Amalgamation Day in Lagos, 1914

Amalgamation Day in Lagos, 1914

24 November, 2013

Still Talking About Nigerian Debt

Image from Ghana Business News


As you know, if you've been reading this blog (the stats tell me there are at least a few of you), I am not overly fond of the "debt cancellation deal" of 2005.

The future value of the $12 billion we paid was equal (at a minimal interest rate) to what our Paris Club creditors could have realistically expected to receive from us based on what we were actually paying at the time.  The opportunity cost, or lost value to us, was much greater;  those reserves could have been used to leverage even greater spending (greater than the reserves) on our infrastructure problems (or health problems, or education problems, or security problems, or etc), with economic effects in excess of the so-called billion-dollar-a-year savings.

And we were always bound to run up new debt, meaning we would resume paying the same amount (or more) in debt service that we were already paying, except with $12 billion less in our accounts. Indeed, in the years since the "debt cancellation" we have borrowed back about as much as we owed before the "cancellation", though nobody notices because it has been accumulated as "domestic debt" and not the more noticeable "Paris Club" debt.

The Federal Government's Debt Management Office says the Federal Government currently owes $45 billion in "domestic debt".  Most of this was borrowed after the "debt cancellation" deal, and it is 50% higher than our "cancelled" external debt was in 2005.  The DMO has data on the states' external debts, but if they have data on the domestic debt owed by the states, I haven't found it yet.  Most articles I have found on the internet that rank state debt in Nigeria only reference each state's external (i.e. foreign) debts, and don't acknowledge that is another set of debts they are not reporting on.  Like the federal government, the states' debts to Nigerian banks are likely much higher than their debts to foreign creditors.

The Vanguard columnist who writes under the pseudonym "Les Leba" has a tendency of pointing out that the debts are the result of our governments depositing oil revenues in Nigerian banks, and then borrowing back the government deposits as loans from the Nigerian banks at double-digit interest rates.  It isn't a new concept; the African continent's historic Paris Club debts were for all intents and purpose a function of African countries depositing their foreign reserves and export revenues in Paris Club countries and then borrowing back their own money from the foreign countries with interest tacked on.  The term "Paris Club" is apt, considering the fiscal and debt relationships between France and the CFA Zone are especially weird.

We tend to keep our eyes on the Federal Government when it comes to issues of debt.  Nevertheless, the 36 State Governments and the Federal Capital Territory are also borrowing, and it seems no one is paying attention.  There has been no legislative, political or democratic limitation to the borrowing of the states since 1999; our state governors (and the FCT minister) are far more powerful, relatively speaking, within their respective "domains" than the President is over Nigeria. 

I am unaware of any independent, credible studies of the sustainability of the growing debt loads of the states.  There are a few states where one suspects debt loads have passed the point of "comfort"; I have had interesting conversations with people who have praised their state governors for spending on certain projects, while simultaneously telling me they doubt their states can pay the contractors or the banks that funded the projects.

Truth be told, the state governors are in office a maximum of 8 years, winning re-election in part by rigging and in part by popularity bought with the debt, after which they leave office as wealthy men and leave the state's debt for their successor(s) to deal with.  What do they care?

Debt is unavoidable for governments, corporations and individuals.  It is not necessarily or inherently a bad thing.  But there are questions to be asked and answered. One of the most important questions relating to our 36+1 states is whether each individual state's ability to repay its debts. When the civil service minimum wage was increased by the Federal Government, most state governments protested their inability to pay; clearly their margin for new expenditures is thin to the degree of nonexistence. Yet their debts, and (by definition) their annual fiscal commitments to pay those debts, will continue to grow, eating and exceeding that nonexistent margin.

There are other questions, like what is this debt being used to do?  There are lots of things that either look nice, or feel nice, but which don't generate revenue sufficient to pay for their creation or for their maintenance.  Many Local Government Areas and States have nice new medical facility buildings but cannot not afford to properly staff, equip or resource the buildings to a degree that would have a real impact on the health of the respective communities. And as they commit ever more of their budgets to paying debts, they will have even less in the way of discretionary resources.

Speaking of which, as I said earlier, Nigeria at the Federal level has borrowed back as much in new debts as we used to owe before the "cancellation" deal. Much of this debt was not used for anything relevant to economic growth or citizen welfare.  There was a particularly large jump in the debt in the run-up to the 2011 Elections; effectively Nigerian citizens have to (re)pay the political/electoral expenses of the Jonathan Administration and the Peoples Democratic Party.

The debt situation is about to get worse, though the statistics will show that it has gotten better.

Let me explain.

Nigeria's Gross Domestic Product is currently being recalculated via "rebasing".  It has been almost 25 years since we last rebased the GDP calculation, and the expectation is we will either overtake South Africa and become the biggest economy in Africa, or will dramatically shorten the amount of time before we overtake them.

The new, much higher GDP figure will cause all of our macroeconomic ratios to change. It will mean the various governments' tax collections will be a smaller total share of the economy.  It will mean the various governments' total deficits will be a smaller share of the total economy.  It will mean the debt-to-GDP ratio will drop. It will also mean the number used to represent the estimated growth rate of the economy will change from the 6-to-7% range to the 3.5-to-5% range.

To make a long story short, the three tiers of government are likely to use the rebased GDP size as a justification to increase their borrowing.  One of the most annoying (to me) terms used by so-called experts (foreign and local) in relationship to Nigeria is "under-borrowed".  They seem to think there is a specific amount of debt, relative to GDP, that we are supposed to be carrying, and if we are not carrying that amount of debt, they insist that we borrow a bunch of money for no reason at all beyond their insistence that we need to owe as much as they think we are supposed to owe.

We should owe only as much as is necessary. If the necessary amount of debt is less than what the experts claim it should be, then ... so what?

And even if there is a necessity, an indisputable need to borrow for a particular thing, perhaps the first question we Nigerian citizens should ask ourselves is what type of governments, government leaders and civil service bureaucracies we want to be in charge of this borrowing. Because, if we maintain the current system, we run the risk of having, for example, an $80 billion need in an infrastructure sector, for which our governments borrow $165 billion, and mysteriously deliver only $20 billion of new infrastructure that is useless without the other $60 billion's worth of completion, and now we the citizens owe $165 billion in addition to capitalized interest in exchange for a situation that is not demonstrably different from the situation that existed before we borrowed.

There is also going to be a lot of talk about increasing government revenues from taxation and fees.  Some of this talk will be in terms of relieving the need to borrow.  Some of it will be in terms of raising funds to pay back loans already borrowed and loans to be borrowed.

There are two sides to this coin.  Whatever the real GDP of Nigeria is (I am not sure anyone really knows, rebased or otherwise), the citizens of Nigeria have long borne the fiscal costs of providing for themselves many of the things that are theoretically supposed to be provided by the public or private sectors of the economy.  Assuming the government can efficiently tax the people so as to increase government revenue and decrease the discretionary revenue of private citizens, is there not a chance that the private citizen will be less able to provide himself and his extended family with those goods/services without there being a replacement of those goods/services from the government (i.e. paid for from the increased taxes)?  Suppose the money just goes to pay debt?  Suppose the money pays for more PDP election "victories"?  Suppose the money goes to the right place, but $165 billion of spending in the right place mysteriously purchases only $20 billion worth of the whatever it is?

I am not being cynical (though I am sometimes a cynic).  These are the kind of debates we should be having in our political space, rather than arguing with ourselves which of the "geopolitical zones" deserves the next "turn".

We have borrowed a lot of money.  We are going to borrow a lot more, it seems. There needs to be more of a discussion about this ... before someone starts telling us it is a great idea to spend $24 billion to "cancel" $60 billion, only to borrow another $70 billion eight years afterwards.

No comments:

Post a Comment