Deconstructing the debt story

The national debt is an emotive issue as well as an economic one. The thought of saddling future generations with unserviceable debt is not conscionable and certainly not part of the President Muhammadu Buhariled administration’s agenda. It is, therefore, worthy of an intervention on my part to explain the history, the shortterm strategy and the medium to long term outlook for our economy.

It bears repeating that anyone who thought that the Nigerian economy we inherited in 2015 was in need of minor adjustment was sadly deluded. Oil prices had plunged from a height of over $120 to a low of $28 per barrel, yet the country had foreign exchange reserves of $28.34 billion (having declined by $16bn in the two years to June 2015, from a high of $44.95bn. Despite just 10% of the budget allocated to capital expenditure, debt had (in a period of unprecedented oil earnings), inexplicably risen from N7.9 trillion in June 2013 to N12.1trn in June 2015. Depending on the candour of the commentator, the outlook was at best, ‘challenging’ and, at worst, ‘bleak’.

However, this administration set to work, with a vision, not just to return Nigeria to a stable economic footing, but to deliver a fundamental structural change to the economy that would reduce our exposure to crude oil. We approached this with a number of binding constraints that must be understood. One of these was that a mass public sector retrenchment to create room for capital spending was not an option. Politically, it offended the principles of the All Progressive Congress (APC) and economically, it would worsen an already precarious economic situation and cause untold hardship. In the light of this, an expansionary fiscal policy was adopted with an enlarged budget which would be funded in the short term, by borrowing.

As the economy recovered and returned to growth, borrowings would be systematically replaced by revenue, which is the fundamental missing piece in Nigeria’s economic jigsaw. This does not mean that we would ignore waste, which has been a core focus of our efforts. Through the implementation of the Efficiency Unit and enrolment of Ministries, Departments and Agencies (MDAs) on Integrated Payroll and Personnel Information System (IPPIS), we have successfully saved N206bn in payroll costs using technology to drive the cleansing process, with the removal of 54,000 fraudulent or erroneous entries. This was attained without the negative social impact of retrenchment.

As we put our plans together, our economic modelling team correctly forecast that in the short term, there would be acceleration in the accumulation of debt and an increase in debt servicing costs. However, this would be ameliorated, by correcting the low tax to Gross Domestic Product (GDP) ratio through revenue mobilisation, releasing funds to sustain investment in capital and repaying the debt. Mobilising revenue aggressively is not advisable, nor indeed possible, in a recessed economy, but as Nigeria now reverts to growth, our revenue strategy will be accelerated. This is being complemented by a medium-term debt strategy that is focusing more on external borrowings to avoid crowding out the private sector. This will also reduce the cost of debt servicing and shift the balance of our debt portfolio from short term to longer term instruments.

The subject of inherited debt must also be drawn firmly into the mainstream of this discourse. Analysts will recall that in July 2017, the Federal Executive Council (FEC), approved that N2.7trn of hidden liabilities would need to be addressed. These obligations include salaries, pensions, oil importation, energy bills and contractor payments, some of which date back to 2006. It is instructive to note that the recent Academic Staff Union of Universities (ASUU) strike that crippled our tertiary institutions is one of the many examples of commitments made by previous administrations that were saddled on this team. ASUU’s dispute relates to an agreement reached with the Federal Government in 2013 (when oil prices fluctuated between $102 and $116 per barrel), which was not honoured. On a daily basis, previously undisclosed obligations are uncovered. The most recent of which relates to oil importation in 2014 and is currently being dimensioned - unpaid and secured by a hitherto undisclosed sovereign note. All of this, while declared public debt was increasing by N5trn in two years despite records highs in revenues (in relative terms) from oil sales.

This Administration believes that Nigerians have a right to the truth. The figures recently released by the Debt Management Office (DMO) and much debated indicate that while total public debt in dollar terms has remained relatively stable since 2015, our debt, when denominated in Naira, has increased from N12.1trn to N19.6trn. However, this belies the impact of the recent devaluation of the Naira on the external obligations we inherited, which accounted for N1.63trn of this increase. Also to be considered is the effect of the compounding of debt service on the inherited domestic debt, which was largely short-dated. The Administration has always been transparent and the reward for transparency should not be consternation but rather, patient and informed analysis. Nigeria’s debt to GDP currently stands at 17.76% and compares favourably to all its peers.

This Administration will continue to pursue a prudent debt strategy, tied to gross capital formation. This will be attained by driving capital expenditure in our ailing infrastructure, which will, in turn, unlock productivity and create the much-needed jobs. We accept that in the short term, there will be dislocations as our revenue efforts will by, definition, lag both our expenditure and debt obligations, creating a fiscal deficit. This will be particularly pronounced in the preliminary years of pursuing this strategy.

We are already seeing some performance improvement in our non-oil revenues. Particularly, yearto-date performance of Customs Revenue, Value Added Tax (VAT) and Companies Income Tax (CIT) is 19% (N408.06bn from N342.79bn), 18% (N634.89bn from N539.46bn) and 11% (N838.45bn from N757.40bn) higher respectively, when compared to the same period in 2016. This does not mean that we have succeeded. Revenue remains considerably short of our ambitions and must be increased exponentially over the coming years, but it is a sign that it can be done.

It must be recalled that the President Muhammadu Buhariled administration has expended more on capital projects than on any previous one despite tight fiscal conditions. Our focus on capital is important as it will underpin our medium and long term needs so the impact may not be immediately felt. But there are early and encouraging signs; major construction will resume on 25 roads across the key road networks/sections (A1-A4), which cuts across the 6 geopolitical zones, following the successful raising of over N100bn under the Sukuk debt issuance programme. Our capital releases to Power, Works & Housing in 2016 is estimated to have created 193,469 jobs, with 40,429 being direct jobs and 153,040 indirect jobs. The many thousands of staff of some of our major contractors, who had been furloughed since their last payment receipts in 2014, will attest to the impact of government policy. In agriculture, our policies on rice and fertiliser have seen the resurrection of many rice mills and blending plants and have created a new value chain in industries that were previously import-driven with over 300,000 farmers fully engaged.

It must also be recalled that this Administration is working harder on revenue generation than ever before. Blocking leakages, demanding efficiency and even breaching previous ‘no-go’ areas like tax compliance for our higher earners - there are no sacred cows. All these efforts are aimed at ensuring that Nigeria has an economy that distributes wealth and opportunity fairly among her citizens. This commitment to equity should equally provide assurance that we will never burden future generations with the responsibility for paying for past mistakes. Rather, we will bequeath a vibrant and reformed economy. We are resolutely convinced, based on empirical data that our collective efforts will deliver a Nigeria that works for all Nigerians and in all global economic conditions.

Mrs. Adeosun is the Minister of Finance, Federal Republic of Nigeria.