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Is it too late for Nigeria to pull back from a fiscal crisis?

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Nigeria is standing on the edge of a financial crisis, and it may be too late for the country to pull back. The 2017 budget implementation report released by the budget office last week has figures that should keep all Nigerians awake and ask critical questions from those who manage the country’s treasury. The report shows federal government revenues of N2.7 trillion in 2017, which was about half its projected revenues for the year and 36 percent or one third of its projected expenditure of N7.44 trillion. Faced with the sharp fall in revenues, the government had to cut its expenditure to N6.5 trillion in 2017.
The government spent almost a trillion naira less than it planned to spend in 2017 but the final N6.5 trillion spent was still N3.8 trillion more than the federal government’s total revenues for the year. To fund the deficit, the government had to borrow a total of N2.5 trillion to help fund its financial obligations for the year. The government borrowed N1.2 trillion from the international capital markets and borrowed the balance of N1.3 trillion from the domestic capital markets, an amount that is more than the net increase in lending to the private sector in 2017 from financial institutions. The government got about three times more money from the banks than the private sector got from the banks.
However, the N2.5 trillion that the government borrowed from the banks to fund its deficit was not enough to plug the N3.8 trillion it created spending more than it earned in revenues in the year. This has left the government with a N1.3 trillion hole that it could not close in 2017. This means that there are some contractors sitting out there that have done jobs for the federal government that have not been paid and do not know when they will be paid or if they will ever be paid. The government obviously could not raise the money to pay these contractors. It could have taken on more loans to pay these contractors but apparently felt it was already too over burdened with debts to take on more loans. Contractor debts do not attract interest rates and the government can usually take its time repaying even though the businesses owed tend to suffer, with some collapsing while waiting to be paid for jobs duly executed.
But the government has a reason to be concerned about its debts that keep piling up. As at the end of December 2017, the country’s total debt stock stood at N22 trillion, which is the equivalent of US$71 billion, data from the Budget Office show. The debt stock went up by US$4.4 billion or N1.4 trillion in 2017. A breakdown of the debt shows that US$18.9 billion is owed to external lenders while the balance of N15.9 trillion is owed to domestic creditors. Already, the federal government has exceeded its own target of ensuring that the country’s total debts does not exceed 19.39 percent of economic output or GDP in any year. When the government closed its books in 2017, country’s total debt stood at 20.12 percent of GDP.
However, what would have given the government more concern is the rising debt service burden which is beginning to eat up two thirds of government revenues. Debt service consumed a total of N1.8 trillion in 2017. This represents 75 percent of the government actual revenues in 2017. The government is spending an average of eighty kobo of every one naira it earns servicing the debts it is accumulating. The amount spent on debt service is higher than the N1.6 trillion released for capital expenditure in 2017, of which N1.4 trillion was the amount actually utilized. The country is now spending more money servicing debts than putting in place the infrastructure that will help grow the economy to repay those debts.
There is a further reason to be concerned about the country’s financial stability. The federal government’s total non-debt recurrent expenditure of N2.8 trillion in 2017 was more than its total revenues of N2.71 trillion. This implies that all the revenues that the government earned in 2017 was just enough to run its operations, that is pay staff and cover the cost of overheads. To cover the cost of capital expenditure, the government had to borrow. The government also had to borrow to repay the interest on borrowed funds. Effectively, the federal government has entered the debt trap zone where revenues are no longer enough to cover the cost of its operations and repay its debts.
Sadly, there is indication that the federal government is digging deeper into the debt trap zone that it has fallen into. The government’s N9.1 trillion expenditure plan for 2018 is the first indicator that the government is going to dig into the debt trap zone than find a way out of it. Even though oil prices have been higher in 2018, oil production struggled in the first half of 2018. There is no indication that there would be a significant jump in revenues in 2018 to justify the higher planned expenditure. What we are likely to see is a significant jump in the 2018 budget deficit if the federal government sticks to its 2018 expenditure plan.
To fund the higher deficit in the 2018 budget, the government would have to borrow at a time of rising interest rates in the international capital markets, and very low economic growth back home. Raising money internationally will come at a higher cost, translating into an increase in debt service payments, and a deterioration in the debt service to revenue ratios while raising money domestically will crowd out an already squeezed private sector from the domestic capital markets.
This is not ignoring the fact that the government has been making significant efforts at boosting tax revenues. However, the challenge remains the fragile economic growth which limits the upside potential of any tax revenue drive. The government tax drive will therefore not yield the required revenue surge to significantly reduce the debt surge and the plunge into a debt trap.
To drive debt service to revenue ratio below a more accommodating 50 percent, based on 2017 debt levels, the government would have to almost double revenues. This means raising an additional N2.7 trillion in revenues into the federal government treasury while ensuring that debt levels do not spike further. Achieving this for now, looks like a steep call, unless the government moves to take some difficult economic decisions to cut down expenditure or raise revenues. The hard decisions will have to be made urgently for the country to pull back from what is definitely a potential financial crisis.

 

Anthony Osae-Brown

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