Debt threatens FG’s economic recovery plan

Nigeria’s recently launched Economic Recovery and Growth Plan (ERGP2017-2020) appears to have been generally well received by industry experts. However, the country’s already high debt service ratio in proportion to income, is raising concerns in some quarters about government’s ability to fund the scheme. TONY CHUKWUNYEM writes

 

Nearly two years after he assumed office, President Muhammadu Buhari last Wednesday, launched what his administration has tagged the Nigeria Economic Recovery and Growth Plan (NERGP2017-2020).

Although the event came about a month after the Ministry of Budget and National Planning posted the NERGP on its website, it still generated debate among financial experts. While most analysts welcomed the plan’s three cardinal objectives of restoring growth, improving Nigeria’s economic competitiveness and increasing social inclusion, there were those who argued that it could worsen the country’s already high debt service ratio.

They cited the fact that the Minister of Budget and National Planning, Mr. Udoma Udo Udoma, had confirmed on several occasions that the NERGP was already being implemented as part of the 2017 budget, which government had said would be significantly funded by borrowings from domestic and external sources.

Specifically, in order to revive growth after the economic contraction of 2016, President Buhari proposed a record N7.3 trillion budget for this year, resulting in a deficit of N2.36 trillion. He said the deficit would be financed mainly by projected borrowing of about N2.32 trillion. He had explained while presenting the 2017 budget proposals to the National Assembly, that government’s intention was to source N1.067 trillion or about 46 per cent of the borrowing from external sources while N1.254 trillion would be borrowed from the domestic market.

High debt servicing cost

However, before the NERGP was released, figures published by the Debt Management Office (DMO) show that Nigeria spent $1.974 billion dollars to service its external debt and another N4.855 trillion to service its domestic obligations in the last six and a half years.

DMO Director-General, Dr. Abraham Nwankwo, had, in fact, revealed last February that the nation’s total debt profile as at December 31, 2016, was N17.36 trillion up from N16.29 trillion in June 2016. Further analysis of figures obtained from the agency indicates that the country spent $166.02 million to service its external debts in the first half of 2016 while N616.68 billion was spent on servicing local debts during the same period.

This figure is expected to rise this year and throughout the three year period that the plan covers.

The reason is that apart from the fact that government recently issued a $500 million Eurobond as part of the 2016 budget- after raising $1 billion in February- it is also seeking to get loans (at least $1 billion) from the World Bank in addition to the $600 million it had taken last year out of a $1 billion African Development Bank (AfDB) loan. Financial experts point out that while Nigeria’s debt to Gross Domestic Product (GDP) remains low at around 14 per cent, the country should be worried about the percentage of its revenue that goes into servicing of debts.

IMF’s warnings

Indeed, the International Monetary Fund (IMF) had, in 2015, raised concerns over Nigeria’s rising debt portfolio, warning at the time that the cost of servicing the country’s debt could rise to 35 per cent of revenues in the next four years. In its staff report on Nigeria issued that year, the IMF stated: “While the overall debt burden would remain contained under stress, the interest burden would increase further by an additional four per cent of revenues, bringing the total burden to around 40 per cent of revenues.

Consequently, to ensure sufficient space to finance desired investment, the authorities should continue to follow a prudent approach to borrowing, remain vigilant to the trade-offs between cost and risk, and ensure the proceeds from borrowing is managed to secure the maximum return on investment.”

Similarly, in the report on its Article IV Consultation with Nigeria issued a few weeks ago, the IMF advised Nigeria to remove currency-trading restrictions and reduce its budget deficit and debt-service costs to “sustainable” levels, pointing out that Nigeria’s debt-service costs doubled last year to 66 per cent of revenue.

The Fund stated: “Stronger macroeconomic policies are urgently needed to rebuild confidence and foster an economic recovery,” adding that there’s a “need for a front-loaded, revenue- based fiscal consolidation starting in 2017, to reduce the Federal Government interestpayments- to-revenue ratio to sustainable levels.”

Sanusi’s stance

Interestingly, against the background of the release of the IMF’s Article IV Consultation report on Nigeria, the respected former Governor of the Central Bank of Nigeria (CBN) and Emir of Kano, Muhammadu Sanusi II, also commented on the government’s economic model, saying it would not work. Contending that the Federal Government was borrowing unsustainably, he corroborated the IMF’s view that Nigeria was spending 66 per cent of its revenues to pay interests on debts, stressing that such a model was unsustainable.

The former governor of the apex bank was quoted by journalists as saying: “The Federal Government of Nigeria is spending 66 per cent of its revenues on interests on debts, which means only 34 per cent of revenues is available for capital and recurrent expenditures. “That model cannot work. If you look at the 2017 budget of the Federal Government, I sometimes wonder what Nigerian economists are doing?

In the 2017 budget presented by the Federal Government, the amount earmarked for debt servicing is in excess of the entire non-oil revenue of the Federal Government, but that is not the problem. The problem is that it is a budget that is even going for more debts.”

He said government at all levels should realise that borrowing had reached its limit and should therefore look for ways to attract investments. “Growth can only come from investments it cannot come from consumption. It cannot come from government balance sheet. It cannot come from borrowing because you cannot borrow unsustainably,” he said.

Continued reliance on oil

Furthermore, apart from concerns over the impact of Nigeria’s high debt to revenue ratio on the ERGP, analysts say they are worried that by stating that “oil revenues will be used to develop and diversify the economy, not just sustain consumption as was done in the past,” the framers of the plan are not helping the country’s attempts at diversifying away from oil.

As another former Governor of the CBN, Professor Chukwuma Soludo, put it: “Is the ERGP the plan for a post-oil economy that Nigeria has been waiting for? Will it finally do it? First we must commend the Federal Government for this effort. But let me raise two or three questions.

“Whose plan is it? Ownership would determine whether the plan is just a public relations document or whether it would be implemented….All previous plans since 1960 promised to diversify away from oil.

So how is the ERGP different? Where is the new structure in the country to deliver the new plan as promised by APC (the ruling party)? How would you translate to a post-oil economy when the plan was designed to depend on it? Or are we trying to repeat the same thing?” In addition, a financial columnist for an online newspaper, Dr Ebuka Nwankwo, stated : “The document (ERGP) claims that oil revenue will be used to ‘develop and diversify the economy.’

This wish by the framers of this plan is debatable: A 2.5 million barrel per day oil output cannot sustain the consumptive lifestyle of 180 million people, who depend on it for its entire forex earning, not to speak of being enough to fund infrastructural development, which would spur growth in other sectors.

This has been the problem with the country: almost all the nation’s earnings from oil are spent on recurrent expenditure. Investments in capital projects have always been with borrowed funds. “But the plan overlooks this major issue: the short-term price of oil – which the plan seems to be banking on — is highly unpredictable,” he added.

According to him, even with the cut in production by the Organisation of Petroleum Exporting Countries (OPEC) current oil inventories show that there is still significant supply in the market.

Also, commenting on the ERGP, respected Economist, Dr Ayo Teriba, said: “One of the biggest problems I have with the plan is that its framers still seem to have the mindset that government should be involved in everything. Most sectors are still closed to the private sector. Government simply does not have the money to invest across all sectors so they have to expand sectors in which foreign investors can come in to invest.”

FG tackles revenue concerns

However, reacting to concerns about government’s ability to fund the plan, the Minister of Budget and National Planning, Mr.  Udoma Udo Udoma, stated on a business programme last week, that the government was aware of its challenges in this area and had set up a committee that is currently working on how more revenue could be generated for funding the NERGP. He said that the government was also looking at ways of broadening the tax base and making tax collection more efficient.

Conclusion

But as a financial analyst, Mr. Shola Sanni, argued, “any plan that relies on extensive borrowing has some serious issues. The ERGP is good in that it has brought more clarity with regard to the government’s policy direction.

However, government’s ability to significantly generate sufficient revenue in the next three years will determine whether the plan will be successful or not.”

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