Nigeria’s N19.6trn debt threat to development —Prof Adenikinju

Professor Adeola Adenikinju is a respected voice on Energy Economics, not only in Africa, but globally. In this interview by SULAIMON OLANREWAJU and NURUDEEN ALIMI, the Director, Centre for Petroleum, Energy, Economics and Law (CPEEL), University of Ibadan, speaks on the consequences of the country’s rising debt as well as other topical issues. Excerpts:

The federal and state governments are said to be owing N19.63 trillion. How did we get here?

Every country owes, though there is what we call level of debt sustainability that will look at your GDP growth and will also look at the ability to repay that debt. For a country like Nigeria, where some of these debts are in foreign currency, we must also look at the rate at which the export revenue is growing because that will also determine how far you will be able to repay the debt.

How did we get here? We got here because we did not manage our economy well. This is a country that has earned over $1.2 trillion from oil, and if you are so much dependent on a resource that is very volatile, you learn to save when the commodity is doing well. Again, when the commodity is on the downward flow, you use the savings to mitigate the effect of the downward spiral. But unfortunately, we have not been able to do that. In fact, until two years back, there was a very high compatibility between our GDP growth and our oil prices. And even if you still look at it, government expenditure continues to grow in spite of whatever is happening to oil prices. That shows that we are not able to live within our means as and when necessary.

For a very long time, the Central Bank of Nigeria (CBN) has been providing cushion to the Federal Government to be able to spend without being fully mindful of the revenue base. So, we continue to pile up these debts and therefore we got to where we are now, where a reasonable proportion of our budget goes to servicing debts. We are just servicing those debts, not even repaying and somehow we continue to delude ourselves that our GDP ratio is still within some range. But what we forget is that if we look at our GDP, agriculture is a significant proportion of that. In fact, non-tradable sectors are really very high; the amount of tax we generate from those sectors are not really significant for us to repay those debts. So, if you take away agriculture, you take away some of the wholesales and non-tradable sectors where the tax GDP ratio is very low, you will discover that the bulk of repayment opportunities they have lies on oil and a few sectors. So, that burden is much higher than what we look out for in our own type of economy.

What are the consequences of this high debt profile?

The consequences are really very clear. If you owe and, especially, if what you spend that money on is not what will generate a kind of return that will enable you to repay not just the interest but also your debt, then you will run into a problem such that the purchasing power of your income gets smaller and smaller. It shrinks. If you get N10 and you are paying Four Naira to service debt, then what is left to survive is Six Naira. What then happens is that because that Six Naira will not be sufficient for you to live on, you then go into more debts so you have this debt spiral that goes on. So, the consequence of these debts is that many of the things government ought to do, government is incapable of doing and that is why many states now are unable to meet up with their obligations. Not only that, you also have a situation where the Federal Government also has to borrow to pay some of the recurrent debts.

The consequence of some of these debts is that there will be collapsed infrastructure; the state of health, education and other social infrastructure will get worse. And when you go around, you see poverty everywhere, though some people are doing well. The inequality gap is also very high because you have few people who are doing well, but you have the large proportion of the population who are struggling to earn a living simply because we have not been able to manage our economy well.

Do you see the government repaying this huge debt?

One thing is that government is sovereign. Government cannot default. You can reschedule and continue to sell treasury bills and all sorts. But what will happen is that the responsibility of government to provide infrastructure will lag behind. So, we continue to take on these debts. When we take a new debt, it sounds good on paper that the new debt will be spent on projects but the question is how do we ensure that the rate of return from some of these projects will be sufficient to be able to make the rental income so that they do not add up to the debt that we already have? I think we have issue of ensuring discipline and compliance with laws available because there are laws that guide debts but somehow we ignore some of these things.

On paper, when we go out to present our budgets, we can form the threshold, but we do not have a feedback as to what has really happened at the end of the budget year. You know, in the past when you were going to present the budget, you would look into what happened the previous year. We would be told what happened the previous year and would be given the breakdown for the new year. These days, we do not even have the figures. We do not even know how much is actually spent and all that. So, it becomes difficult to actually do a proper analysis of the budget in terms of performance. In the past, when you had the budget, you had almost 100 per cent confidence that whatever was in the budget would be implemented. Yes, budget is a guide but that time, the reliability on those budgets was very high. So, when you said your capital budget was going to be N30 billion, we knew that the money would be released. But these days, they will say it is N30 billion but, at the end of the day, government is not going to release any money. Why? Simply because of these debts. Because after paying debts, no money is left to execute projects and, therefore, you have contractors abandoning projects and the consequence is that prices continue to increase, inflation kicks in, exchange rate variations kicks in, cost of capital kicks in and, therefore, the amount you budgeted for a project multiplies. So, government either abandons the project or spends multiple of what should have been spent if it had really done a proper budgeting process.

Would the trend change if the price of oil should go up?

It is sad. At the time oil was selling for over $100 per barrel, did we expect to be in this position? It is like we have not really learnt. While countries were talking about tens of billions of dollars in the sovereign wealth, we struggled to save $1.2, $1.5 billion. So, in other words, the fixation on oil is even our problem and the long-term trend of the price of oil is not going to be more than $60 per barrel. If you look at the development in the global energy on a long term basis, it is towards getting rid of fossil fuel. You know, many countries are coming up now with energy policies that want to get rid of petrol and diesel vehicles and these are major energy-consuming countries. With a combination of technology and the effect of climate change, fossil fuel is not going to be the energy of choice in future and the more you have that demand shrink, the more likely you have the price shrink as well.

Is that a bad news for Nigeria?

It is both bad and good news because there was a time we did not have oil and we were doing well. When we did not have oil and we were living on agriculture, there were developments. The people were happy with what the government was doing with the tax they paid at that time. The taxation method at that time made government responsible and accountable. They were able to empower the private sector, empower individuals to be able to generate more revenue. But oil came and everything changed. The resistance against restructuring is because of the oil revenue. I think we have started with some measures towards going back to agriculture and some other sectors.

Given our huge debt profile and our inability to increase production and productivity, do you see a Greek situation playing out here?

One of the lessons we learnt from the past was that the bulk of our debts are bilateral debts and they are eternal debts. Gone are the days when much of our debts were to IMF, World Bank, London Club and all that. The Greek situation happened because most of those debts were also owed to other countries, IMF, the EU and the World Bank. In our case, what we owe the World Bank and IMF is not significant to the extent that they will say they want to write our economic policies for us. We have exited that; the Greek situation cannot come into play because we owe China and China knows what it is doing because they are getting some other things from us. We owe some countries here and there, but it is not that significant. The bulk of our debt is really domestic. The problem is the crowding out effect because when you owe the banks and the non-public individuals, why would a bank lend money to a farmer or a young entrepreneur when it can lend the same money to the government at a riskless rate of return that is high? In fact, government treasury bill now is almost 15 per cent interest rate. So, they will rather go for that.

Does that mean that debt forgiveness is not possible in the future?

At the time we had debt forgiveness, the global community realised the impact of huge debts owed to these multinational institutions, World Bank, IMF, London Club on the low income countries so, that they had arrangements for these countries on how they would forgive their debts. Like I said, given the structure of our debt now, if we do not go ahead to continue to borrow from the international banks and other creditors, then we may not run into that kind of problem. At that time, we were borrowing from the open market with low interest. States were borrowing and the Federal Government was guaranteeing those debts and there were all kinds of stories on those debts. But now, I am not sure we are borrowing from the open market. We sold one or two sovereign bonds at the international market but it is still at a level that is sustainable. So, if you look at our external domestic debt ratio, it is low. So, we may not qualify for debt forgiveness.

Some people are of the belief that the CBN is overfunding the Federal Government. Do you share that belief?

I read about the debate and the CBN governor denied it because there was not enough evidence to back it up. The CBN has two key objectives; to keep inflation very low and to support economic development. The CBN has the responsibility to create an enabling environment for private sector to operate, but it should do that with a view to ensuring that inflation and interest rates are at a level that is manageable. Now, if you continue to fund the Federal Government in a way that exceeds certain threshold, then you may be bringing about negative effects on the economy. Because there is less cash in the economy, you keep the inflation low, but the interest rate becomes very high and then the private sector finds it difficult to borrow. It is something that the CBN has to really work on to let the government know that you have monetary policies, you also have fiscal policies. You cannot use one of those instruments alone to cushion or to support the developmental goal of the government. It is just like a bird trying to fly with one wing; it is not sustainable.

Does this excessive borrowing result in inflation?

Inflation is caused by a number of factors. When you have imported inflation, your exchange rate becomes very high and, therefore, you need to spend more money and if you are so much dependent on imports then that will lead to increase in the cost of production. If there is a high growth in money supply, if the supply is higher than the rate of goods and services then there will be inflation. If you get money through ways and means; if the CBN just prints money and gives to the Federal Government and the Federal Government spends that money then that will lead to inflation. Even if they are not printing and they are borrowing from the public, that reduces the amount of money with the banks and therefore the interest rate will go up. Therefore, there is no way excessive borrowing will not result in inflation.

Do you think Nigerian banks are properly regulated?

Twenty years ago the issue of central banks: autonomy came into play. The essence of this is to allow them deploy the appropriate instruments when necessary without government interference. Central banks try to fight inflation. They also do what they call financial stability. They want the banks to be strong. They want them to have sufficient capability to be able to withstand shock so that other economic agents are not unnecessarily put at the risk of losing their funds. You know, the recent global economic crisis when banks collapsed, people lost money and things like that. So, they have learnt from that. What some of the central banks do now is to do a very rigorous stress test for money deposit banks to be sure that whatever shocks that come, they are strong enough. We need to continue to do that. The CBN must continue to do that to ensure that these banks are not over-exposed. You cannot have a single borrower taking so much percentage of the total debt or else you become very much exposed if that sector has issues. So, the CBN cannot put its eyes off regulating the banks because if the banks fail, they bring down many things because it is a matter of trust. I put my money in the bank because I want to go there anytime to withdraw. When there is a run on the banking system, that is the end of the financial system and you cannot allow that to happen. The Etisalat thing is something which shows that the CBN has a lot to do in ensuring that there is a proper implementation of rules and regulation that guide the conducts of banks and their lending practices.

There is this Sukuk controversy, what is your view?

I just read a report about it and the DMO said the recent instrument they put out was oversubscribed by about 5.6 per cent. Sukuk is a way of diversifying sources of funds. But in the other way, it is still adding to your debt stock and they said it will be tied to projects and when they are tied to projects, those people will be given rental income because basically this is in consonance with Islamic rules. But when you put it on rules, how do you determine the appropriate rental income you need to pay? If you do not pay that rental income because normal debt is that every six months or whatever, if I am selling a bond and it carries 10 per cent, that means that you get 10 per cent of the face value of that debt so you know what you get at the end of the year. This rental income is normally used for projects that, if you make profit, you share out of the profit. For infrastructure where the profit is long in coming, you are going to be paying yearly rental income. I am sure they would have sorted that out when they were highlighting what that rental income was going to be. If it is a fixed rate, then it becomes like any interest-yielding instrument. If you are going to be sharing profits then it is good for the country. I think there are still a lot of things that need to be done. In a sensitive environment like ours, what are the implications of these things? We need to be very careful. Really, there are many projects, in my view, that, if there is credibility of government, if the right environment is there, the private sector will be willing to fund them. All government needs to do is to ensure that there is a conducive environment for those people to operate.

NBS said we have exited recession. How true is this?

Official statistics is good because you must have a way of measuring your progress. But the people themselves are the evidence of whether we have exited or not. People have not been paid salaries and they are like walking ghosts. I do not know about you, but some people are carrying the burden of so many people. These days, people are afraid of picking phone calls for the fear of the callers bringing burden to them. When people start telling you their problems, you realise that really, people have real issues. And if you have money in your account, except you are a very tough person, you will give. We still need to institute a social security net. Some other African countries have it. There should be a mortgage system where you can build and pay over a period of time. In Nigeria, if you need to build a house, you have to look for the money. But in those countries, you can make a 10 per cent down payment for a house and pay the balance over a long time at little amounts that will not constitute a burden to you. All these things have failed in Nigeria and these are what we need to make this economy really functional.

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