Confronted with sharply declining revenues, hefty budget deficits and barren buffers, Nigeria’s slow trot into a new external debt trap has progressed into a frantic gallop. President Muhammadu Buhari’s request for parliamentary approval to take another $5.5 billion loan together with ongoing borrowing plans has sent alarm bells reverberating around the world. Borrowing may indeed be inevitable; borrowing the right sums for the right purpose and restructuring the economy for sustainable growth are however more important.
Buhari and his team face daunting challenges and the option of taking the easy way out could be very tempting. As Kemi Adeosun, the Finance Minister, has repeatedly said, the government aims to spend its way out of recession and on to the path of growth, which explains the latest $5.5 billion external loan lunge. This, however, is only part of the $29.9 billion total borrowing plan for 2017 and 2018. Add this to the existing debt stock of $15.04 billion by June end and federal domestic debt of N12.03 trillion and the alarm bells ring louder. To the dismay of many, the country had started borrowing shortly after exiting a long-running debt overhang in 2005/06 with debt rising steadily as the previous government, despite bumper oil prices, went borrowing. Is Nigeria aggressively pursuing all other available options that would reduce the debt component and avoid bequeathing unsustainable peonage to coming generations?
Development experts generally agree on the need for some borrowing to reflate an economy, especially to fund infrastructure and diversify the revenue base. However, there are deeply troubling signs in our new obsession for loans that we started taking only a few years after exiting a three-decade-long debt trap. Buhari’s explanatory note reveals that $2.5 billion is to fund the budget deficit and $3 billion to refinance maturing domestic debts. Recall also that only about 30 per cent of the N7.44 trillion 2017 budget has been earmarked for capital projects and a whopping N1.66 trillion, representing 32.73 per cent, for debt servicing.
This translates to feeding our national culture of consumption, instead of production. Crucially, while the government continues to trumpet its 19 per cent debt-to-Gross Domestic Product ratio as “one of the lowest in the world,” both the World Bank and the International Monetary Fund have raised strident warnings that the critical numbers a structurally weak, mono-product country like Nigeria should watch in taking loans are debt-to-revenue and debt servicing ratios. So, while Adeosun may feel we have not reached the threshold of 42 per cent to GDP, we have moved closer to debt non-sustainability as debt-to-revenue ratio rose by 25 per cent in the last one year, according to Gloria Joseph-Raji, a Word Bank Senior Economist. Adeosun has admitted that our main source of revenue, oil and gas receipts, has reduced by 85 per cent between 2014 and now.
For the IMF, danger also lies in high interest payments, especially when remembered that it was interest payments and penalties that ballooned Nigeria’s Paris Club debt of less than $7 billion to $30 billion. Elsewhere, the $22 billion debt South Africa inherited from the Apartheid era has increased to $136.6 billion. The World Bank believes that Nigeria may soon need to devote 60 per cent of its expenditure to debt servicing, going forward, at the current rate of borrowing.
We deplore the refusal of the Buhari government to opt for an aggressive privatisation plan to draw in the much-needed Foreign Direct Investment and raise cash. The notorious Nigerian National Petroleum Corporation is set to once more waste public funds on the four moribund refineries instead of selling them to reputable foreign investors along with its depots, pipelines and retail outlets. The government is similarly borrowing and wasting resources on railways, airports and refloating an airline and a shipping company while searching for concessionaires for Ajaokuta Steel instead of undertaking targeted outright sale to the world’s best operators in those sectors.
Mambilla power, Nnamdi Azikiwe International Airport and rail projects are some of the projects to be funded by the loans: a wiser course of action would have been to liberalise the operating environment to lure private capital to provide substantial funding for these admittedly important infrastructure to free public funds for roads, water supply, education, health and sanitation.
Liberalisation and privatisation will bring in FDI and obviate the desperation for unsustainable foreign loans. Of the $68 billion invested in telecoms following the sector’s liberalisation in 2001, $35 billion flowed in from FDI by July 2016, according to the International Telecommunications Union, with only a small portion of the rest from public funds. Government also urgently needs to reform the tax system, plug leakages such as the N30 trillion revenue the parliament says is unremitted by agencies, while drastically reducing the number of its agencies and employees. The Railway Act 1955 should be repealed, airports, seaports and inland waterways reformed and revenues freed for investment in social services and rural development rather that in servicing an inefficient, corrupt and inhibiting bureaucracy.
Buhari and Adeosun should henceforth focus on sustainable debt, diversifying investible revenue sources and remodelling the structure of our rentier economy. Malaysia’s debt-to-GDP (nominal) ratio of 52.7 per cent in 2016 may look high, but the country is rated the world’s 20th largest export economy and 15th most complex in the Economic Complexity Index 2016 where Nigeria ranked 49th and 107th respectively. Compared to our pre-industrial, mono-product economy, the seven countries with the highest debt-to-GDP ratios listed by Forbes magazine – Japan (227.2 per cent), Greece (175.1 per cent), Italy (132.6 per cent), Portugal (129 per cent), Singapore (105.5 per cent), United States (101.5 per cent) and Belgium (101.5 per cent) – are highly diversified, industrialised, export-led champions.
Nigeria should target creating a private sector-led economy to avoid the prevailing scenario of revenues and loans being squandered on white elephants and political projects such as the idle airports scattered across the country and extending rail lines to areas with low commercial value.
For now, we must heed the advice of our multinational partners and halt the rush into another debt trap.