Recession looms amid debt crisis, forex scarcity, others

By Motolani Oseni & Tunde Shorunke

Why debt servicing may hit N3.8trn in 2020

‘Nigeria will be characterized by large budget deficit’

We’re heading back to recession, expert warns

Nigeria may be closer to its second recession in four years than expected as Africa’s biggest economy continues to struggle with high debt servicing, foreignexchange scarcity, global oil prices crash and continuous rise in the inflation rate, among many other economic challenges.

An investigation by The Daily Times has revealed that Nigeria may spend N3.8trillion on debt servicing in 2020 against the projected N2.9 trillion by the Federal Government.

Also, findings revealed that an approximate figure of N316million was spent on debt servicing on a monthly basis, amounting to N1.58 trillion for five months.

If the federal government continues with this trend, N3.8trillion would have been spent on debt servicing by the end of 2020.

The coronavirus pandemic negatively impacted global oil prices, which in turn affected Nigeria, putting its revenue generation at only N1.62 trillion in five months.

According to Budget Office statistics, the federal government only realised a meagre N324million on a monthly basis, considering the N1.62 trillion generated due to the significant decline in economic activities during the period.

This implies that if the Nigerian government is not creative in its revenue generation and keeps raking in only N324 million monthly, the nation would realise about N3.9 trillion by the year ended December 31st, 2020.

Further analysis of the figure shows that debt servicing would be at N3.8trillion during the same period, representing 97.5 per cent of the N3.9 trillion projected revenue, leaving only 2.5 per cent for capital expenditure by the end of the year 2020.

The scenario can however be managed by creating multiple streams of revenue; diversification of the economy; placing embargoes on external borrowings; reduction in importation, strong fiscal and monetary policies, among other measures that should be properly put in place for quicker recovery.

According to the latest International Monetary Fund (IMF) projection, debt servicing may gulp all Nigeria’s revenue in 2020.

“The first vulnerability comes from having a very low level of fiscal revenues, total revenues at seven per cent of Gross Domestic Product (GDP) is less than half of sub-Saharan Africa’s average and far lower than the averaging oil-exporting countries.

It is also lower than the minimum threshold of 12 per cent which is considered necessary for the government to provide an enabling and growth-enhancing role.”

“Interest payments take up a large share of revenues, leaving little resources for everything else this year, in particular, all of the federal government’s revenues are expected to be spent on interest payments,” IMF added.

It is worthy of note that the debt servicing will be negatively triggered by the recent devaluation or adjustment of Naira to the official rate of N380 to the Dollar.

Economists have proclaimed that debt servicing will gulp more of the nation’s revenue due to the recent currency adjustment by the Central Bank of Nigeria (CBN), as loans are denominated in the Dollar currency, which will make Nigeria spend more paying back foreign investors.

In an exclusive chat with The Daily Times, an analyst, Mr Ojo Moses, said that Nigeria is generating revenue that is far less than the debt it servicing, “in a situation where almost all the revenue is being used to service debt, it shows that a large budget deficit will characterize the country.

“What it shows to us signifies that all is not well in the fiscal policy of the country and there is a need for policymakers either to cut wages or find a way to generate more revenue.”

Speaking further on the recent Naira devaluation, Moses said, “Devaluation of our Naira actually balanced out because what it simply means is that the revenue that the government is earning from oil receipts are in Dollars which actually will be making them exchange at a higher rate, meaning that the government will be earning more Naira for every Dollar they are earning.

“Looking at it from the aspect of debt servicing, what it simply means is that we’re going to need more Naira to exchange into Dollars in order to service our debt, but if we look deeply, the government will be gaining more because they will be exchanging almost all the Dollar receipt into Naira in which part of it will be used to service debt.”

Commenting on the looming recession in the country, Moses said, “Certainly there will be a recession when the GDP numbers are out, but that will be as a result of the pandemic that necessitated the lockdown and social distancing in the country.”

Also, a Development Economist and Chairman of the Board, Amaka Chiwuike-Uba Foundation (ACUF), Dr Chiwuike Uba said, “There has always been this argument that our debt is still very sustainable to GDP which is not very right, because GDP does not pay debt but revenue does, and the implication is that if we’re are using over 97 per cent of our revenue to pay the debt, the creditors, will be worried about giving more money.”

He explained that over time, Nigeria won’t be able to get more loans from other countries. “We can see what is happening with the loan from the World Bank that has lingered because the World Bank is not comfortable with the fact that most of these loans are contracted for consumption purposes instead of capital expenditure.”

He added, “From our budget, you will discover that our capital expenditure is so minimal compared to recurrent expenditure.

So, we are funding the re-current expenditure which also is inclusive of subsidies and all other fees which is why the World Bank is clamouring for removal of subsidy on a lot of things.

“The truth is that a lot will happen. The citizens will suffer so much because most countries and multinational companies are worried about giving us loans.

We’re now heading back to recession which means the prices of goods will be so high (already experiencing push inflation) and that will continue because people will have little funds in their hands to consume, which will also increase the poverty level.

“Also, people will die as a result of hunger and as at now, our food hunger was about 78.6 per cent.

This will increase because people won’t feed well anymore due to unavailability of resources to feed.

“The agriculture we’re practising is still subsistence agriculture which will not be able to feed all of us without considering export.

The solution is that we need to rethink our expenditure pattern in the sense that we spend less and earn more compared to our budget that is still suffering from frivolities.

Even with the situation of COVID-19, the government is not spending on areas of COVID-19 infrastructure; social sector, community sector, others that will help us to jump-start the economy.” Meanwhile, Nigeria’s inflation rate has been on the rise for the eleventh consecutive time, and is now at 12.82 per cent in July.

The CPI, which measures the rate of increase in the price of goods and services, is said to have dragged the rate to 12.82 per cent in July, representing a 0.26 per cent points higher than the 12.56 per cent recorded in June 2020.

This increase represents an upward trend in inflation from August 2019 when it stood at 11.02 per cent.

The Director-General of Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf lamented the growing National debt, which he said is a cause for concern. According to him, the 2020 budget, debt service commitment and recurrent spending are beginning to crowd out capital expenditure.

This trajectory is not consistent with our national aspiration to build infrastructure and a competitive economy. “Debt service of N2.45 trillion is more than the capital budget of N2.14 trillion in the 2020 budget.

That is 114 per cent of the capital budget. It is against this background that the new request for $30 billion is troubling. Care should be taken to avoid a full-blown debt crisis.

“The opportunity cost of high debt service commitment for the economy and citizens is very high.

There is also the exchange rate risk inherent in the exposure to mounting foreign debt which we need to worry about.

“As the currency depreciates, the burden of servicing foreign debt would intensify. This is a major problem with increasing the stock of foreign debt.

“This underlines the need for appropriate policy choices to attract domestic and foreign private-sector capital for infrastructure financing.

The government needs to look beyond tax credit in its quest for more complementary funding sources for infrastructure. We should be looking more in the direction of equity financing.

But for this to happen the policy and regulatory environment must be right”, he said. He added that the ballooning recurrent expenditure, in the face of declining revenue is a cause for concern.

“There is a need to clarify the place of the new loan request in relation to the 2020 budget and the 2020-2022 medium term expenditure framework.

Additionally, borrowing should strictly be in line with section 41 of the Fiscal Responsibility Act which stipulates that ‘Government at all tiers shall only borrow for capital expenditure and human development, provided that, such borrowing shall be on concessional terms with low interest rate and with a reasonable long amortization period,” he added.

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Meanwhile, the Federal Government itself had said there is a likelihood of Nigeria sliding into another recession in the Q3 of this year.

The government said the COVID-19 pandemic resulting in the crash of global oil prices among other economic factors had adversely affected the nation’s economy, with the GDP growth for Q2 most likely to be negative.

The Minister of State for Finance, Budget and National Planning, Clement Agba, made the revelation saying, “Nigeria’s Q2 GDP growth is in all likelihood negative, and unless we achieve a very strong Q3 2020 economic performance, the Nigerian economy is likely to lapse into a second recession in four years, with adverse consequences.”