. The loans were sourced from the debt market at stiff conditions. Akwa Ibom, for instance, went further to float Ibom Airline Company in a brazen disregard for expert caution. 

Also, the proposed Akwa Ibom Free Trade Zone has started generating the Tinapa sort of publicity in its heydays, The World Bank and the International Financial Cooperation (IFC), as usual, have shown interest in partnering with the promoters of the scheme, chief of which is the state government. 

From Sokoto to Lagos, there is a “Tinapa” currently being funded with debts the creditors have no concrete plan on how they will be cleared. While some of them may be well-thought but lack the required cost-benefit analysis, the majority are merely ego-boosting. Rather than having wealth-creating projects, the country ends up being filled with unusable monuments. 

 …The Rail examples

THE state governments are not alone in this gambit. If the state chief executives are culpable in how to waste unavailable resources on unviable projects, the federal government is guiltier. The culture of public infrastructure debt-funding is almost as old as a modern Nigeria except that it does not become a public debate until the government becomes too indulging to realise that debt is only one of the many financing options.    

There have been many storms about the rail project, the choice of funding and the question about viability. Interestingly, the first documented Nigeria public foreign debt was incurred by the colonial administration in 1958 to finance the same Nigerian Railway Corporation (NRC). A modest $28 million was procured for rail projects, which was a major catalyst for growing the nascent economy in the days. In fairness to the colonial master, the rail system became the most important public infrastructure it bequeathed Nigeria at Independence in 1960. 

In the intervening years, the system benefited from the same missteps that set the post-Independence economy spiralling. The schools started losing shape owing to poor maintenance. And so were the rail facilities and other public infrastructure. It did not take long before the country realised that the rail system was a burden the federal government could not bear for long.

The usual story started. There was not enough funding to maintain the infrastructure. Agreements were not followed through. Projects were abandoned. The system could not sustain its operating costs much less sparing any resources for capital reinvestment. Salaries were becoming irregular. Pension arrears become the most visible legacy handed over to every incoming administration. The government took loans, more loans and yet another. Yet, the rail system could not roar back to life.

In no distant time, the NRC headquarters at Yaba in Lagos became a junkyard. Every available space was overtaken by unserviceable engines, coaches (some of which were brought in new but abandoned to rust away), tools and equipment originally meant for rehabilitation. The buildings, which housed the workers and served as workshops, became hideouts for miscreants, posing an enormous threat to the neighbourhood. The Railway Compound, as it was commonly called in the days, became an eyesore – an epic representation of the wastefulness Nigeria’s public sector is known for.  

The NRC case study demonstrates the government’s inability to sustain any investment and make a success out of any initiative. So much investment but too little result! Sadly, without an adequate diagnosis of the failed past the federal government is back to the trenches. 

A DMO document indicates that a $500 million loan agreement was signed with China in December 2010 for the Idu-Kaduna railway project. While the loan has swelled the country’s debt profile, there is no indication that the project is generating enough money to service or repay the loan. While the current administration is scaling up activities on the service route with additional capital injection, Minister of Transportation, Rotimi Amaechi, admitted recently that the major concern of the government is to cover the running cost. 

Before the fares were increased in July, there were reports that the cost was subsidised by the government. If the flagship of the railway modernisation programme runs on subsidy, does that say anything about the management template of Lagos-Ibadan, Itakpe-Warri, Lagos-Kano and Lagos-Calabar and other routes that will kick off soon? If there will not be fair pricing to at least cover the running cost, how will the federal government fund the capital-intensive track and coach maintenance? 

A few weeks ago, Amaechi told Nigerians that any attempt by the National Assembly to probe the $5.3 billion commercial loan agreement between Nigeria and the Export-Import Bank of China could affect ongoing negotiation with the creditors. “Summoning us to the National Assembly to come and address the loans would look like the government is no longer interested in the loan,” the Minister argued. 

Amaechi’s argument seems to have defined the existing tradition. Nigerians only get to know about a loan agreement when the government cannot fulfill its obligation like in the case of the Paris Club. And as usual, those who signed the agreement would have long left the government before the bubble burst.

In 1964, Nigeria secured a $13.1 facility from Italy for the development of Niger Dam. That same year, a grant amounting to $82, as revealed by a document on the website of the Bretton Wood institution, was secured from the World Bank for the same project. The dam and other power-related assets have been used by successive administrations to shop for loans from all available sources before the defunct Power Holding Company of Nigeria (PHCN) was unbundled and privatised. 

…The power conundrum

PRIVATISATION has stopped government’s spending on power, a concern that has raised questions about the terms of the transaction. In 2019, Siemens signed a power sector deal. The country was told that the government had committed N8.6 billion. The rest of the agreement have been shrouded in secrecy while Siemens is said to have started implementing the contract. 

Azura Power Plant, a private project financed with $686million debt raised from 15 lenders led by the International Finance Corporation (IFC), is an example of how Nigeria fritter accumulated debts inadvertently via opaque agreements. The Senate, which had been indifferent to the terms of the deal, suddenly raised the alarm that the project is a drain on the country as the Share Purchase Agreement signed with the private owners says the country must pay for every kilowatt of power generated whether it is used or not. This may, in a few years, amount to a debt obligation the government will have to pay. 

The federal government is currently pursuing a legal battle to overturn the $9.2 billion judgment debt delivered against it by a British court in favour of an Irish firm, Process and Industrial Development (P&ID). The government had entered an agreement many people described as thoughtless, with the company. If the country escapes the payment of the fine, it will surely not evade the cost of litigation to upturn the ruling.  

Future production (earnings)—health, education — in a tailspin. 

Statistics say Nigeria has moved 19 places to 131st on global ease of doing business rating but those in manufacturing say it is more difficult to do business today than any other time.

NIGERIA has experienced the consequences of debt default. Shell Petroleum Development Company and other international oil companies sometimes had to cut down investments owing to the delay of paying the debts the Nigerian National Petroleum Corporation (NNPC) owed them via their joint venture operations. Before the 2006 Paris Club’s debt negotiation and relief, Nigeria had a herculean task securing debt from especially members of the club. Consequences of debt default, which Prof. Owoh said is very likely, include poor rating and capital flight. When a country’s rating is downgraded, it borrows at a much higher rate at the international market.

There is a consensus among Economics theorists on when a country could afford to accumulate debt for future generations – when there are strong indications that the coming generation will be richer than the current and the previous ones. Today, the two key determinants of future production (earnings) – health and education sectors – are in a tailspin. 

To show how poorly Nigeria is doing in human capital development, it is sixth on the bottom of the global human development index (HDI) ranking. Rwanda, Kenya, Ghana, Angola, Guinea, Congo Democratic Republic, Sierra Leone, Madagascar, Mozambique, Sudan and Tanzania are among the few African countries doing better than Nigeria.

According to the United Nations Children’s Fund (UNICEF), every fifth out-of-school child is a Nigerian. It adds that 10.5 million of the country’s children aged between five and 14 years are not in school. Those who are in schools are taught with curricula experts dismissed as obsolete and out-of-touch with the new world requirement.

The population has grown at an average of 2.6 percent in the past 10 years. But the job-creating capacity has continued to plummet. Job market statistics released by the National Bureau of Statistics show that one out of every two Nigerians that are able and willing to work is either jobless or underemployed. It could be worse as the authority admitted that its survey was limited by Coronavirus containment measures. 

Statistics say Nigeria has moved 19 places to 131st on global ease of doing business rating but those in manufacturing say it is more difficult to do business today than any other time. With the recent increase in electricity tariff, Nigeria’s energy cost has surpassed the global average, which is about N47, meaning it will now be much more expensive to produce locally. Bala Zakka, an energy economist, says the deregulation of the energy and downstream sector of the petroleum industry will not boost efficiency but fuel importation and speculative investment, which will increase the unemployment rate.     

So, where would the incomes that will pay the mounting debts come from?