FEDERAL Government’s excess borrowing in the midst of dwindling revenue is heightening inflation, throwing millions of people into poverty and mortgaging the future of the country’s youth. The was the view of Professor Kingsley Moghalu, who is a former deputy governor of the Central Bank of Nigeria (CBN) and the immediate past Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf.
The duo, who made the observations at separate events, frowned on the often quoted Nigeria’s low Debt-to-GDP ratio argument which they say is deceitful because the country does not pay debt out of its Gross Domestic Products but out of revenue. They are concerned that Nigeria’s high debt-to-revenue ratio is not healthy for the economy because increased borrowing worsens inflation and erodes the value of people’s income, affecting ultimately their standard of living. According to Yusuf, the borrowing spree of the Federal Government is hurting the economy as it escalates the already high rate of inflation in the country. “The value of a currency has a lot to do with poverty and welfare. We must be worried about the fast rate of money supply because inflation triggers poverty,” he said.
He spoke at the bi-monthly forum of the Finance Correspondents Association of Nigeria (FICAN) held at its national secretariat in Lagos, on Thursday.
Ways and means is a mechanism for the government to borrow from the Central Bank under specified credit policy which, most times, entails printing money.
Yusuf disclosed that the facility usually comes at a huge cost to the taxpayers as the government paid N480 billion interest on the N1.8 trillion facility granted to it through the ways and means window between January and May 2021. He expressed concern that government’s excess borrowing has put pressure on the central bank to exceed the “5 per cent ceiling of actual government revenue for the preceding year,” specified in the CBN Act.
According to him, the fast rate of money supply has adverse effects on the people’s standard of living which has become a source of worry to Nigerians. He added that “Inflationary environment elevates production costs with adverse impact on corporate profitability, thereby making it increasingly difficult for businesses and corporates to meet their debt obligations to lending institutions. This translates into a significant increase in credit loss provisions with adverse impact on banks’ profitability.”
According to Yusuf, “We need to caution the government against being too dependent on the CBN for financing deficits because of the high inflationary impact. Inflation is a terrible thing. When people complain about hunger and poverty, it is because the money they have in their hands cannot buy anything much.”
Dr Yusuf advised the government to prioritise its borrowing in the light of dwindling revenue, noting that up to 90 per cent of the nation’s revenue is committed to debt servicing which he said should be a major concern to the Nigerians. Similarly, Dr Moggalu, in a position paper made available to newsmen, said the country is now on a dangerous, debt-induced fiscal cliff.
“Put simply, the government is mortgaging the future of our country’s youth. We have to stop further borrowing and start to manage the current obligations in order to avoid a sovereign debt default or, at best, a costly restructuring.
“Further borrowing will lead to a disastrous debt bubble bust.”
The former presidential aspirant further stated that the rate at which Nigeria’s public debt has increased in the last six years is unprecedented, alarming, and unsustainable. Over the past months, debt service cost has taken up more than 90 per cent of government revenue. This Moghalu simplified that for every one naira generated in public revenue, more than 90 kobo is used to pay the interest on government’s loans.
“It is debilitating that Nigeria is spending so much money that should go to development towards merely servicing the interest on our debt, not repaying the debt. It also makes justifications based on our debt to GDP ratio off-point. “From $10.31 billion at the end of June 2015, the total external debt increased to $32.85 billion at the end of March 2021, which represents a 218 per cent increase. “The total outstanding public debt stock increased by 173 per cent in the same period, from N12.11 trillion to N33.10 trillion. On the average, over N3.6 trillion is being added to the public debt annually,” he said.
This massive borrowing, according to him, and the infrastructure investment that has been used to justify it, have grossly underperformed. Instead of delivering economic growth, the economy has dipped twice into recession, and when out of it, growth has been underwhelming at two per cent at best.
“And rather than the debt-funded infrastructure projects creating ample numbers of jobs for the citizens, the national unemployment rate has increased to 33.1 per cent while youth unemployment has reached 42.5 per cent,” he further stated.
Under a scenario of a coordinated economic policy by a competent government, the debt capital outlay would have catalysed private sector investments and sizable foreign direct investment (FDI) flows into the economy.
He recommends that public-private partnerships should be the dominant approach to infrastructure development in a country like Nigeria, instead of contract awards that, from information available from comparable projects in countries such as Ghana and Ethiopia, are at best overvalued and, at worst, grossly inflated in their costs.
“But in the real situation of the incompetence of the government in the last six years, businesses have been groaning and FDI inflows have decreased,” he stated.
As alternatives to debt, Moghalu suggests that the government needs to focus on increasing domestic revenue by expanding the tax base not by increasing tax rates as has been done with the value added tax (VAT) and by introducing reforms for ease of paying taxes while abolishing multiple taxation.
He said taxation requires the government to maintain a social contract with the people.
According to him, at the minimum, the government must restore security to the country so that citizens can go about their business, assured of their safety he submitted. Giving his own recommendation, Yusuf suggested rationalisation of spending as a way out of excess borrowing, noting that borrowing to fund recurrent expenditure is inimical to economic development.
He also advised the government to consider a private partnership in funding projects that require huge capital outlay as well as selling idle assets to raise funds for building infrastructure.
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