Borrowing the future now

By Lakinbofa Goodluck

Nigeria has always been an indebted nation, but with different debt status at different times. Being indebted is not entirely bad so long as a nation’s Debt to GDP ratio is positive and shows the creditworthiness of the nation. What is most vital is how the country utilises the borrowed funds. No country is truly immune from debt. The top economies in the world such as the United States are all heavily indebted. It is a normal component of the political economy of every nation. Governments borrow for many reasons, but in an ideal situation, all can be traced to one motive – to make life better for the citizenry. Borrowing is an option to avoid burdening the citizens with the introduction of new taxes or increase in taxes to raise the required funds to finance major projects that will benefit the country. In our case, a country that has poor tax administration system and completely reliant on crude oil for our foreign earnings, it may be difficult to avoid borrowing except we are unserious about addressing the huge infrastructural deficit that currently bedevils our nation.

For a country that was in recession for months, it would be practically inevitable to explore the borrowing option since local production already nosedived, which naturally means lower tax receipt for government. By the way, it is important to note that borrowing is an easier option for financing projects, because taxes could turn the people against the government and nobody really likes to pay tax. Therefore, when there is the need to fund a public project, borrowing is naturally enticing to policy makers since there are always ever-willing creditors.

The sources of borrowing for the government are usually local and international and it is mostly done through the issuance of securities, which the government pays back with interest. International borrowing is however characterised by some complexities that require a considerable level of savviness on the part of the country’s financial managers and planners, in order to ensure that the debts incurred are productive. Otherwise, borrowing becomes a major burden that can distract development when the government has to dedicate so much to debt servicing. Government borrowing to service existing is a major bottleneck that debilitates growth.  This was Nigeria’s experience prior to the 2005 when we secured debt relief from our creditors most notably, the Paris Club. However, we have not been able to manage the normal urge to embrace borrowing; we have gone back to the market again. Last year, the President wrote the National Assembly seeking approval for the external borrowing plan of $29.960 billion to execute key infrastructural projects across the country between 2016 and 2018.

The National Bureau of Statistics (NBS) last week reported that Nigeria’s foreign debt stood at $15.05 billion, while the domestic debt portfolio was put at N14.06 trillion in June this year. The report indicated that federal government debt accounted for 74 per cent of Nigeria’s total foreign debt while States and the Federal Capital Territory, FCT, accounted for the remaining 26 per cent. In the same vein, federal government’s debt accounted for 78.66 per cent of Nigeria’s total domestic debt, while States and the Federal Capital Territory, FCT, accounted for the 21.34 percent balance. The salient part of the report is the percentage increase in the country’s debt profile since the current administration took over. The figures increased from $10.718 billion in 2015, to $11.406 billion in 2016 and $15.047 billion in 2017, which presupposes an increase of 40%. A breakdown of the nation’s creditors shows $9.67 billion as multilateral debt; $218.25 million as bilateral (AFD) and $5.15 billion from the Exim Bank of China credit to the Federal Government. The data from the NBS confirms a follow up letter written to the Senate earlier this year by the Executive to borrow from China to fund the railway projects in Nigeria. By July the Senate approved $1.806 billion Federal Government 2016-2018 external borrowing (rolling) plan for Lagos-Kano railway modernization project and reconstruction of the North-East. The other reasons for borrowing are also in the public domain, which provides us a template for tracking government spending of the borrowed funds.

By way of assessment, the government has indicated that the Lagos-Kano railway modernisation project is scheduled for completion in December 2018. Other railways projects for which the country specifically secured the loan from China are also scheduled for completion at various dates. The other reason for borrowing is the reconstruction of the North-East, which was destroyed by the Boko Haram insurgency. Apparently, not much has been done in this regard except for the grass that was cut with millions of naira.

Nevertheless, going by the letter written to the Senate, it appears by the time the current administration would leave office, Nigeria’s debt profile would be double of what it was in 2015. This is because there is no doubt that the federal and state governments will again explore the borrowing window between now and 2019, which will be left for future generations to handle. As established earlier, borrowing is not bad; it is only a burden when the funds are not judiciously used. The resultant effect of mismanagement of borrowed funds is the unavailability of funds to service the debt, thereby impacting on the creditworthiness of the country.

Vigilance on the part of citizens is required to ensure that the government expends borrowed funds on the specified projects. When this is done, it will have a significant impact on the economy. Jobs will be created and there will be more liquidity in the system. On the contrary, if the borrowed funds make their way into private pockets, then we are gradually walking back to the era before the Paris Club debt relief. If we ever find ourselves in that situation again in the future, we will have to scout for another Okonjo Iweala to facilitate a relief from debt that should not have been in the first place.

For instance there are reports that some States are borrowing to pay workers’ salary, build government house and expend funds on projects that do not directly stimulate economic growth or add value to the people. The same State Governors still move about in a large convoy of luxurious vehicles and a retinue of aides, yet presiding over dilapidated hospitals, schools and other weak infrastructures.

The question we should be asking is how we intend to pay back this huge debt. The world is gradually moving away from crude oil and analysts have advised that the days of $70 per barrel are unlikely, which means for countries like Nigeria that are heavily reliant on oil proceeds, the days of dollar rain are over. And the only solution is to structure the economy to allow for diversification. In spite of this reality, our governments at all levels have not done enough to fully diversify the economy. The last GDP report from the National Bureau of Statistics confirms that Nigeria’s economy is still primarily dependent on crude oil. We have been talking about the diversification of the economy for many years, yet there has not been a significant shift in policy and fiscal direction to indicate government’s commitment. Rather, we are spending unavailable resources on searching for oil in the north, whilst some victims of the same search are still suffering in the den of Boko Haram abductors. This shows that we may have predicated on borrowings on projected crude oil receipts.

In the likely event that oil price drops below $30dollars, how will this nation survive? Where will the country source funds to service the debt? Many States that have obtained loans to pay workers’ salary largely depend on what they get from Abuja at the end of the month, with no concrete plan for self-sufficiency. This again calls to question the nature of our federal system. Ours is obviously a structure that encourages borrowing without appropriate plan to make the future generations benefit from the money borrowed today. A proper government financing is expected to take into consideration the benefits that will accrue to both present and future generations; not only focused on how to survive the present with no plan to address future challenges. Our governments, especially at the State level have not sufficiently shown that funds borrowed are spent on noteworthy projects.

If we eventually find ourselves resorting to begging lenders to grant a debt relief again in the future, we only become a joke in the international community and also project ourselves as a country with no fiscal discipline. As the government intensifies the drive on domestic and external borrowing, let the policy makers also be aware of the possible implications of their decisions on the future generations. The only way to safeguard the future is to spend borrowed funds judiciously and create an economic environment that will move the country away from our reliance on crude oil and put us in good stead to meet our economic obligations in the future. Crude oil may not be able to service the debts in the future.