Nigeria, a debtor by choice

NIGERIA is a case in unnecessary economic contradiction a sad development that should not be. Oil export accruals to the Federation Account (FA) have accounted for over 50 per cent of the annual budgets of the federal and state governments on paper since 1974.

Subject to handling the oil proceeds in accordance with economic best practice, any economy with such a revenue profile would experience actual balanced or surplus or low deficit annual budgets and conducive production conditions.

And over a period of four decades, the Nigerian economy should have not only achieved self-sustained rapid growth and development but also accumulated savings, part of which could be lent to multilateral agencies or be directly invested abroad. On the contrary, however, Nigeria has been in official denial of debilitating excessive fiscal deficits and has remained an underdeveloped and persistent debtor country. Even the acknowledged debts so ballooned that a negotiated external debt exit was struck in 2006. But after a respite of barely three years, the national debts began to rise again.

Nigeria’s total external debt has grown by 170 per cent from its US$3.5 billion level upon debt exit to $9.5 billion as at March 2015. Over 90 per cent of the accretion of $5.9 billion has occurred since January 2010.

The external debt, which comprised multilateral and bilateral categories in 2006, is currently made up of multilateral (69%), bilateral (15%) and commercial (16%) categories. The Federal Government’s share of the external debt stock is 67 per cent, while the state governments account for 33 per cent.

When it is recalled that accumulated commercial debts caused the problematic overhang for which the country paid dearly in the past, their reappearance in the form of Eurobond since 2011 is unwarranted.

Additionally, Nigeria has piled up bulging domestic debts. According to data from the Debt Management Office, the national domestic debt surged by over 480 per cent from N1.75 trillion in 2006 to N10.2 trillion as at last March.

National domestic debt incurred since 2010 accounts for over 80 per cent of the increase since 2006. The Federal Government including the Federal Capital Territory owns 83 per cent of the domestic debt and the state governments contributed 17 per cent.

However, officially denied but extremely injurious economically are technical borrowings from the CBN by the tiers of government in proportion to withheld FA dollar allocations, which the apex bank substitutes with freshly printed naira funds. Such borrowings constitute unintended excessive deficit financing of government expenditure.

These faulty fiscal procedure-induced borrowings have reached a grand total of some 100 per cent of GDP. Despite being denied and so non-repayable, the excessive fiscal deficit borrowings exert their characteristic toll and are responsible for monetary policy-impacting features like excess liquidity, high inflation, high lending rates and the ever-sliding domestic currency.

They also give rise to the inclination to import all manner of goods and services including dollar allocations which led the Senate Joint Committee on the 2015-17 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) to recommend self-indictingly, that “in 2015 (in order not to crowd out the private sector from the domestic credit market) new borrowing should be pegged at N882.12 billion with N217.12 coming from domestic sources and N665 billion (that is $3.5 billion) from external sources (at lower interest)”.

Government borrowings in their present form arise mainly from faulty policies and are unessential. They are not self-liquidating and will run into repayment difficulties in the future. For instance, apart from imported locomotive engines, there are not completed projects and accrued services to ascribe to the huge federal debt stock.

The reason? The Federal Government domestic debt is almost entirely made up of excess liquidity funds that are sterilised and non-investable. Yet, the high interest debt service charge doles fat unearned income, which is accorded first-line deduction from budgeted government revenue, to banks and sundry investors particularly foreign portfolio investors (FPIs).

In effect, FPI funds, which are not invested in the real sector, and the tendency toward dollarisation drain away chunks of the wrongly withheld FA dollar allocations thereby disproportionately pushing up demand for forex that exacerbates naira depreciation to the detriment of the productive sectors of the economy.

An end to withholding FA dollar allocations will eliminate the sterilised excess liquidity-fed national domestic debt and stanch the present priority debt service recurrent budget provision with corresponding increase in cash-backed capital budget expenditure.

The Senate committee had difficulties finding new sources to boost the capital budget. Pertinently, because the federal capital budget will remain limited, government should make up for that normal outcome by adopting sound policies that guarantee the enabling conditions for private sector investments, which are akin to public sector capital expenditure.

Secondly, the senators’ claim that government borrowings crowd out the private sector is a blunder. In reality, there has existed for some years in the financial system over N70 trillion (and still growing) unutilised bank lending capacity or 114 times the actual Federal Government capital expenditure in 2014.

But excessive fiscal deficit-induced high lending rates render unviable possible private sector investments/projects in the various sectors of the economy and so prevent the private sector from accessing the idle bank credit in order to set up forward and backward linkage industries that will produce symbiotically with the firmly established ones.

This is the road to actualising the Senate Committee’s recommendations relating to rapid diversification of the economy, facilitation of transition to government dependence on non-oil revenue sources, systematic breaking of infrastructural bottlenecks along the way and the creation of jobs to alleviate poverty.

In light of the practically inexhaustible bank lending capacity, therefore, the Senate once again should be concerned about how to improve interest rates and terms so that necessary public and private sector borrowings should be procured domestically in tune with the “Buy Made in Nigeria” mantra. Now, the faulty fiscal and monetary practices responsible for Nigeria’s unsatisfactory economic performance were identified as far back as 2001.

After stonewalling for six years, the CBN in August 2007 publicly confessed that FA oil proceeds were being mismanaged and fixed a date for FA beneficiaries to begin to convert their respective FA dollar allocations as and when desired correctly to non-inflationary naira revenue via deposit money banks in order to guarantee a favourable monetary environment.

But the then Attorney-General scuttled the plan on behalf of ex-President Umaru Yar’Adua. It constitutes not only an impeachable breach of the 1999 Constitution as amended but also outright corruption for the President to refuse to rest patently incorrect and ruinous fiscal and monetary policies.

Sadly, successive Senate and House Committee on Finance, National Planning, Economic Affairs and Poverty Alleviation, which perform oversight functions on the economy, have yet not used the CBN’s confession and proposed corrective action to overturn the Attorney-General’s wrong action in order to bring an end to the persistent national economic travails.

The Senate Joint Committee which considered the 2015-17 MTEF/FSP had 20 members including three ex-state governors. The committee obtained oral/written submissions from 10 MDAs including the National Planning Commission and CBN. In spite of that, the committee’s report, as is already noticeable, lacked economic depth.

The senators even applauded both the high inflation levels in 2014 and the big devaluation of the 2015 MTEF/FSP naira exchange rate over the 2014 rate (which are contractionary), and still expects the real sector in 2015 to be buoyant, generate increased tax revenue, reduce unemployment and alleviate poverty. The standard of the committee’s report leaves much to be desired.

For the economy to make sustainable progress, public sector oil proceeds and autonomous foreign exchange should be fed correctly without fail into the system. That way, the Federal Government, as the sole monetary authority, stands to accumulate external reserves that qualify as additional FG-owned internally generated forex revenue.

External borrowing will become unnecessary. Part of the forex IGR may be appropriated if need be to execute federal projects most of which will cut across various states. Also, the idle bank credit capacity will become available at competitive interest rates and attractive terms.

So, viable public private partnership projects may be embarked upon in their numbers to accelerate economic growth and development.

Therefore, the National Assembly has the bounden duty to take up the August 2007 CBN proposal regarding proper management of FA dollar accruals and bring to an end the wasted four decades or so, the lost era that mocked deep knowledge and lacked discernment and rejected economic best practice while a counterfeit exchange rule and an Attorney-General’s meddling asphyxiated the economy.