By Kabiru Isa Dandago, PhD
Indebtedness is a situation whereby a component of an economy (individual, firm, or government) borrows money or other resources from a surplus unit of the economy to meet an obligation, mainly financial, for repayment at a later date. The obligation could be expenditure on short-term, medium-term, or long-term project. The borrower is, however, expected to observe the principle of good financial match, where short-term project is to be executed using short-term fund (bearing in mind the source of the fund). The lender usually extends the credit/loan based on the borrower’s acceptance of some conditionalities, especially repayment time and terms.
Each of the three components of the economy borrows at one point or another, but the conditionalities dictating their indebtedness agreement differ. When an individual borrows, he/she might be saddled with the challenges of providing reliable collateral security, trustworthy grantors, ability to timely service the debt before the maturity date, and ability to repay the principal amount on the maturity date. Other conditionalities might apply, depending on the creditor and the purpose of the loan.
When a firm borrows, its directors have to approve acceptance of all the conditionalities put across for the loan and the strategic plan (developed by managers) on the need for the borrowing and how the amount borrowed would translate into better financial performance of the firm. For government, the executive arm (which is to propose the borrowing) must get the approval of the legislative arm (as part of its appropriation responsibility) before the loan is obtained, and all the conditionalities provided by the proposed creditor must be made very clear to the legislative arm for their legislative debate before granting approval to the executive arm to put the government or the public into a state of indebtedness.
As this write up is about the government, which is the component of the economy that engages in securing public debt for financing public budget deficit, we shall analyze indebtedness level of Nigeria as a debtor nation; reasons why those in government embark on borrowing on behalf of the public; and how to get out of the ‘debt trap’ Nigeria seems to have already fallen into. This piece, therefore, restricts itself to the public debt crisis Nigeria is suffering from, hoping that the issues raised could be extrapolated and generalized to other developing economies, especially those in the African continent.
Nigeria in “Debt Trap”
The Debt Management Office (DMO) is an agency of the Federal Government of Nigeria (FGN) responsible for managing the debts of the federal government and providing control and technical support for the management of the debts of the other two tiers of government in the country (state governments and local governments). The agency is expected to account for the indebtedness of the country at any given point in time. According to that agency, as of 30th June 2021, the total public debt of Nigeria is approximately $86.57billion, which is equivalent to N35.5trillion! This is made up of $33.47billion (38.66%) external public debt and $53.10 billion (61.34%) domestic public debt. This shows that the country’s indebtedness, though very high, is more skewed towards internal/domestic public debt than external public debt.
Domestic public debt, which accounts for 61.34% of the total public debt, is relatively more expensive than external public debt (which accounts for 38.66%). Some of the external debt’s components are concessional in nature, with very low cost attached. Institutional loans from World Bank, IMF, AfDB, etc do not charge high cost, but their conditionalities are the matters of concern as they mostly affect the wellbeing of the masses negatively. On the other hand, most of the internal/domestic public debts are FGN bonds (constituting 75%) that are not tied to self-liquidating projects/assets. This means that the borrowing government decides what to use the money for as the lender does not care to oversee the usage of the amount borrowed.
Next to FGN bonds in the hierarchy of quantum of domestic debts are the Treasury Bills, which constitute approximately 17% of the total Domestic Public Debts (DPD) as of 30th June 2021. Federal Government of Nigeria Sukuk, surprisingly, accounts for only 2.06%, despite its road’s infrastructure development impact across the six geopolitical zones of the country. Other components of the domestic public debt are FGN savings Bond (0.09%), Green Bond (0.15%) and Promissory Notes (5.05%). Except for Sukuk, which is an asset/property backed instrument, mainly used to secure long-term finance through a leasor-leasee arrangement, all the other instruments have high interest rate to be serviced by the borrower and the interest is compounding. This makes the domestic public debt very expensive, especially as the creditors could be foreign institutions or individuals who operate in Nigeria and repatriate their earnings to their mother countries.
The country’s public debt figures, as brandished by DMO, are sometimes used by some public debts analysts to claim that Nigeria is yet to reach the threshold of high-risk indebtedness set by the World Bank/IMF, since the country’s total public debt is “comfortably” below 55% of GDP; and that concerned Nigerians should not be entertaining fear about the continuous increase in the indebtedness of the country (which is akin to falling into a trap). But since the increasing debt burden is not commensurately moving with increasing positive national development or enhancement in the standard of living of the people, concerned individuals and organizations have all the bases to raise alarm on the continuous indebtedness of the country.
Still on the 55% Debt/GDP threshold, one important fact to note is that public debt is not to be restricted to the FG indebtedness (which is around 30% of GDP), as all the SGs’ and LGs’ debts are also to be considered. If you add the over N12trillion CBN loans to SGs and businesses, in the name of intervention for various developmental projects; the Assets Management Company of Nigeria (AMCON)’s debt of over N5trillion; the trillions of Naira gratuities and pensions FG and SGs owe retired public servants; the trillions of Naira salary arrears some SGs owe some civil servants; the trillions of Naira in the form of contingent liabilities and guarantees at the FG and SGs levels; and the trillions of Naira the FG, SGs and LGs owe contractors for various projects in the country, you would see that the public debt to GDP ratio would have exceeded 60%! That being the case, the IMF/World Bank’s public debt to GDP threshold could be said to have been actually exceeded in Nigeria.
Another matter for concern is the percentage increase in the quantum of the debt. The June 2021 DMO figures revealed that, from December 2014 to June 2021, public debt has risen by over 200%, with external component rising by more than 750% (from N1.6trillion in 2014 to N13.7trillion in 2021)! Servicing these debts annually costs a lot for Nigeria, hence the situation whereby the 2020, 2021 and 2022 annual budgets of the FG showed budgeted figures for debt servicing being higher than those for capital projects execution. In 2020, BudgIT (a Civil Society Organization serving as a pressure group on budget matters) reported that N3.34trillion was budgeted by the FG on debt servicing, which was about 97% of the total FG’s projected internally generated revenue for that year! This indicates weakness in internal revenue generation/collection effort and also suggests that if the indebtedness has not been incurred in the first place, the amount meant for debt servicing could have been used for executing many developmental projects. Again, with the high indebtedness, the annual budgets are showing that the amounts to be borrowed to finance the deficit in the budgets are higher than the amounts budgeted for debt servicing! What a clear show of capture in the “debt trap”!
The facts on the ground clearly show that drastic but workable reform measures have to be taken by the governments at all levels, especially at the FG level, to get the country out of this clear public debt crisis. This is necessary in view of the fact that as the country gets more indebted, its leaders become more corrupt and more vulnerable to the dictate of the creditors. Another worry is that the impact of the amount claimed to have been borrowed is not being felt by the masses, in most cases. Again, a lot of insinuations are being made by various analysts that out of whatever loan secured from domestic or foreign sources, government functionaries (at the executive and legislative levels) ensure that a certain percentage of the amount (even if it is working capital only that comes to them) goes to their private accounts. What is left (after siphoning a percentage share of the amount) might not be enough to executive the proposed projects completely, thereby leaving many incomplete and abandoned projects all over the place.
There is need to also appreciate the fact that Fiscal Responsibility Act (FRA 2007) has provided that the annual budget must not provide for borrowing of amount beyond 3% of GDP. That provision of the law must have been breached in the 2021 and 2022 budgets, since the governments at all levels have come to the agreement that if they don’t go for loans, they would not be able to fund the development of critical sectors of the economy. This is another dimension of the public debt crisis in Nigeria.
The issue of financial mismatch could also be noted in the way the amount borrowed domestically and externally are being applied by governments at various levels. One could notice that amount being borrowed are not mainly used for long-term project execution (which should be self-liquidating), sometimes a greater percentage of the amount borrowed might be planned to be used to cover recurrent expenditure. For example, the Budget Office of the Federation, in 2018, reported that public debt to the tune of N3.4trillion was to be secured to fund that year’s budget deficit, while the amount budgeted for capital projects was N1.038trillion, meaning that more than N2.3trillion (about 70%) out of the amount in the borrowing plan for the year was for recurrent expenditure! The 2022 budget carries plan to obtain public debt to the tune of more than N5trillion, which is over and above the budgeted figure for capital expenditure. This is, unfortunately, becoming the public financial management trend at the federal, state, and local government levels in Nigeria, which clearly shows that the country has actually fallen into a debt trap!!!
To be concluded in the next part.
Professor Kabiru Isa Dandago PhD, FCA, FCTI, FNIM, FNAA, FFAR, MNES, AQIF is a Professor of Accounting @BUK, Professor of Taxation @PAAUA. He can be reached via kidandago@gmail.com, +2348023360386
