Can Nigeria really slow down on borrowing?
It was a surprise for many in the financial community when the Minister of Finance, Kemi Adeosun said last week that the country will slow down on borrowing. She was quoted as saying that the country cannot afford to borrow anymore and needs to generate revenues to meet its rising obligations.
The statement was a bit surprising because Nigeria has been on a sort of borrowing spree in the last two years following the collapse of crude oil prices and production. The country’s low taxation from non-oil sources and inability to immediately cut down on our expenditure in the face of dwindling revenues has forced the country to accrue debts at a very high pace. This year alone, besides raising US$1.5 billion in Eurobonds, the country has raised another US$300 million in diaspora bonds and about N900 billion in domestic bonds.
Nigeria’s total debt stock stood at N19.2 trillion as at the end of March this year. This is approximately N7 trillion more than the country’s debt stock of N12.6 trillion as at December 2015.
Based on the official exchange rate of N305 to the US$, the dollar equivalent of Nigeria’s total debt stock stands at $62.9 billion. But not all of Nigeria’s debt stock is held in dollars. A breakdown of the total debt stock shows that N12.1 trillion is owed to domestic investors. That means this part of the debt, or 62.5 percent of the total debt stock is in naira.
The external debt portion of Nigeria’s debt stock stands at N4.2 trillion or US$13.8 billion based on the official exchange rate of N305 to the US$ and this makes up 22.1 percent of the total debt stock. The dollar debts have swelled by more than US$3 billion in the last two years.
The dollar portion of the debt is also the riskiest as it is highly subject to foreign exchange risk. Anytime the naira weakens, the foreign exchange portion of the external debt also balloons along with the naira revenues needed to service it. So even though Nigeria’s external debt is considered relatively low, it comes at a high risk because the general outlook for the naira is negative. A truer value of the naira could be near its N362 market determined exchange rate in the investor and exporters window than the N305 official exchange rate. This means that in naira terms, Nigeria’s external debt could be much higher if the market value of the exchange rate is used instead of the Central Bank of Nigeria pegged rate.
Nonetheless, Nigeria’s total debt stock at about 28 percent of 2016 GDP is considered relatively low when compared to the global average debt to GDP ratio of 75 percent for most countries. Even the United States has a debt to GDP ratio in excess of 100 percent.
The challenge for Nigeria however is the higher debt service to revenues ratio which stands at 33.6 percent. Basically, the country is spending about one third of its revenues servicing its debts. If it is considered that the country also spends two thirds of its revenues as recurrent expenditure, then it is easy to see that without borrowing, Nigeria would not have money for infrastructure, which is critical to economic development. Except the country cuts down on recurrent expenditure significantly and that option can be politically costly.
This could explain why Nigeria has been aggressively courting China for loans to expand its infrastructure especially in the railway sector. Without these loans, Nigeria will struggle to put in place this infrastructure. Already, the Federal Government is seeking approval from the National Assembly for a US$5.6 billion from China for infrastructure.
But debt is not really the only option open to Nigeria to fund infrastructure. An alternative strategy will be to attract private sector investments for infrastructure through public private sector partnerships or PPPs. Sadly, PPPs have not been very successful in Nigeria basically because the government has shown over the years that it does not regard validly executed contracts as sacred.
In many cases, the government has resorted to self help in a bid to do away with contracts that it considers not favourable to its interest. The result is a lack of trust in government and therefore reluctance by the private sector to participate in PPPs. With low interest in PPPs, the government is forced to fund infrastructure from its low revenues budget that could easily be funded through PPPs.
Asset sales could also have helped but that also is not politically popular and so the government is reluctant to go there.
But a more sustainable alternative to boost revenues and raise money to fund infrastructure is to raise tax compliance in the country. Records show that Nigeria has a very low tax compliance ratio compared to even neighboring African countries.
At just six percent of GDP, Nigeria’s tax to GDP ratio is one of the lowest globally, indicating a low tax compliance rate. This is why the government has launched the Voluntary Asset and Income Declaration Scheme in a bid to boost tax collection. BUSINESSDAY has done some calculations that shows that if we match Ghana’s tax to GDP ratio, the country could raise taxes to as much as N19 trillion annually, about five trillion more than the average of N14 trillion currently taken in.
This would significantly reduce the country’s debt service to revenues ratio and reduce the risk of an imminent debt crisis.
The challenge with improved tax collection and compliance remains the structure of the Nigeria private sector which has a larger than usual informal sector where more than 70 percent businesses are largely classified as micro businesses.
With a very difficult operating environment, many of these businesses are already struggling, hence talks of additional tax burden is not good news unless the government can significantly improve the banking business environment for them. Non oil tax revenues will continue to remain a challenge in the long run.
In the immediate future there is no chance, given Nigeria’s current low level of taxation that it can slow down on borrowing. Figures from the CBN monthly reports show revenues targets for the budget have never been met in any month in the last two years. There is nothing to show that the revenue situation has changed significantly despite some improvements in oil revenues.
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