2020 budget: Anxiety as Nigeria’s borrowings to fund deficit keep rising

By Ihesiulo Grace 7 October 2019 22 No comment

…As Buhari collects N8.14trn loan in 4yrs .Set to borrow additional N4.6trn in next 3 years

…Stakeholders decry rising deficit, borrowings

Nigeria is currently experiencing an all-time high external debt profile of $25,609.63 billion representing its equivalent of N7.860 trillion, even as the Federal Government is currently projecting a deficit budget in the year 2020 fiscal year.

Similarly, the Nigeria’s debt servicing has been on the increase in the recent time as the Federal Government of Nigeria in the last four years provided a whopping sum of N8.14 trillion as budgets deficit, findings by The Daily Times revealed.

The breakdown of the figure showed that President Muhammadu Buhari led administration in 2016 budget provided a deficit of N2.19 trillion, however, reduced a bit to N2.14 trillion in 2017.

Further checks revealed that the Federal Government borrowed N1.95 trillion to finance the deficit in the 2018 budget, but declined further to N1.86 trillion in 2019 budget.

And again, Africa’s largest economy will run a deficit of N1.70 trillion in the year 2020 fiscal year as Federal Government has projected an aggregate of N7.17 trillion revenue from shares of the Federation Account and Value Added Tax (VAT) as well as other revenues.

Though the projected aggregate revenue for the year 2020 is N170.41 billion or 2.4 per cent more than the N6.99 trillion for 2019 revenue projection, it is N1.95 trillion short of the entire 2020 budget estimated at N9.12 trillion.

As contained in the Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/ FSP) document forwarded to the Senate by the president recently, the Federal Government has projected an increase in the nation’s debt servicing from N2.14 trillion in 2019 to about N2.45 trillion; Statutory Transfer of N526.46 billion, from N502.1 billion in 2019; and sinking fund of N296 billion, from N110billion.

Recall that the Minister of Finance, Budget and National Planning, Zainab Ahmed, had said the in the 2020 budget, recurrent non-debt the appropriation was put at about N4.57 trillion against N4.39 trillion in 2019 Budget.

With this development, the debt financing under the current administration of President Muhammadu Buhari, according to statistics from the Debt Management Office (DMO), has been on the increase, as Nigeria’s total debt profile in the first quarter of 2019 grew by N560.009 billion due to growth in domestic stock by N458.363 billion.

Although debt profile keeps rising, the Debt Management Office has said there is no cause for alarm as it continues to be sustainable and is well within the threshold of 56 per cent for countries in her peer group.

Currently, Nigeria’s total debt profile as at 2019 first quarter stood at N24.95 trillion as against N24.39 trillion that was recorded in December 2018.

The figure swelled by 12.25 per cent from N21.725tn in 2017 to N24.39tn in 2018. The debt rose by N2.66tn from December 31, 2017, to December 31, 2018, the Debt Management Office said.

Meanwhile, the DMO in its 2017 report on Nigeria’s national debt justified the borrowings, noting that while Nigeria’s total public debt stock is relatively low vis-à-vis the country’s GDP,

the increased funding requirements needed to sustain the economic recovery, address the huge infrastructural deficit, as well as meet budget financing requirements, would entail enormous funding resources, including borrowing.

DMO however, maintained that funds injected through the borrowings strongly supported the implementation of the Federal Government’s budget, which helped the country to exit the recession in 2017.

For instance, in 2016, the country borrowed to build new roads and invest in outdated power grids with a view to boosting agriculture and other non-oil industries, and reducing the economy’s dependence on dwindling crude revenues.

In 2017, the former Minister of Finance, Kemi Adeosun revealed that the Federal Government would apply $3 billion in refinancing the legacy debts of the immediate past government out of the $5.5 billion foreign loans being sourced from the international financial markets.

The minister said the proposed $5.5 billion loan was made up of two components – refinancing of heritage debts to the tune of $3 billion and new borrowing of $2.5 billion for the 2017 budget.

The first component of $2.5 billion represented new external borrowing provided for in the 2017 Appropriation Act to part-finance the deficit in that budget.

“The borrowing will enable the country to bridge the gap in the 2017 budget currently facing liquidity problem to finance some capital projects.

“For the second component, we are refinancing existing domestic debt with the $3 billion external borrowings. This is purely a portfolio restructuring activity that will not result in an increase in the public debt,” Adeosun had explained.

She noted that the President Buhari-led administration was investing in critical infrastructure such as roads, rails and power in order to deliver a fundamental structural change to the economy that would reduce the nation’s exposure to crude oil.

In 2018, $1.3 billion was borrowed from the Chinese government for the construction of the Abuja-Kaduna standard gauge rail.

In aggregate, statistics showed that Nigeria’s debt which has grown in the past four years by over N9 trillionn was majorly spent on capital projects to build roads, petrochemical plant, power plants fertiliser plant and gas processing plant, railway, among many others.

However, the latest data from the Ministry of Budget and National Planning shows that the Federal Government is planning to borrow fresh N4.6 trillion within the next three years, covering 2020 to 2022, to finance its programmes.

It is, however, worthy of note that if the N4.6 trillion new borrowings scale through legislative scrutiny and get executed, then Nigeria’s indebtedness to local and foreign creditors would hit about N29.55 trillion by 2022, going by the country’s current debt profile of N24.95 trillion.

The MTEF, which is currently being worked on by the committees on finance and appropriation, contains the fiscal strategy of the Federal Government for the next three years.

An analysis of the document shows that the Federal Government is planning to borrow N1.7 trillion in the 2020 fiscal period.

A breakdown of the N1.7 trillion shows that the sum of N850bn is expected to be sourced locally while the balance of N850bn is expected to be raised from foreign creditors.

In 2021 fiscal period, the government plans to borrow N1.6 trillion which would be sourced in equal proportion of N800bn each from domestic and foreign sources.

For 2022, the government projects to raise N1.3 trillion through debt instruments to finance its operations. This is made up of foreign borrowing of N650billion and domestic borrowing of N650bn.

Meanwhile, the latest data from the Federal Ministry of Finance, Budget and National Planning has revealed that not less than N1.11 trillion has been spent to cover debt service obligations in the first six months of 2019, exactly 54 per cent of the revenue made within the period. This further affirms that debt servicing takes a larger chunk of the country’s revenue.

According to the ministry’s 2020 budget, a circular released earlier this month, the Federal Government aggregate revenue of N6.99 trillion was projected to fund 2019 Budget of N8.92 trillion. This implies a deficit of N1.92 trillion will be financed mainly by borrowing.

The circular showed that as of June 30th 2019, the total debt service rose to 1.11 trillion in just six months, while the Federal Government actual revenue was N2.04 trillion, which represents only 58 per cent of the N3.49 trillion pro-rata budget.

Essentially, it was stated that shortfall of 42 per cent is attributable to the underperformance of both oil and non-oil revenue.

The report further showed that of the total appropriation of N8.92 trillion and a prorated expenditure sum of N4.46 trillion, N3.39 trillion was spent by June 2019 (i.e. 76% performance).

“A total of N2.05 trillion has been released for non-debt recurrent expenditure, including Salaries, Pensions and Overheads, while N1.11 trillion has been released to cover debt service obligations during the period,” the report reads.

In the effect, it was stated that the deficit of N1.35 trillion was incurred as at end of June 2019, which is 70 per cent of the budgeted deficit for the full year.

Meanwhile, no capital expenditure according to the release was made in the first half of 2019 under the 2019 Budget Provision. The ministry in the report explained that it was because the 2018 capital budget was implemented until June 2019 as stipulated in 2018 Appropriation Act.

While debt financing is not entirely bad, the latest disclosure implies that Nigeria’s debt challenge persists, and this may take the country’s debt profile to a new height in the coming year, while capital projects still face some major setbacks.

Speaking in an exclusive telephone chat with The Daily Times, a financial expert, Lecturer and President Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogunbunka, said that despite the high amount used for Nigeria’s debt servicing, there is no positive impact as bad roads and decayed infrastructure keep staring the country in the eye.

“The only impact is that the Federal Executive Council members and National assembly members appear to be increasing their take-home pay in a disproportionate manner that is not in line with the reality of the economy and that is what is leading us to borrow and also service our debts.

“The only way we can reduce debt service is to reduce our recurrent and overhead cost or else we will keep on borrowing with no revenues to complement,” he said.

He added that the country needs to evaluate how much it is getting and how much it is spending.

“Government needs to do more in improving infrastructure, schools, health systems so that medical tourism or a situation where pupils sit on the floor to receive lectures won’t be there,” he said.

Also, Business and Investment Consultant, Dr. Vincent Nwani, says the debt ratio to revenue has been hovering around 45-50 per cent in the past two years including the 2020 budget which he described as high.

Nwani said economists have been warning the government but they have always said Nigeria’s borrowing is still within range.

“Our total borrowing is about $81 billion compared to our foreign reserves which are around $43 billion and it is worrying.

“Even if the government wants to borrow, it should be on infrastructure that will last for generations to use.

“A child born in Nigeria now inherits a debt of about N100m while Norway, a child born there inherits assets of N100 million.

“As such it’s high time the government should begin to increase revenue through concessionary measures like the prisons and other assets that are not in use so that revenue can be increased and the reason to borrow will reduce,” he said.

On his part, a Professor of Economics at the Olabisi Onabanjo University Ago-Iwoye, Ogun, Sheriffdeen Tella, said that the country currently has a debt problem.

Tella said that with the Federal Government spending about 20 per cent of its budget size servicing the country’s debt, it was practically impossible for Nigeria not to have a debt problem.

He called on the government to discontinue borrowing in order to avoid the current situation where a huge chunk of the country’s annual budget was spent on debt servicing.

“We have a serious problem with debt. We should not even accumulate further debts beyond what we currently owe.”

Similarly, Managing consultant, BIC consultancy Services, Dr. Boniface Chizea, warned that if Nigeria doesn’t reduce its debt servicing, it may be using 60 per cent of its revenue servicing debt.

He said that experts have always advocated for sustainable borrowing as the nation’s recurrent expenditure is still high.

According to him, the tragedy of this country is that we borrow to pay salaries instead of channelling it to education, good roads, hospital or other ventures that will benefit the common man. If you borrow for capital spending it is way better than borrowing for recurrent.

“It was only in 2006 that Ngozi Okonjo Iweala granted us debt relief since then, our debt to GDP is on the rise without any valid measures for sustainable.

“It is high time government removes subsidy on petroleum. Although it will create inflation, the amount being spent need to be channelled somewhere because the people benefiting are not the real intended people.

If it doesn’t benefit the common man then there is no need. Our revenue needs to be increased if not we will keep borrowing,” he added.