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Mitigating budget deficit amid rising debt stock

The Debt Management Office put Nigeria’s total debt stock at N31.009 trillion as of June 30, 2020, a disturbing development considering the recurring budget deficit occasioned by crumbling revenue sources as reason for borrowing. Isa Abdulwahab reports

Nigeria’s debt stock gained public traction about 2005 amid conversation stirred by debt negotiations with the Paris Club. In June 29, 2005, debt relief sought by Nigerian government from Paris Club yielded fruit. The Paris Club granted Nigerian government $18 billion debt relief package. As a pre-condition, Nigerian government was mandated by creditors’ club to establish structured debt coordinating agency. The DMO was established on October 4, 2000 to centrally coordinate management of Nigeria’s debt, hitherto being done by a myriad of establishments in an uncoordinated fashion. Since its debut years ago, DMO has been coordinating all affairs pertaining to the nation’s debts including but not limited to debt obligations contractions, debt servicing, bonds issuance, etcetera.

Debt stock update

DMO put Nigeria’s total debt stock comprising Federal Government, states and the Federal Capital Territory (FCT) as of June 30, 2020 at N31.009 trillion or $85.897 billion. The quarter on quarter information update on Nigeria debt status by DMO put paid to varying figures flying in public space. DMO’s new figure indicates that the debt stock increased by N2.381 trillion or $6.593 billion as against corresponding March 31, 2020 figure of N28.628 trillion or $79.303 billion.

“The increase in the debt stock by N2.381 trillion or $6.593 billion was accounted for by the $3.36 billion budget support loan from the International Monetary Fund, new domestic borrowing to finance the Revised 2020 Appropriation Act including the issuance of the N162.557 billion sukuk, and Promissory Notes issued to settle claims of exporters,” DMO clarified.

The agency explained further that the public debt stock was expected to grow as balance of the new domestic borrowing is raised and expected disbursements are made by the World Bank, African Development Bank and the Islamic Development Bank, which were arranged to finance the 2020 Budget.

The Federal Government adjusted 2020 Appropriation Act to reflect provisions made to arrest adverse and severe impact of COVID-19, which affected her revenues and increased her expenditure needs on health and economic stimulus provisions amongst others. “Additional Promissory Notes are expected to be issued in the course of the year, this, and new borrowings by state governments are also expected to increase the public debt stock,” DMO explained. Analysis of the debt stock showed that the country’s debt stock (external component) to multilateral or bilateral financial institution stood at $10.46 billion, the indebtedness to the World Bank Group as of June, 30 2020. Nigeria’s indebtedness to the International Development Association and the International Bank for Reconstruction and Development were $10.05 billion and $409.51 million respectively.

The International Bank for Reconstruction and Development and the International Development Association are both organisations of the World Bank Group. Other organisations of the multilateral financial institution include the International Finance Corporation, the Multilateral Investment Guarantee Agency and the International Centre for Settlement of Investment Disputes. The World Bank Group and the African Development Bank Group are two prominent multilateral institutions that lend to the nation. Nigeria’s total indebtedness to the multilateral institutions during the period under review stood at $16.36 billion, representing 51.97 per cent of the country’s total external debt stock. The debt office put the country’s indebtedness to the AfDB Group at $5.896 billion.

The external debts of Nigeria to African Development Bank, Africa Growing Together Fund and African Development Fund are $1.325 billion, $140,000, and $921.91 million respectively. Nigeria’s debt to other organisations of the AfDB Group such as the Arab Bank for Economic Development in Africa, European Development Fund, Islamic Development Bank and International Fund for Agricultural Development was $5.88 million, $52.52 million, $30.22 million and $201.68 million respectively. Further analysis of the country’s external debts showed that Nigeria’s total indebtedness to bilateral organisations, which in this case include foreign nations, was $3.948 billion as of June 30. This represents 12.54 per cent of the country’s entire $31.477 billion external debt stock during the period under review.

For the bilateral organizations, the country’s indebtedness to China (Exim Bank of China) was $3.24 billion, while its debt to France (Agence Francaise Development) was $403.65 million. The country’s debt to Japan (Japan International Corporation Agency) was $76.69 million, while Nigeria owes India (Exim Bank of India) $34.87 million. Nigeria also owe Germany $192.7 million. DMO put the country’s Eurobonds at $10.87 billion, while its Diaspora Bond was $300 million. Eurobond and Diaspora Bond are commercial external debt stock and account for $11.168 billion, representing 35.48 per cent of the country’s external debt stock. The office had taken time to enlighten some Nigerians banding inaccurate external debt figure. For instance, while responding to request from Falana & Falana Chambers with respect to foreign loans taken by Nigeria, the chamber had tasked DMO to explain Nigeria’s external loan put at $76 billion. Responding to Falana’s chamber request, DMO stated that $27.6 billion was what Nigeria currently owes externally.

Budget deficit and imperative for loan contraction

Nigeria’s relies majorly on crude oil sale to finance her budget. Most times, revenue expected from oil and other income sources to finance budget fall short of expenditure. Nigeria’s budgets for many years back never ceased to run on deficit. The 2020 budget couldn’t escape deficit.

To fill deficit gap, there has to be provision by way of loan.

Director-General, Debt Management Office, Patience Oniha, shed light on the imperative of contracting loans to tackle budget deficit at a recent media parley with Nigeria’s media senior editors. Oniha explained: “Every year, we draw the budget and you see new borrowing. This is because there is deficit which means our revenues are short of expenditures. When we are talking of the growth in debt stock, we forget the origin. Once you see a deficit in the budget, you have to look for funds to finance it.

“What is different now and makes it worse is that the revenue is lower. During COVID-19, the price of oil per barrel dropped to $16. Some oil producing countries were even offering 50 per cent discount. With the pandemic, our budget deficit widened. What has COVID-19 done to us? If you asked in January and February this year, in 2020 budget, we were going to borrow about N1.6trillion to cope with the deficit for 2020 Budget. But with COVID-19 it is now about N4.2trillion because our revenue dropped by about 50 per cent.” She said borrowing was not peculiar to Nigeria and nobody was out to mortgage the future of the next generations. “It is not only Nigeria that borrows. I am sure you know how indebted the United States is.

The fact that some governments are run on borrowing does not mean that borrowing is wrong. Sometimes a government may have surplus but it will borrow to keep its markets open. This is the case with Russia, the UK, Qatar, and Germany. “We had oil price at N110 per barrel and we were producing at 1.8million barrels per day during the administration of the Peoples Democratic Party (PDP).

But we were still borrowing because the budget had deficits, we still borrowed. Since we came out of the London-Paris Clubs’ loans, there are more controls around external borrowings. After the exit of London- Paris loans, we decided that we will take concessional loans. These loans are not used to finance budget but to fund capital projects.

“I know debt has moved from an economic subject to a political subject. I think it is one of the political tools to say this government has failed or has sold future generations. Some alleged that we are enslaving future generations. Successive governments have always been borrowing. The debt sticks out because the revenue is low. Our borrowings cumulative are attributable to many governments. “We are not out to sell the future generations or mortgage future generations. Some loans have three per cent interest with a tenor of about 30 years. We have also been paying back some loans.

We should try to be analytical and understand economic dynamics which made some of these loans necessary,” she clarified. Oniha cleared controversy with respect to Chinese loan. She said government had yet to draw from the $22.76 loans approved by the National Assembly. She said: “What was submitted in 2016 was a request for $30billion concessional loans. But the lawmakers cherry-picked and approved. The balance was the $22.7billion which the Federal Government submitted to the National Assembly in 2019.

“These are concessional loans with the interest of about three per cent and tenor of about 30 years. We need to let Nigerians know that the lenders will not give Nigeria $22.7billion at once. “These loans are disbursed according to milestones. That is the loans are released based on the projects they are meant for after the lenders’ consultants have done some evaluation. It does not mean that once the $22.7billion was approved, we will just be given.

Last line

Given consistent slump across all revenue sources, budget deficit remains a monster, which can only be taken care of by guided and responsive borrowings to uplift key infrastructure.

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