Feature

Economists: N3trn subsidy’ll push Nigeria beyond 40% GDP borrowing limit

…budget deficit hits N8.81trn

 

As the Federal Government announced plan to borrow about N3 trillion to fund oil subsidy in this year’s budget, PAUL OGBUOKIRI reports that the development would take government borrowing from the current 36 per cent to about 40 per cent of Gross Domestic Product (GDP)

 

Oil subsidy borrowing to increase total government borrowing to N8.81 trillion

 

Indication are rife that if the Federal Government goes ahead to borrow the N3 trillion approved by the Federal Executive Council (FEC) on Wednesday to fund the oil subsidy in the 2022 budget, the country would reach the 40 per cent of GDP borrowing limit at which the nation’s debt becomes unsustainable and considered a heavily indebted nation.

 

The warning came as the Federal Executive Council (FEC) approved a N3 trillion lifeline to cater for the payments for this year. The Presidency, on Wednesday, said Nigerians will pay a price for the Federal Government’s decision to maintain fuel subsidy for the next 18 months.

 

The government’s payment plan announced at the end of the FEC meeting on Wednesday would jerk up the N17.1 trillion budget for 2022, which is criticised for its huge deficit.

 

Presidential spokesman, Femi Adesina, had stated earlier on Channels Television’s Sunrise Daily programme that Nigerians would have to pay a price if the subsidy is retained beyond June 2022. He said that the decision had left the government with no other choice than to continue borrowing to fulfill its fiscal obligations.

 

On the financial cost of the 18-month extension for subsidy removal, the presidential spokesperson said: “Head or tail, Nigeria will have to pay a price; it is either we pay the price for the removal in consonance and in conjunction with the understanding of the people. The other cost is that borrowings may continue and things may be difficult fiscally for both the state and the Federal Government.”

 

The 2022 budget has a deficit of about N6.25 trillion, approximately 3.39 per cent of GDP. This is slightly above the 3 per cent ceiling set by the Fiscal Responsibility Act 2007 (FRA). The deficit is expected to be financed by new borrowings, privatisation proceeds and drawdown on loans secured for specific projects.

However, economists have continued to express concern over the Nigeria’s rising debt profile, especially debt to GDP and debt service to revenue ratio, as well as foreign exchange liquidity constraints, both of which have been exacerbated by the COVID-19 pandemic.

 

According to Dr Fidelis Obioma Ogwumike of the Department of Economics, University of Ibadan, while some of the revenue generating initiatives in the 2022 budget are commendable, a key focus area may be to explore avenues to diversify export revenue sources away from crude oil, which currently accounts for more than 80 per cent of total foreign exchange receipt.

 

He said that concerted and coordinated efforts are required to improve the policy environment and address insecurity in order to boost domestic investment and attract foreign direct investments.

 

 

He expressed worries that the additional N3 trillion to be borrowed to fund oil subsidy would further endanger the Nigerian economy as the country would take Nigeria above the 40 per cent of GDP borrowing limit. He explained: “The rule is we should never borrow more than 40 per cent of our GDP.

 

But we are already at 36.9 per cent of GDP which means that 3.2 per cent more and all the alarm bells go off. “Now – imagine if our revenue keeps dropping as we are yet to start feeling the impact of the rising oil price, and the debt keeps increasing with this proposed additional oil subsidy borrowing. What that means is that one day, we could cross 3.2 per cent.

 

Then, we will really have a debt problem. “Since we currently borrow to pay salary, when the alarm goes off – further borrowing is a disaster: “The Government will struggle to pay salaries(which is scary considering that the government is the biggest employer of labour in Nigeria).

 

“More taxes will be imposed to raise money, including tax on goods which will increase the prices you pay on foreign rice for example. Our currency will get further devalued, which means that things will get even more expensive in the market.”

 

Subsidy jacked up by about 300%

 

Meanwhile, the Minister of Finance, Budget and National Planning, Zainab Ahmed, had said that the Federal Government has proposed a N3 trillion budget, over 300 per cent increase from the estimated N886 billion the Federal Government is supposed to incur in 2022.

According to the Minister, the increase is to meet the incremental fuel subsidy request in the 2022 budget. She disclosed that only N443 billion had been provided for in the budget passed, which was meant to accommodate subsidies from January to June.

 

By this trend, the total subsidy payment for the year would have been around N886 billion for 2022. She said that the new request was considered by the Council, which directed the ministry to approach the National Assembly for an amendment to the fiscal framework as well as the budget.

 

“The Nigerian National Petroleum Company (NNPC) has presented to the ministry a request for N3 trillion as fuel subsidy for 2022. What this means is that we have to make an incremental provision of N2.557 trillion to be able to meet the subsidy requirement, which is averaging about N270 billion per month.”

 

Conflicting figures on monthly subsidy payment

 

On Monday, the Finance Minister met with the Senate President, Ahmad Lawan, on the petrol subsidy issue, where she stated that the average being paid monthly is around N250 billion. But while briefing the State House reporters on Wednesday, she announced a N3 trillion spending on petrol subsidy, specifically the N2.557 trillion to be spent from July 2022, would be about N270 billion per month.

This came as the House of Representatives on Wednesday set up two ad hoc committees to investigate Nigeria’s daily fuel consumption and the state of the country’s refineries as the debate on the removal of fuel subsidy rages.

Speaker Femi Gbajabiamila, who announced this at the resumption of plenary, said the outcome of the investigations would guide the House on whatever action it would take on the raging issue of fuel subsidy removal. Gbajabiamila said there has been raging debate on the exact quantity of petroleum the country consumes on a daily basis with different figures being bandied every now and then.

The speaker urged members of the committee to be thorough in carrying out their investigations. “We have had figures bandied here and there without any authenticity. Before we can begin to talk about subsidies, we need to know how much we are consuming.”

Sources in two of the agencies responsible for monitoring happenings in the petroleum sector said it was unlikely for the House of Reps to uncover anything.

One of them said: “The whole probe will fizzle out in the coming days because the issue of how oil is imported, stored and distributed is shrouded in many economic and political considerations.”

 

Borrowing to fund recurrent expenditures

 

Nigeria’s 2022 budget is tainted with a huge deficit and loans whose repayment will, again, cost the country a fortune.

 

These, analysts say, puts the Nigerian economy under fiscal pressure. President Muhammadu Buhari’s government has relied heavily on borrowing to      orsustain its budget cycle, with the Central Bank of Nigeria (CBN) serving as lenders of last resort to the Federal Government.

The 2022 budget is projected at N17.13 trillion, which is 18 per cent higher than the N13.59 trillion 2021 budget. That is set to rise to about N19. 69 trillion, about 45 per cent of the 2021 budget.

 

Also, recurrent (non-debt) spending, which is estimated at N6. 91 trillion, is 40 per cent of total expenditure and 20 per cent higher than the 2021 budget. The amount is not set to rise to N9.47 trillion, over 55 per cent of total expenditure.

 

At N3.8 trillion, debt service is 22 per cent of total expenditure and 34 per cent of total revenue. The 2022 budget has a deficit of about N6.25 trillion, (to rise to N8.81 trillion) approximately 5.5 per cent of the country’s GDP.

 

Budget deficit is to be financed mainly by borrowings, with targets from domestic; foreign; multi-lateral/bi-lateral loan drawdown; and privatisation proceeds.

 

“We’re borrowing and have high level of budget deficits, when you jack up the budget from N17.127 trillion to about N19.69 trillion and you are borrowing with high level of deficit, it calls for concern,” Professor of Financial Economics and Director of Centre for Economic Analysis and Research at the University of Lagos Ndubuisi Nwokoma, said in a monitored programme on Arise Television on Thursday.

 

“Also, we are looking at N3. 8 trillion for debt servicing, which is close to N3. 16 trillion projected oil revenue. Remember, and now we have this huge subsidy bill to be added to the budget

. It shows the budget is ‘highly leveraged.’ This is not just for this year. This has been happening for some time now.”

 

The economist noted that the projected revenue of N10.1 trillion from oil and non oil sector, which was often not met, left Nigeria with excessive borrowing, adding that, “it will be a Herculean task this year for the country to meet its debt servicing obligations.”

“How do we finance the deficit? Fiscally, we have to borrow about N7.7 trillion, alongside other project-tied loans, in addition to proceeds from the sale of government assets.”

They noted that the government had a spending problem, not a revenue issue. “Even if the revenue agencies generate N30 trillion, it would be spent with less economic impact on the lives of the people. Is it not the Federal Ministry of Agriculture that made the budget for the mosque from the ministry’s budget,”

 

A Political Economist and Associate Consultant to the British Department for International Development (DFID) Celestine Okeke, said. Speaking further on the budget, an economist, banker and former gubernatorial aspirant in Abia State, Alex Ottih, expressed concern about low productivity level of the Nigerian economy and over-reliance on oil, saying at the point where the country is now, the risk of the country defaulting in debt repayment is high.”

 

He further said: “There is no doubt that the country has a big problem, which is structural and must be resolved for the economy to start moving again in the right direction. The country has a problem with productivity.

 

“A situation where the country, for more than half a century, relies on a single product, which the populace adds little or no value to, for a large chunk of its foreign exchange earnings is not sustainable. “No matter what it takes, the country needs to expand her productive base by getting more people to participate in economic activities.”

 

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