Dr. Okonjo-Iweala cannot keep dodging fiscal reality

Everywhere else in the world, governments heave a sigh of relief if the majority of their debt is denominated in their own currency and held by their own citizens and corporations.  This is usually deemed a safer proposition for the government, for all sorts of reasons.

I guess Dr. Ngozi Okonjo-Iweala has different ideas. The Minister of Finance, and "Coordinating Minister for the Economy" has announced her intention to use dollar-denominated borrowing from foreign sources to retire a portion of the debts our governments owes to domestic creditors.  In other words, we would still owe the same amount of debt, but a higher proportion of said debt will be owed to foreign entities and a lower portion owed to domestic creditors.

In the year 2005, the domestic debt load of the Federal Government of Nigeria was $11.83 billion.

In mid-2012, the domestic debt load of the Federal Government of Nigeria is somewhere around $44 billion.

The federal government has borrowed $32 billion in the last 7 years.

Recall that 7 years ago, we were told to celebrate the "debt cancellation" deal brokered by Dr. Okonjo-Iweala on behalf of the Obasanjo Administration. We had borrowed around $19 billion from foreign creditors, paid them around $42 billion over the years, but still owed them about $30 billion, due to capitalized interest and other penalties. The Obasanjo Administration, under the terms of Dr. Okonjo-Iweala's deal, paid out an additional $12 billion in what was essentially a lump sum drawn from our reserves, and our foreign creditors "wrote off" (if you can call it that) the balance of $18 billion. All in all, we borrowed $19 billion, in exchange for which we paid $54 billion.

This happened 7 years ago.

And in those 7 years, we've borrowed $32 billion.

If you want to know how that is possible, consider the fact that Dr. Okonjo-Iweala's plan for the future includes capping our annual borrowing at ₦500 billion, equivalent (at ₦160.00 per $1.00) to $3.12 billion.  If we were borrowing $3.2 billion each year for 7 years, it would add up to $21.84 billion. Now factor in the upward spikes in borrowing in 2007 and 2011; some $6-to-$8 billion in borrowing provided funds to manipulate the outcome of the elections.  Add $10 billion in borrowing in 2010 alone, likely to deal with the budgetary effects of the global economic crisis (and the popping of our separate, self-generated stock market bubble) and you can see how we could have replaced $30 billion in supposedly cancelled debt with $32 billion in new debt in just 7 years.

But, why would we want to transfer our debts from domestic creditors to foreign creditors?  With all due respect and no offence intended, these are the type of decisions that make conspiracy theorists come up with conspiracy theories about people like Dr. Okonjo-Iweala. She is as much a part of the World Bank, as an entity, as a concept, and as a philosophy, as Nelson Mandela is a part of the ANC. The conspiracy theorists accuse people like her of coming up with policies that weaken countries like Nigeria while strengthening countries whose economic interests are served best by the World Bank.

Seriously, we must be the only country in the world that has a choice, and is using that choice to run away from domestic creditors and towards foreign creditors. 

Dr. Okonjo-Iweala has cited two reasons for her decision:

 (a)  The Federal Government's Naira-denominated domestic borrowing is crowding out private sector businesses, and driving up the interest rates;

(b) She believes the Federal Government can get foreign loans at concessional interest rates that are much lower than the interest rates being paid for the Naira-denominated domestic debts.

I agree with the honourable "Coordinating Minister for the Economy" that these are issues that must be tackled. But her proposed solutions remind me of the Nigerian Football Federation, who never address the substantive, structural reasons for the problems in our football, but instead try to paper over everything by hiring a European coach who is always more expensive than a Nigerian coach would have been, and who ends up achieving the same footballing results we would have achieved under a Nigerian coach because the underlying structure and strength of Nigerian football has not changed just because you changed the nationality of the coach.

The solution lies, not in trading one nationality of creditor for another nationality of creditor, but in cutting down on the borrowing in the first place.Bear in mind, what I have written about above is the Federal Government debt.  Most if not all of our 36 States have also gone on a borrowing spree that is every bit as uncontrolled, unchecked and unmonitored as that of the Federal Government.  Collectively, the 37 governments at the Federal and State levels have been borrowing (and are still borrowing) way too much money, and are spending it on things that do not generate returns sufficient to pay off what was borrowed (and in many cases on things that generate no returns at all).

We are talking about transforming the Excess Crude Account into a Sovereign Wealth Fund, when we are no longer generating surpluses to put in such a Fund!  Things are so fiscally tight that the Federal Government is signalling there will be no new capital projects announced in the 2013 Budget.

The solution to our dilemma lies in administrative consolidation.

For what feels like the one millionth time, I will reiterate that the starting point to any substantive process of reform, restructuring and transformation in Nigeria is having:

(a) Between 70 and 84 third-tier administrative units, down from the present-day tally of 774 constitutional LGAs and dozens more unconstitutional LGAs.
(b) Exactly 7 Regions instead of 36 States (with federal territories like Abuja counted among the third-tier units, albeit excluded from any of the 7 Regions).
(c) A Federal Legislative Upper-House that is numerically 70% fewer than what pertains now.
(d) A Federal Legislative Lower-House that is numerically 15% fewer than now.
(e) Hard, constitutional caps on things like the size of the respective cabinets, and on things like assistants, special assistants, senior special assistants, etc.

I won't bore you with the full detail of my calculations, but, believe it or not, we can reduce the size of the political component of our three-tier administration by more than 50%, without overly affecting the Civil Service (a sensitive issue that would otherwise torpedo efforts at reform).  It is not just a question of reducing direct budgetary outlays, but also of easing the further spending occasioned by the decisions made by each of these political points in the matrix. Bear in mind direct theft (a.k.a. corruption) is not the greatest fiscal challenge facing Nigeria; our greatest fiscal challenge is legal waste, and from that perspective we are like a bucket that is leaking from far too many holes.

We should start from here. There are other things we need to do to fix our fiscal problems (and ease the private sector's access to finance, as well as easing the pressure on interests rates) .... but this is the point from which we must start.

Seriously.

Dr. Okonjo-Iweala had initially moved to cut the federal deficity by removing the fuel price subsidy, but she, President Jonathan and CBN Governor Sanusi were forced to backtrack by public protests. To understand why people reacted that way, you have only to look at the many revelations of corruption spilling (unintentionally, it seems) from the legislative probe into the issue. Among other things, billions of dollars in import-subsidizing payments were being paid to people who never imported a single drop of fuel. If Okonjo-Iweala, Jonathan and Sanusi had first clawed back some of these billions by prosecuting the culprits and seizing their wealth, they might still have failed to gain public support, but there would not have been such scorn for their plan.

Nigerians know the current situation is fiscally problematic. However, citizens believe that any funds saved by cancelling the subsidy will simply be stolen or wasted like the rest of the funds available in the budget.  Indeed, people perceived that the government was taking away the subsidy in order to pay for its own fiscal inefficiency, which is a lot easier than taking the decisions that would make our administrative structure more fiscally efficient. If I had a Naira for every time a discussion about how to improve something in Nigeria was brought to an end by a variation of the "They will just steal the money" comment, I would be a rich man.

My take on the issue is the Federal Government has no interest in reducing the number of states and LGAs. And even if some in the government know that administrative consolidation is necessary, the government as a whole is far too cowardly to fight the governors and the broader political class to bring it about.  Heck, this current Administration (like all of its predecessors) could only be in office because of all of the aspects of our governance and administration that would be changed if we were serious about reform. As such, the men and women of the government would be consigning themselves to political irrelevance if they pursued reform.

Making more funds available for the government's discretionary spending by eliminating the fuel subsidy would simply make funds available to keep the fiscally inefficient administrative structure going for a few more years.  Indeed, with the new money, the administrative structure would likely grow, making it even more difficult to force cuts and consolidation, because a larger number of politicians and political dependents would be affected.

This is why the "Coordinating Minister for the Economy" is doing everything in the world except the most important thing we should have been doing these last 14 years. We are wasting time, wasting money and mortgaging the future.