The decision of Nigeria’s Federal Executive Council (FEC) to adjust the Debt of Gross Domestic Product (GDP) ratio from 25% to 40% is a big concern not just to the nation but particularly Nigerians.
The fact is, this will no doubt make room for Federal Government (FG) to borrow more to finance both capital and recurrent expenditures. As cool as this sounds, it appears the economy will have a cocktail with debt. We need to ask, “Who will pay’’?
Borrowing is a cheap option with tremendous heavy weight of repayment on the nation’s revenue. Before the last debt forgiveness, the country, like many African counterparts, had a very low window for budget financing, the debt service to revenue was in a bad shape. The military rulers literarily mortgage the future of the country before the fourth republic. However, it was never this bad.
Making provision for further allowance in borrowing limit is tantamount to sacrificing the near future in the hands of commercial creditors. At 25% of GPD, debt service was beyond 60% in 2020. Some states had beyond 90% of IGR. Are you worried? It is normal if you are.
Unfortunately, our debts are no longer bilateral or multilateral in composition. Larger percentage of these loans, according to Debt Management Office (DMO), are commercial in nature. Commercial loans do not respond to pity party. How then will commercial loan be forgiven? Certainly not in the volume we owe. We should be ready to pay!
It is therefore important for us to consider the three decision rules when it comes to a country’s borrowings.
The first is Debt to GDP. This seems to be moderate at less than 20%. It should be mentioned that this is illusionary and dangerous. Clearly, debt service to revenue matters more. GDP is passive in debt conversions. It is only the first consideration. In fact, countries have over 60% but they perform better when considering other conditions. If the GDP is not maximized for revenue, then using it as a parameter for borrowing is faulty. Our revenue to GDP is less than 10%. Countries we compare our economy to do beyond 30% annually.
The second conversion is very important. The second decision rule considers the ratio of debt service to GDP.
A look at 2019 and 2020 reveals that the burden of debt has a major significance of our revenue.
With near 50% and beyond 60% in 2019 and 2020 respectively, it is clear that there are revenue challenges and the Federal Government must proffer a lasting solution before it is too late. How then should we promote an increase in debt to GDP? Will the GDP pay back? The real argument is, how are we going to pay back? With the revenue that is emaciating, even when compared with our abysmal budgetary provision, debt cannot fill in the gap. Debt is burdensome, it should be discouraged and reduced. There is an urgent need for FEC and DMO to immediately reconsider the new debt strategy because it will harm the economy.
The last but the most significant decision is the impact of debt on GDP growth. While adding the releases from DMO together for five years between 2015 to 2020, we have grown debts by over 15% in within these years but the economy has only grown by less than 2% on the average in 5 years. This tells us that even with debt, there are leakages. The culture of kickbacks and corruption must be dealt with. They have eaten deep into the fabrics of several sectors. This makes the impact of debt not to be felt in anyway. The question again is, should we continue to borrow to finance a budget that is not impactful on the economy? The answer is a NO.
Authorities must become very innovative as the economy has changed. The sectoral contributions to GDP in the last quarter of 2020 reveal that telecom plays a significant role in taking Nigeria out of the last recession. What seems to be left behind is government revenue as it refused to grow with the current momentum in the sector. The traditional fiscal function has changed. Unfortunately, over 90% of our state are still fixated on the precolonial approach.
We must gradually, look beyond oil as it is unstable. Nigeria must be positioned to maximize revenue from the new global economic ecosystem. I am expecting significant drop in our borrowing plan in near future not what we currently have.
In less than 5 years, we may get to a point where more than 70% of revenue is spent on service. At that point, we will have to borrow to pay wages, infrastructure and other important obligations. Some of these are currently happening. More countries will request for sovereign guaranty as security for borrowing.
Government must review overheads and recurrent expenditure. This is not sustainable. A poor country cannot be spending more than rich countries on political office holders. We must deliberately cut expenditure on political office holder but in the executive and legislative arms. This will afford us the needful revenue for other more vital expenditure.
Lastly, we added almost one trillion naira to our debt profile by borrowing nothing. We added the sum because we devalued naira twice in 2020. Thus, advocating for more debt or increasing the debt to GDP cap is making allowance for increase in poverty, hunger and deprivation.
My advice is that the Federal government should immediately throw away the plan to expand debt to GDP ratio cap. Rather authorities should capitalize on the current surge in global oil price and other solution mentioned above to boost revenue.
Paul Alaje is Senior Economist at SPM Professionals
