How an income problem is quickly turning into a debt crisis in Nigeria

Last week, during a program in Abuja, Benedicta Akpan, who works for a non-profit organization, painted a real picture of the economic reality in Nigeria. She said: “Exactly around this time last year, a 12.5 kg baking cylinder cost 3,400 N, today it is worth 9,500 N. And now here is a government’s proposal to remove the payment of gasoline subsidies, which will increase the product from N 165 per liter to N 340 by January. Everyone falls back on tough times.

Inflation is everywhere, the government is broke but also unwilling to reduce the cost of governance. So he borrows more and more to feed his appetite. And for proponents of continued debt accumulation, their slogan is that Nigeria’s debt-to-gross domestic product (GDP) ratio is still healthy. The leader of this group is the Minister of Finance, Budget and National Planning, Zainab Ahmed, who has consistently said debt levels in Nigeria are not high.

“If you consider the size of the Nigerian economy, we now have a debt to GDP ratio of 33%. Some of the African countries you can compare us with have up to 70% debt, ”she said in a recent TV interview.

At the end of March 2021, Nigeria’s outstanding external debt was around $ 32.9 billion. Of this amount, debt to multilateral institutions such as the World Bank accounted for 54.3%, followed by commercial debt (33%), bilateral debt (12.7%) and promissory notes (0.55 %). The stock of domestic debt was approximately 16.5 trillion naira or 40 billion US dollars, using the official Central Bank of Nigeria exchange rate for August 30, 2021 of 410 naira to 1 dollar.

Nigeria’s total public debt was around $ 87 billion. Domestic debt represented 62.3% as at March 31, 2021 and external debt 37.6%.

Nigeria’s external debt in June stood at $ 33,468.92 billion, of which 9.7 percent or $ 3.3 billion was owed to the Import-Export Bank of China. Debt to China accounted for 80.1% of bilateral debt, or $ 4.1 billion. The other countries that have lent to Nigeria are France, Japan, India and Germany.

In November 2021, following Senate approval of the government’s new loan request, Nigeria’s external debt rose to $ 54.87 billion from $ 33,468.92 billion at the end of June.

In principle, borrowing means spending tomorrow’s money today, so it must take advantage of it tomorrow to be optimal. This cost of borrowing must be weighed against the benefits that flow from these sources of finance, which involves assessing what the borrowed money is being spent on. The net benefit may be positive, but this requires an assessment of the composition and effectiveness of public spending. If the government borrows simply to finance consumer spending, then this is difficult to justify.

Some have argued that it is not correct to judge a country’s debt and its ability to pay simply by the amount borrowed. But debt risk is not only about the amount borrowed by a country, but also the country’s ability to service its debt.

Economists use two indicators to determine a country’s debt sustainability. The first is gross debt as a percentage of a country’s economy as measured by gross domestic product (GDP). This is what the Nigerian Minister of Finance referred to earlier as the debt-to-GDP ratio. The second indicator of debt sustainability is the debt service ratio, which is the proportion of export earnings used to service a debt, including principal and interest payments. On the basis of these two indicators, the Nigerian debt would be theoretically sustainable.

So why are there concerns about Nigeria’s increasing debt? One of the reasons may be concerns about Nigeria’s ability to meet its debt obligations in the future.

“Debt repayments are often made from income generation. At less than 5%, Nigeria has one of the lowest income-to-GDP ratios in Africa. The average for countries in sub-Saharan Africa is almost 20% and 30% for oil exporters, ”according to Stephen Onyeiwu, professor of economics at Andrew Wells Robertson, Allegheny College.

Government figures show that about 65 percent of Nigeria’s income and over 90 percent of foreign exchange earnings comes from the oil sector. Uncertainties in the global oil market and sluggish income growth, as well as the negative impacts of COVID-19 on the economy, imply that the country would face challenges generating enough income to service its debt.

During the presentation of the draft national budget 2022, President Buhari’s speech to the joint session of the National Assembly raised many questions which were identified by the Center of Social Justice (CSJ) Nigeria during a review of the supply bill. Some of these issues include the poor performance of revenue projections in 2021 (January – August) at -27.3% of total revenue, including public enterprises (EGO) and -32.2% of retained earnings in the exclusion of EAs, which followed the trends for 2019 and 2020.

There is also the issue of the recurrent deficit (6.26 tn which represents 3.39% of GDP) and beyond the 3 percent rule of Article 12 of the budgetary responsibility (FRA) as modified in the 2020 Budget Law, which stipulates that overall spending may only exceed the ceiling imposed by the FRA when there is a clear and current threat to the national security or sovereignty of the Federal Republic of Nigeria.

The 2022 Appropriation Bill relies heavily on sovereign debt of 5.0 trillion naira to finance key infrastructure and fiscal provisions. This is the result of the failure to activate the main mechanisms for mobilizing national resources, to use those that exist, to block tax leaks and drains, and to build the fiscal architecture necessary to harness the economic potentials, resources and the energy of the Nigerian people for development.

As of October last year, only 64 percent of expected oil revenues had been generated. This was due to the poor performance of crude oil production in 2021, which averaged 1.4 mbpd and below the Organization of the Petroleum Exporting Countries (OPEC) + quota. Meanwhile, government spending has grown faster than expected, meaning deficits will be covered by borrowing. More borrowing means that an increasing proportion of the income generated will be spent on debt service.

Nigeria needs to reduce the high cost of governance, curb corruption and promote faster economic growth by investing in infrastructure. The relatively poor performance of MDAs capital spending over the years, including fiscal 2021, is not expected to continue. In August 2021, the investment budget had underperformed by -34%. However, aggregate investment spending, including investment spending by public enterprises, underperformed by -47.1 percent.

The inability to continue to provide details of statutory transfers and big votes in the Wide Votes Service (SWV) and simply report them as lump sums is very fertile ground for grand corruption. This goes against the rules of fiscal responsibility, as no MDA or authority in a constitutional democracy is allowed to spend public resources in a way and in a manner unknown to the citizens who are the ultimate rulers.

It is also necessary to increase the vote for the national capital. Past experience indicates that the vote for the capital is very poorly implemented. For example, out of the 2021 (January to August 2021) global pro rata capital vote of 3.323 billion naira, only the sum of 1.759 billion naira has so far been released, which represents an implementation of the budget. investment of 52.9%. This is a very bad record in an economy lacking infrastructure. It is also imperative that the administration ensure that in these times of declining revenues, priority is given to development capital spending rather than administrative spending. This will ensure that the spending has a direct impact on the majority of citizens.

It is imperative to note that budget financing alone cannot wipe the surface of Nigeria’s infrastructure demand. The National Assembly should therefore consider other sources of funding for key capital projects.

Governments have many competing demands for financial support. Any expenditure should be tempered by fiscal responsibility and carefully considering the impact of the expenditure. When a government spends more than it collects in taxes, it runs a budget deficit. He must then borrow. When government borrowing becomes particularly large and sustained, it can dramatically reduce the financial capital available to private sector companies, as well as lead to trade imbalances and even financial crises.

Currently, there is a concerted initiative by the National Assembly to amend the 2007 Fiscal Responsibility Act (FRA) in order, among other things, to give the Fiscal Responsibility Commission more financial disciplinary powers to take the lead in cases government tax evasion.

Like other legislative acts, the principles of sound fiscal management as set out in the proposed changes in the Fiscal Responsibility Act should be given the status not only of a theoretical framework rather than of a effective implementation.

The consistent implementation of sound fiscal and debt management principles would pay dividends not only now, but for generations to come. It is crucial for Nigeria to move forward towards effective implementation and not just discuss measures that make good statements.

“The preponderance of fiscal challenges currently faced at the federal and state levels, where debt servicing swallows up most of disposable income, wages are paid with borrowed money, and some states become virtually insolvent, benefits no one.” , Eze Onyekpere, The direct CSJ leader expressed support for the FRA amendment proposal.

Therefore, the enthronement of fiscal responsibility through new legislation is a task that must be supported by all patriotic citizens.

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