BY FESTUS OKOROMADU
Penultimate week, the Debt Management Office warned the Federal Government against additional borrowings, stating that 73.5 percent of this year’s revenue will be used to service debts.
The agency said the current high debt service-to-revenue ratio is unsustainable and poses a threat to debt sustainability. The DMO, therefore, called on the Federal Government to focus on increasing revenue generation. It suggested that the government should strive to increase its annual revenue from the current N10.49 trillion to N15.5 trillion to sustain the nation’s debt viability.
The DMO maintained that the debt service-to-revenue ratio of 73.5 percent exceeds the recommended threshold of 50 percent due to low revenue generation. It also emphasized the importance of seeking existing regulations on government borrowings, such as the Fiscal Responsibility Act 2007 and the Central Bank of Nigeria Act 2007, to moderate public debt growth.
Offering solutions, the DMO charged the government to focus on revenue generation initiatives and reforms to increase tax revenue to GDP ratio. It also advocated encouraging private sector involvement in funding infrastructure projects through Private-Public-Partnership and reducing borrowing by privatization or sales of government assets.
Prior to DMO’s latest warning, the IMF, last year, had warned that by 2026, the Nigerian government may be spending 100 per cent of its revenue on servicing the interest payments on its debts.
Also speaking to the critical financial challenges facing the country, a leading economist and Chief Executive Officer of Financial Derivatives Limited, Bismarck Rewane, had called on the new administration of President Bola Tinubu, to implement bold economic reforms to rescue the most populous nation in Africa, stressing that ‘Nigeria is chocked.’
Addressing business elites that gathered in Lagos recently, Rewane said further delay would pitch the country into a free-fall.
“There is a poverty problem, unemployment problem, an oil smuggling problem, an inflation problem, the deficit and all of that. It is like a desperate case lying in the emergency room.
“The only way out is to take tough decisions. Once that is done and reforms pushed through, there will be an inflection point, after which economic growth will bounce back,” Rewane noted.
He, however, pointed out that one of the toughest challenges facing the country is debt.
Meanwhile, Nigeria’s external debt composition is varied. The lion’s share is owed to multilateral lenders, including the World Bank, IMF and African Development Bank. Much of it is on concessional terms.
Notably, over $4 billion of Africa’s largest economy’s debt is owed to Chinese lenders, principally the Export-Import Bank of China.
Asked whether Nigeria could avoid an overseas debt default, Rewane said; “I think so. First and foremost because you are taking policy decisions, you are more likely to achieve the rescheduling of debt with your creditors. The rescheduling of debt means that you avoid default.”
“Unfortunately, while the government is focused on taxing goods and services that affect the common man, there are no indications that those in government will be affected. We hear the salary of Judges have been increased by 114%, same with the legislative arm. Though the executive denied such an increment on its part, there is no evidence that they will not do so unofficially”
He, however, admitted that some non-sovereign debtors could have a tougher time making hard currency debt repayments as the value of their Naira earnings decline due to the unification of the foreign exchange market which has led to a nosedive of the local currency lately.
It would however appear that President Tinubu is consenting to the arguments of some of the local and international economic experts as his first major policy pronouncement at his inauguration as the 16th President of Nigeria on May 29, 2023, was the removal of fuel subsidy.
In addition, the government announced the abolition of the dual foreign exchange market with other reforms such as increased taxation, including VAT, hike in electricity tariff, withdrawal of subventions to professional bodies and councils among others.
So far, there are indications that the international community seems comfortable with these initiatives.
Reacting to a question on the implication of the subsidy removal on the country’s debt portfolio, Africa and Middle East research head at Standard Chartered Bank, Razia Khan, said; “The removal of the fuel subsidy is one of the most significant fiscal reforms Nigeria has seen in years.”
The reforms may also convince market players that Nigeria is serious about tackling its chronic economic frailties.
“The strong reform momentum makes it cheaper for Nigeria to borrow again externally, so the fuel subsidy removal helps to bring down financing costs overall,” Khan added.
Implications of reforms on local economy
The World Bank has thrown its weight on the policy initiatives of the new administration but also warned of consequences of failure to allocate part of the savings from the gains from fuel subsidy removal into programmes that can alleviate the pains of the ordinary Nigerians.
Speaking at the launch of the Bank’s latest Nigeria Development Update in Abuja last week, the World Bank Country Director for Nigeria, Shubham Chaudhuri, said, without immediate measures to compensate for the negative impact of subsidy removal on the populace, an additional 7.1 million Nigerians would be pushed into poverty by the year end.
“The removal of the petrol subsidy and foreign exchange (FX) management reforms, are crucial measures to begin to rebuild fiscal space and restore macroeconomic stability, and the opportunity should be seized to take further, necessary policy reform steps,” he stated.
The Bank asked the government to seize the window of opportunity the reforms offer for a transformative impact on the lives of Nigerians and establish a solid foundation for sustainable and inclusive growth.
On how subsidy removal affects the ordinary Nigerians, the World Bank stated; “In the immediate term, the removal of the petrol subsidy has caused an increase in prices, adversely affecting poor and economically insecure Nigerian households.
“Petrol prices appear to have almost tripled, following the subsidy removal. The poor and economically insecure households who directly purchase and use petrol as well as those that indirectly consume petrol are adversely affected by the price increase.
”Among the poor and economically insecure, 38 per cent own a motorcycle and 23 per cent own a generator that depends on petrol. Many more use petrol-dependent transportation.
“The poor and economically insecure households will face an equivalent income loss of N5, 700 per month, and without compensation, an additional 7.1 million people will be pushed into poverty.
“Many current, as well as newly, poor and economically insecure households, will likely resort to coping mechanisms that will have long-term adverse consequences, such as not sending children to school, or not going to the health facilities to seek preventative healthcare or cutting back on nutritious dietary choices.”
Government must cut cost of governance, experts speak
While some experts suggest increasing revenue generation, others such as the labour unions in the country are of the view that the government should prioritize slashing the cost of governance.
The President of the Trade Union Congress, Festus Osifo, gave this advice while speaking with The Point in Abuja during the weekend.
He commended the World Bank for advising the government to deploy part of the money saved from the fuel subsidy removal to take care of the most vulnerable Nigerians.
“The government has told us that they are going to save a massive amount of money when the subsidy is removed. So, part of this money should also go to taking care of Nigerians, especially the vulnerable.
“More importantly is that as a government, they must be creative. As a government, they must be innovative; they must put on their thinking cap and be able to grow the revenue of the country,” he said.
Osifo argued that reducing the cost of governance would help the government save some more money in addition to what it will get from subsidy removal.
In the same vein, an economist and lecturer, University of Abuja, Olanrewaju Aladeitan, said while he applauds the new administration’s concern on revenue generation, it must hurriedly provide ways to support the citizens.
Aladeitan noted that the proposition to increase taxes and other sources of revenue is a welcome development but must be complemented with platforms that can ensure growth and productivity.
“At this point the government should focus on reducing the challenges posed by insecurity. Recall that the key factor driving inflation is the cost of food. If farmers across the country can go to farm and the government keeps to its promise of setting up an exchange market for agriculture products, the tension emanating from price increase in goods and services will be absolved.
“We hear the government is trying to implement payment of N1000 Proof of Ownership Certificate Fees on vehicles. While the idea may be good the timing is not right in my opinion,” he said.
Aladeitan expressed worry that the Tinubu’s government policies appear to be targeted at the poor alone. “Unfortunately, while the government is focused on taxing goods and services that affect the common man, there are no indications that those in government will be affected. We hear the salary of Judges have been increased by 114%, same with the legislative arm. Though the executive denied such an increment on its part, there is no evidence that they will not do so unofficially,” he said.
He advised that with the World Bank confirming that four million Nigerians have been thrown into the poverty bracket and another 7.1 million likely to join by the year’s end, the government should activate schemes that can rescue people from poverty before striving to increase taxes.
Aladeitan recommended that the fastest way to encourage productivity is for the government to tackle insecurity, stop oil theft in the Niger Delta and increase access to electricity.
“Government should look out for the long term as overtaxing the people has its negative social economic implications,” he said.
Also, speaking, a public affair analyst, Victor Odion, noted that with the current inflation rate at 22.4 percent in May and interest rate now 18.5 percent, every N1000 you keep in the bank has been reduced to about N780.
“The Government’s Bond rate is 10 percent interest rate. So, how do you expect foreign investors to come and invest? To boost the economy, interest rates must be higher than inflation rate, this is simple economics,” he said.
Arguing further, he said; “The CBN and DMO appear to be incapacitated, what the economy needs now is a structural reform. Crude oil is stolen; no action has been taken to stop that. Nigeria exports next to nothing, containers bring in imported goods and leave the country empty. CBN cannot defend the Naira; your foreign reserve is less than $36 billion. CBN cannot meet their forex obligations to the economy,” these and many more are the issues a serious government should address.”
Odion hinted that there is a likelihood of bank mergers as he argued that with a managed float regime, commercial banks will have to recapitalize to stay in business and continue to lend to the economy.
“Nigerians have been making sacrifices since the 70s. What sacrifices can you point to that these greedy politicians make? Interestingly, in the midst of all these challenges our borrowing is growing faster than our revenues, and that’s a negative balance sheet”
“So, you may witness some bank mergers and acquisitions soon. Nigeria is currently surviving by the grace of God. The poverty in that land is scary.
“Unfortunately, the Nigerian politicians won’t take any haircuts; look at the convoy of Mr. President when he came to Lagos recently. Nigerians have been making sacrifices since the 70s. What sacrifices can you point to that these greedy politicians make? Interestingly, in the midst of all these challenges our borrowing is growing faster than our revenues, and that’s a negative balance sheet.
“The World Bank approved $800 million for Buhari. They’ve now approved $500 million for President Bola Tinubu as well. These are supposed to be palliatives for the poor who are finding it difficult. So, we have a $1.3 billion facility from the World Bank for the poor. I hope it won’t end up in private pockets?
“With fuel now at N520 per litre and speculations that it might increase to N700 per litre in the coming weeks, 7.5% VAT on diesel, 40% increase on electricity tariff, the jettisoned 114% salary increase for the politicians, and the N1000 for your vehicles Proof of Ownership Certificate. I am convinced that more people will join the poverty bracket,” Odion warned.
He advised that this government must focus on engineering a productive economy, encourage Nigerians to go into productive ventures, and provide loans for entrepreneurs not political associates and friends.
Tinubu assures Nigerians of better days ahead
Meanwhile, President Tinubu has appealed to Nigerians to endure what he called the ‘baby steps’ of pain following some economic decisions his administration took on assumption of office.
Tinubu made the appeal during a private visit to the palace of the Alake and paramount ruler of Egba land, Oba Adedotun Gbadebo, in Abeokuta, Ogun State, on Thursday.
Tinubu said as the President, he has also been taking some baby steps and “not ready to march the ground in a hurry.”
“Let’s be united. Let’s be focused. No distractions. We will arrive at the positive destination for this country and it’s all in our hands. By the grace of God Almighty, we shall reap the fruit of our labour.
“Nigeria will see positive changes as we move along; just go through these baby steps of pain. Me too, I am taking baby steps as the president, not marching in a hurry, ready to listen, maintaining an open-door policy; letting the freedom flow, letting the confidence return to Nigeria. This country is the only country we have. I have been a refugee. I know what it is to be a refugee,” he said.
But how Nigerians will cope with the reality of rising cost of goods and services while the general perception is that the politicians are living in affluence is the task ahead of all.
What is certain for now is that more Nigerians are sliding into the poverty basket as confirmed by the World Bank. The enormous problem before Mr. President and his economic team is how soon they can stop the draw in the purchasing power of the people so happiness and smiles can return to the faces of the common man.
There are many Nigerians who cannot travel from one point to the other just because they cannot afford the fares.
