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FG has no reason to borrow more as growth does not justify huge debt –Alaje

Mr. Paul Alaje, senior economist and partner at SPM Professionals, is a Fellow of International Management Consultants Board (FIMCB), USA. Alaje, a business, financial and economic development consultant, berates the Federal Government for its quest to get the nod of the National Assembly to borrow more money from external sources as he argued that the country’s economy has only recorded a growth average of two percent in the last five years despite debt increasing by as much as 20 percent. He revealed in this interview monitored by Bamidele Famoofo on Arise Television that the tussle over VAT revenue between the states and the Federal Government is the first step towards attaining financial autonomy by the sub-nationals.

What’s your reaction to the request of the FG to the National Assembly to approve its plan to borrow over $4billion from external sources to finance its budget?

My concern is not only for debt service but exchange rate risk, so for me it is important to find alternative to borrowing. The proposal from the president to the national assembly for me is at best disturbing and worrisome. If I must explain there are three cardinal points economics says should be considered for a country to determine if it should continue borrowing or to stop borrowing or re-think it position. The first one is debt to GDP. It is less than 40 percent in Nigeria, and we are within that corridor that is not bad at all, but that is not the only condition; it is only one out of three. The second condition is debt service to revenue. What we are doing at the moment is over 50 percent and we should not be using more than one- third of what we make to service our debt, but we are using more than half of our revenue and projection shows that we may be spending between 60 and 70 percent to service debt in real term. When you now consider the last condition which is the most critical and very important, it is a question about what impact debt has on the economy. In Nigeria, debt has grown by over 20 percent in the last five years but economy has grown with an average of two percent in the same period. The question is of all this money we are borrowing, where exactly is the impact?

The president has said we need the borrowings whether we like it or not because we don’t have enough funds locally to finance our budget. So, where do you suggest that the federal government gets the money from?

I think the national assembly must have to work with the executive arm of government to get things working but they don’t always have to approve of all the requests from the executive to borrow. They should subject requests to borrow to certain parameters for instance debt to GDP. Looking at debt to GDP, we can still accommodate the FG, as a matter of fact, looking at our external debt at over N33trillion, we can afford to increase it to about N66triillion by putting the debt to GDP parameter only into consideration. But the question is how are we going to service this loan? So, limiting what the executive needs to borrow is very important. We must ask how we want to fill the gap. Where are we going to get money? And the answers are not farfetched. The first thing to do is to optimize public-private partnership. We have seen what Africa’s richest man Aliko Dangote did in the Lekki /Ajah expressway in Lagos State, which is on large scale. We can get two or three companies to come together and government give them tax credit for them to finance some of government expenditure, which will not put us at the exchange rate risk of what exchange rate value should be. What we borrowed in 2013 for instance, at approximately N150/USD is now officially above N400 per US Dollar while parallel market is over N540/dollar. So, should we then continue to borrow when we know we are not able to control what is happening to Naira? What they should is to optimize PPP and look at potential revenue windows and how to explore them. If we consider what the National Bureau of Statistics (NBS) reported on the telecom sector, the sector that has been growing despite the scourge of pandemic, but revenue to government from this particular sector, I’m afraid is not growing.

What is the best time for government to hit the market with the three billion Eurobond considering that that the US fed and FOMC will be meeting next week. Do you think it is best for us to launch into the market before FOMC?

I think it is very important for us to quickly get into the market because if the meetings affect rates, it may end up affecting what the rate will be for Nige- Alaje ria. Remember this is a commercial loan which means it will respond to market rates. So, I think it is important that we quickly make the move to approach the market to raise the loan just before the US FED meets in the coming weeks.

Concerning VAT, beyond the legal and political tussles, I consider that everything boils down to how to share the revenue in a manner that is fair to all and not really about who collects the revenue. Do you perceive it same way?

Well, I also think it is about sharing because who collects also have the power to share. In a case when in 2020, Lagos State contributed approximately 25 percent of the GDP. A formal Minister of Finance, Mrs Kemi Adeosun also revealed in 2017 that six States which include Lagos, Rivers, FCT (Abuja) with some three others, contributed 80 percent of total value added tax revenue generated by the nation while the remaining states contributed only 20 percent to VAT revenue. So, the issue is if some states are contributing as much as they are doing, why are they getting as less as they are getting? States have said they want to collect their own VAT revenue but before now some states including the FCT had collected tax before that right was abolished through a Decree sometime in 1993 and VAT was introduced. Having checked what the Constitutions say about collection of VAT, I will say it is not particularly clear who in particular should collect VAT revenue. We cannot talk about sharing without first talking about who will collect what. But that does not mean that the Federal Government does not have role in VAT revenue collection even if Lagos State, Rivers and so on say they want to collect VAT revenue. We must inform Nigerians that VAT is divided into three components. We have import, non-import, foreign and local. In 2020, for import, we had N348billion that was collected by Federal Government through the Federal Inland Revenue Service (FIRS) and for foreign and non-import VAT we had N420billion and local was N763billion, this is so important because even if states say they want to collect and share, the truth is that some states that are weak in terms of structure, collection and in fact, in terms of Internally Generated Revenue (IGR), will definitely be affected. But that does not mean that all is well with states like Lagos and Rivers who are big in revenue generation.

Six out of 36 states in Nigeria are very powerful in terms of revenue generation while the remaining are weak. What does that speak to the overall development of the country?

Six out of 36 is not a winning number and that is because the foundation was bad. The reason most of the states were created by the military was to appease some people. They felt States are created to satisfy personal interests. They didn’t consider how the states being created will be sustained. Right now we are in a democracy where sustainability is the key issue for the sub-nationals. Now those states that have been helping the entire federation to survive through revenue generation are beginning to say they are getting tired, their hands are getting weaker. They are saying we need to help ourselves. For me we are getting to that point where we need to begin to have conversation as to whether we need States that are financially incapacitated, unable to finance their own budget, that will perpetually wait on the Federal Government before they money to spend?

But the reality is that every state has got something to make money from. Do you think it is time for the national assembly to review the economic and financial viability and going concern status of the 36?

I think it is very important for the National Assembly to have a review of the finances of the whole federation especially the states. I’m however happy that some efforts are being made as regards the review of the Constitution. Research has shown that there is none among the states that does not have at least an agric produce which is well enough to sustain its economy. The NBS have always reported through figures what the states have and what they should do with them to help sustain them but I think the chief executives of most of the states are not interested in the figures and what they should do to help themselves. But personally, I and the organization I represent believe that each of the states can generate at least N50billion above what level of revenue they have hitherto achieved on a monthly basis. Lagos state can make far more than they generating now if they are allowed to collect their own VAT.

Is this all about financial autonomy for states?

Well, I think it is about financial autonomy and I think it is the beginning of the new things to start in Nigeria. But before states have it, they should also free the Local Governments from the shackles where they are because when we talk about financial autonomy, the LGs needs it because the real poor people in the country are closer to them than they are to the other arms of governments (states and federal). We will be able to promote efficiency in the system when we achieve this autonomy at all levels.

 

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