Following last week’s revelation that Nigeria’s debt service cost presently outweighs its revenue with clear signs of economic dangers ahead, some notable economists in the country have stressed the need for the federal government to reprioritise its expenditure, drastically reduce the cost of governance and block all avenues of fiscal leakages.
The economists who gave their advice in separate interviews with THISDAY at the weekend included: Member, President Muhammadu Buhari’s Economic Advisory Council/CEO, Financial Derivatives Company Limited, Mr. Bismarck Rewane; Director-General of the West African Institute for Financial and Economic Management (WAIFEM), Dr. Baba Musa; Founder, Centre for Values in Leadership, Prof Pat Utomi, and a former Member of the Monetary Policy Committee/former WAIFEM DG, Prof. Akpan Ekpo.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, last week sounded the alarm bells as she revealed that the country’s debt service cost in the first quarter (Q1) 2022 was N1.94 trillion, N310 billion higher than the actual revenue received during the period.
Also, Ahmed projected a total of N6.72 trillion as full-year budget for petrol subsidy payment in 2023, if the country decides to continue with the policy that had been identified as a drain on the economy.
But speaking with THISDAY, , Musa pointed out that Nigeria’s biggest challenge has always been the debt service cost for its domestic debts, compared to the external debts.
He noted that the interest rate the federal government pays on its domestic debts is twice as much as what it pays on external debt and they are short-dated instruments.
“When you look at the redemption profile of our debts, that of domestic debts are much higher. And the bonds, the government keeps rolling them over and when they roll them over, they do so at higher cost. So, the issue is that there is some money kept aside in sinking fund; if I am to advise the Minister of Finance, I think this is the right time to use the sinking fund to pay off all the domestic debts rather than rolling them over. That will reduce our debt burden.
“Another thing is to do what is called debt re-profiling, so that for those that have two to three years maturity duration, we can elongate the tenor, so that it can mature in five to 10 years or beyond. This will enable government have breathing space. Otherwise, our debt service cost would continue to dwarf our revenue, which is a mis-match.
“The second thing is that we need to bring in innovative way of increasing our revenue. For that, if I am the federal government, I would cancel any tax relief that relief that I had given to people. For now, you don’t need to give any tax relief because the government is in dire need of revenue. Our biggest problem has been expenditure; we need to re-prioritise our expenditure and only spend on essential items until our revenue profile improves. Unfortunately, we are going into an election year and naturally in an election year in every government in Africa, you spend more than what you had budgeted. But I pray that we would have that fiscal discipline. Eventually, I see us going back to the International Monetary Fund (IMF) for support. We have to do that because that is the only way we can get support, at least in the medium term.”
In his contribution, Rewane explained that the country’s rising debt service cost was because interest rates had increased, therefore making debt refinancing costs more expensive.
According to him, “we have some debts that are maturing and we have to refinance them to raise more money. Treasury bills rates have increased and the Monetary Policy Rate (MPR) has gone up to as much as 14 per cent. Some of the debt instruments are marked to the MPR. So, what do you do? You have to increase your revenue.
“It is not about cost management; it is about raising revenue. But how do you do that? You have to increase the tax net and the efficiency of collection. But those things don’t work in a low growth environment. When there is growth and people are making money, then you can comfortably tax them. If there is tepid growth and companies are just struggling, the tax revenue would not improve. So, you need to go back to the fundamental of growth.”
To Utomi, there is need for the government to unfold an austerity programme that would cut costs drastically.
“There is so much waste in governance and too much stealing in the system. We need to reform the civil service. Most of the people who have been directors of finance in Ministries, Departments and Agencies have been in an elaborate web of corrupt scamming of the system today. So, we must go after those places and reform them, reduce corruption and cut down the leakage.
“But the more important part is increasing production. How do you increase production? Right now, the confidence level in the world is very low; so even though there is abundance of capital in the world, very little of that capital come to Nigeria because of the low confidence level. That is why there is a need for a dramatic change in leadership.
“If a leadership the world perceives as more serious, more prudent comes up, there would be a surge of new investments into Nigeria. In my mind, there is need to build production. And part of the strategy of our third force movement is to use limited industrial policy, focus on our factor endowments and try to dominate value-chains in which we have factor endowments,” he explained.
He cited an example of the seseme seed as a commodity that the country can benefit tremendously through its value-chain.
Responding to a question on the drain being cause by fuel subsidy which the labour unions had been resisting, Utomi said: “I was one of those who protested the 2012 so-called subsidy removal. Was I in support of subsidy? No. The truth of the matter is that a very significant per cent of the subsidy is part of a big scam between the bureacrats in government and those who import petrol.”
On his part, Ekpo advised the Debt Management Office to be transparent about the country’s borrowing and debt profile.
“I say this because as at today, we don’t know whether they are borrowing to finance infrastructure or to pay salaries and other recurrent expenditure. A lot of these monies come from Eurobond where you do not have much scrutiny like the IMF, World Bank or AfDB loans. So, they are not transparent about it. If they transparent about it, people would have advised the government to stop borrowing to refinance recurrent expenditure, but to finance capital projects.
“The other thing is that we need to increase internal revenue. We have to look at our tax regime again and has the Finance Act been fully implemented to raise the desired tax revenue. Another issue is that over the years we have been advising them to be calculating debt-to-revenue ratio and use that to decide whether to borrow or not, instead of using debt-to-GDP ratio. GDP does not pay debts, it’s your revenue that pays debts.
“In the Nigerian case, the source that you are sure of is crude oil and the oil you don’t control the price and output. That is what is called exogenous source of revenue and you cannot use that to finance development. So, if you are using debt-revenue to calculate, you will know that it is not healthy to borrow, except it is really important. The third issue is that we need to look at the expenditure side of our fiscal profile.”
Furthermore, Ekpo expressed concern over the cost of governance in Nigeria, advising the federal government to cut down its expenditure, “or do what economists call expenditure switching.”
“If you look at the cost of governance at the federal level, from the executive, Senate and House of Representatives, you will cry. Don’t forget that what we are talking about today is the cost of servicing the debts, we are not even talking about paying the principal. Going forward, let the economy be a productive one where we produce non-oil goods, export and earn foreign exchange. We are more of a consuming economy; the things we consume we import virtually all of them using forex.
“Now, how are they going to be paying from subsidy? They are going to borrow. Where in the world do you borrow to fund petrol subsidy? On this subsidy issue, we have told them over the years to fix the refineries so that we can preserve our forex. Today, two—thirds of our forex inflow is used to import refined petroleum products, which is crazy. There is also an expenditure crisis, we are spending too much on governance,” he added.
Obinna Chima
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