If there is anything that should ignite national discussion in the 2019 budget than others, it is the debt conundrum and future implications. From the budget document, we’re reminded of the unprecedented debt binge over the past years and how it is already taking tolls on the country’s derivation– a clear reflection in the allocation set aside for servicing debt this year alone.
In the 2019 budget, a staggering N2.140 trillion was set aside to settle debt obligation, indicating that about a quarter of the budget provision for the fiscal year would go to debt repayment. This moved up by N130 billion when compared with the N2.010 trillion that supposedly went into debt servicing in the 2018 fiscal year.
But that is not the issue. When you look at the debt servicing to revenue ratio, you would be as apprehensive as many experts have offered cautionary advice to the Federal Government on the accumulation of debt. As at the last evaluation, Nigeria’s debt stock stood at $81.27 billion (N24.947 trillion), pushing the debt servicing-to-revenue ratio from 67% to 70%. In plain terms, for every N100 earned into the public coffer, about N70 would likely go to debt payment.
Oftentimes, the government discard the debt servicing to revenue ratio and instead, adopt the debt to GDP (Gross Domestic Product) to dissuade concerns on growing indebtedness. They persuade citizens with the narrative that Nigeria’s debt portfolio currently stands at 19.03% of the GDP and still below the 25% threshold set by the government on medium-term 2018-2020, insisting that there is no cause for alarm.
But that logic seems to be a clever approach to dodge genuine concerns. The simple truth is that, as long as the country’s debt mount, so would revenue prospect slump and the unborn generation would be thrown into uncertain financial situation. Already, the effect of past debt binge is limiting revenue availability and this is obvious from the N1.859 trillion deficit in the 2019 budget proposal, which the Debt Management Office (DMO) had hinted would be sourced from external loans.
With the worrisome trajectory of debt, it seems Nigeria has failed to draw from the hard lesson of the pre-2005 debt crisis. Before the debt relief granted by the country’s lender, London and Paris Club creditors, Nigeria was one of the most heavily indebted countries. At that time, Nigeria owed a princely sum of $35.994 billion, yet, its revenue was less than $9 billion, putting the debt-to-revenue ratio at over 400% and when measured with the GDP, which stood at $62 billion then, it was 58%.
That era was one of the darkest moment in Nigeria’s history as the country’s economy and revenue were at the mercy of creditors. Then-president, Olusegun Obasanjo, understood the country’s public debt is unsustainable as it requires 152% of what it earned as exports and 400% of annual income to clear the debt, hence, negotiated for a relief but before that could happen, Nigeria parted with a whopping $12.4 billion to be forgiven of the balance.
But that relief was temporary as debts are again piling up. While the current stock of the nation’s debt can’t match that of pre-2005 but the rate at which it is building up raises cause for concerns. For instance, by June 30, 2015, Nigeria’s total debt stood at N12.12 trillion but by March 31, 2019, DMO’s data showed that the country’s indebtedness had double that figure at N24.947 trillion.
This trend prompted lawmakers of the upper legislative chamber to raise their voices against the rising debt stock of the country on March 2019, which they feared would “put the nation’s generations unborn in very great danger”, if not checked. Ike Ekweremadu, who was at that time the Deputy Senate President, corroborated the fears of many Nigerians on the surge of the nation’s portfolio and suggested thorough scrutiny of the government borrowing plan going forward to avert a return to the pre-2005 debt crisis.
This is no different from the concern raised by the African Development Bank (AfDB) and other international institutions, who at different times questioned the sustainability of Nigeria’s binge. In its 2019 Economic Outlook for countries in West Africa sub-region, the AfDB said “The increase has heightened the fiscal burden in an already fiscally and growth-constrained environment. This raises important concerns regarding the sustainability of external debt.”
But they are not alone with such concern. Nigeria’s apex bank, the Central Bank of Nigeria (CBN) had at the end of its January Monetary Policy Committee (MPC) meeting, cautioned the government on the borrowing spree, which it warned could return Nigeria to the pre-2005 debt trap. Godwin Emefiele, the bank’s chief noted that “on external borrowing, the committee noted the increase in debt level advising for caution, noting that it could fast be approaching the pre-2005 Paris Club level.”
Without doubt, the penchant for accumulating debts by the Nigeria government is inimical to future revenue expectations and also mortgage the unborn generations. This is so, given to the unstable nature of oil prices in the global market and the collapse of the productive sector, which would have augmented any shortfall in oil revenue. In plain terms, piling up debt mounts pressure on future derivations and most disturbing, leave the unborn generations incapacitated to pursue their fiscal policy.
I’ve listened to some arguments throwing up infrastructures as enough justification for accumulating debts. That is a scary drift of thought and should set off alarm bells for all Nigerians. If derivations from crude oil as at present could not provide for infrastructures and other basic needs because a larger part of it goes to paying a debt, would it not be pushing the stake higher with another round of debt binge?
Vast increases in debt will ultimately compromise Nigeria’s ability to easily fund future programmes, let alone be able to match contemporaries and worse, threaten their standard of living. It’s like a couple in their 40s deciding to borrow money to sustain a lavish lifestyle and then leaving the debts for their kids to pay off after they are gone. Eventually, the interest on all debt will force the governments of future generations to strict austerity policies to pay for today’s profligacy.
The effect of the United States’ Shale Oil on Nigeria?
OPEC is hoping Shale Oil loses steam and goes on the wane.
What is Shale?
The introduction of massive shale oil created a cataclysmic effect in the global oil economy as supply outweighed demand tremendously. Ironically, in the not-too-distant past, several observers expected an international shortage of crude. This shortage failed to fall out partly attributable to the imperious rise and growing production of oil within the USA.
How is Shale oil produced? Shale is uniquely produced as it exploits technological advances in drilling. The process involves horizontal drilling and the hydraulic fracturing of underground rock formations containing crude oil that are trapped within rocks. The popular term this is called is fracking. It is so expensive and requires lots of CAPEX (capital expenditure). The production of shale relies on the drilling rigs (which is reported every Friday by Baker Hughes data) and technical labor, which is one of the reasons why America has the capabilities to carry on this production.
U.S. shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 12 million barrels a day as of 2019. Notably, these figures were at 4 million barrels per day in 2014. The growth has been exponential, and this called for dramatic policy changes within the OPEC network. The U.S. has usurped Saudi Arabia as the country with the most oil produced daily. This oversupply in the market led to the crash in oil prices from 2014-2016. Ever since then, OPEC has gone through several cuts to pursue equilibrium between supply and demand. These cuts have been largely inconvenient for members of OPEC+. Caroline Bain, the chief commodities economist at Capital Economics, said in a note that “Russia has made no secret of the fact that it is concerned about the growth of the U.S. shale industry and of its view that repeated output cuts by OPEC were effectively handing market share to U.S. producers,”
For the last couple of years, Nigeria and other OPEC members have been making cuts to balance the oil economy which has had adverse effects on Nigeria’s oil production. A couple of years ago, Nigeria had a crisis in Niger Delta where pipelines were being vandalized and resulted in low production of oil from our facilities. After the country recovered from that period of militancy, it has not been able to achieve its capacity as the West African nation has been subject to several cuts as a duty to help it’s OPEC partners balance the market. This situation has led to serious loss as Nigeria’s revenue depends significantly on oil. Nigeria has been painted as a “laggard” when it comes to cuts.
The reason behind their poor compliance could be attributed to technical difficulties in shutting off wells or deliberate attempts to cheat quotas and make more revenue. A quick look at the numbers. Nigeria’s 2020 budget is benchmarked to an oil price of $57 per barrel, but the decline in the price of oil has forced the government to revise to $25 per barrel with compulsory cuts to the OPEC Pact.
Hopefully, OPEC is hoping Shale Oil loses steam and goes on the wane. The only factors that can end Shale are lack of funding from banks and investors and climate change activism. Nigeria sincerely needs Shale to end as diversification of the economy still seems far off.
E-payments ecosystem continues to show promise
We expect the e-payments industry to continue to record significant growth even beyond the pandemic.
The payments industry in Nigeria continues to demonstrate its promising growth with the recent data from the Nigeria Inter-Bank Settlement System (NIBSS) showing solid growth across the various e-payments mechanisms in the first 5 months of 2020 (January – May 2020). NIBSS Instant Payment (NIP) transactions recorded a healthy 17.3% y/y and 47.7% y/y growth in transaction value and volume to N48.7tn and 615.3m respectively. For POS transactions, total transaction value and volume grew 44.0% y/y and 50.0% y/y respectively to N1.6tn and 228.9m respectively. The most impressive growth was recorded in Mobile transactions category where transaction volume and value grew 567.5% y/y and 364.7% y/y to 41.1m and N853.7bn respectively.
The sustained growth in e-payments transaction volume and value in Nigeria evidences increased adoption of technology in payments and cash transfers by the Nigerian populace. This is driven by increasing internet & mobile penetration as well as investment by banks and other payment-based fintechs investment in payment technology infrastructure. Furthermore, we note that the Central Bank of Nigeria (CBN) announced reduction to the fees payable on mobile and internet payments/transfers. We think this has had a mild impact on increased usage of these platforms. In addition, with the onset of the pandemic the use of physical cash in settling payments and bills has been discouraged. Thus, we think e-payments benefitted from significantly from this.
Going forward, we expect the e-payments industry to continue to record significant growth even beyond the pandemic as many of the new methods of transacting will be sustained in our view. In our opinion, the e-payments sector of the fintech ecosystem is expected to serve as the growth frontier of the new decade in Nigeria as highlighted in our 2020 Nigeria Fintech Sector Report (See CSL_Nigeria’s Fintech Industry 2020; Growth Frontier of the New Decade). Consequently, we expect banks and payment fintechs like Interswitch & Paga to benefit significantly from the e-payments revolution.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Avoiding or mitigating recession in post COVID Nigeria – Olisa Agbakoba
How do we avoid and or minimize the impact of inevitable recession on our economy?
The massive macro-financial shock caused by Covid-19 has continued to ravage the global economy putting all systems and nations under severe financial instability never seen in history. Stock Markets around the world have been pounded and ravaged, and oil prices have fallen to an all-time low. Nigeria is not spared from this crisis. Total revenue expected to be realised from the 2020 National budget was N8.42trillion. However, following the Covid-19 pandemic, revenue projection was reduced to N5.16trillion. This represents a drop of close to 40% or N3.26trillion. Key sectors like manufacturing, maritime, aviation, hospitability and the creative industry, collapsed resulting in huge financial and job losses. The World Bank 2020, Global Economic Prospects, June 2020, forecast that the Covid -19 pandemic will plunge all countries into the worst recession in history. GDP of advanced economies are projected to shrink by 7 percent. The outlook for emerging market and developing economies is bleak as they are forecast to contract by 2.5 percent. This would represent the weakest showing by this group of economies in at least sixty years. The crucial issue is – How do we avoid and or minimize the impact of inevitable recession on our economy?
The first and critical policy action is to harmonize fiscal and monetary policy. Fiscal policy must be expansionary. In other words, big spending is required to massively stimulate the economy. This is called Keynesian economics named after the economist John Maynard Keynes. Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973). American President, Franklin Delano Roosevelt used the Keynesian economic model by spending massively on public works programs to get America out of the great depression. The mantra for Nigeria is to spend big to get out of recession. We acknowledge the government has adopted an expansionary policy by borrowing massively but we must have a clear strategy. First, we must determine our Public Sector Borrowing Requirements (PSBR). Additionally, we will need to identify an inventory of Public Sector Spending Requirements (PSSR). The PSBR and the PSSR should be indexed to identify funding gaps. Additionally, an inventory of government assets should be created as we have many wasting assets that can be converted to cash. Using the abandoned Federal Government Secretariat in Lagos as the index case, informed valuers believe it has a forced market value of N100 Billion. This can build the East-West Road. Abandoned projects abound, Ajaokuta Steel, Aladja Steel, the Newsprint at Iwopin, the various steel rolling mills around the country, the Onitsha Port, etc. It is believed these assets are worth at least N15, trillion yet untapped. These wasting assets, if sold will boost fiscal policy immensely. Turning to Monetary Policy, we clearly need a very flexible monetary policy with interest rates pegged at no more than 5% (Single-digit) to create a framework for quantitative easing and open market operation (OMO).
Quantitative easing (QE) makes borrowing easy for business. QE makes burden on business lighter. OMO flood the economy with liquidity. A harmonized fiscal and monetary policy will lay the foundation to rebuild the economy. Three requirements to avoid a recession are Job creation, revenue mobilization and control of cost of governance. If we get the macroeconomic environment right, which is the alignment of fiscal and monetary policy, it will release economic energy to create Jobs estimated at between 5 and 6 Million, year on year. With respect to revenue generation with the right framework, massive funds can be generated and pumped into the economy. With respect to cost of governance, everybody knows it is far too high. In the revised 2020 budget, 73.5% of total expenditure are for salaries and debt servicing, while only 26.5% are for capital expenditure. This is unsustainable. We cannot continue to borrow to pay high recurrent bills. Rather we must invest in capital expenses to reflate the economy. The Government has taken steps to implement the Orosanye report but there needs to be a timeline for implementation. Corruption is a leading cause of high cost of governance. It is important to review anti-corruption strategies to reduce public corruption. Tackling the menace of big government and public corruption will give us more balanced revenue to debt profile. With the macroeconomic framework highlighted above, we can now review some critical factors that can help grow the economy and avoid recession.
Diversification of the Economy
This is one area government needs to urgently activate because of the massive budget deficit. Nigeria runs a mono –cultural economy as 85% of her revenue is derived from crude oil exports. As a result of the price shocks occasioned by COVID -19, crude oil receipts have gone down and are no longer able to sustain the economy. The total revenue expected to be realised as stated in the 2020 budget is N8.42trillion, including a deficit of N2.17t. However, following the COVID -19 pandemic, fiscal deficit has grown from N2.17t to N5.37t, which must expectedly be financed by fresh borrowing. We are now running a deficit budget and borrowing massively. Unless we diversify the economy, we will continue to borrow to the point where it becomes unsustainable. Many governments have paid lip service to diversification, but this is the time to develop a very strong policy on diversification. We must follow the example of the United Arab Emirates which diversified its economy by reducing dependence on oil receipts from 100% to only 35% by going into service and smart industries. Some of the sectors to diversify our economy into are Agriculture, Transportation, Aviation/Space, Rail and road transportation, Maritime, Hydrocarbons, solid minerals, information technology and entertainment.
Nigeria has no trade policy which is why it is a major dumping ground for foreign goods. We spend billions of dollars importing basic food commodities that can grow locally. We must grow what we eat. We need to reverse this with a robust trade policy. Trade policy refers to the rules and regulations on imports, exports, tariffs, duty etc. Trade policy rests on a tripod of critical factors – import substitution, tariffs, border enforcement and compliance. We need to enact trade remedies legislation and a trade Expansion Act. These legislations will impose anti-dumping duties on non-essential products. There are also special duties and measures we can impose on exports into Nigeria which are subsidized by a foreign country. The trade remedies legislation will prohibit imports if it is adjudged that they will cause material injury to local industries, for example by impeding local growth. It is also important to enact legislation that will support the recently established Nigerian Office for trade negotiation (NOTN). It is crucial that the office is elevated to ministerial level. We need to establish a National Customs and Border Enforcement Services. This Border Enforcement Services will need new legislation to merge immigration and customs services. The Border Enforcement Service will replicate the US Customs and Border Enforcement Agency. The merged service will reduce duplication and proliferation of agencies at the borders. To comply with ECOWAS protocol and the African Continental Free Trade Agreement (AfCFTA), the border closure policy should be replaced by a border enforcement policy. A strong trade policy will help create millions of jobs, grow local industries and expand the economy.
Access to Capital
Capital is the oxygen and lifeblood of the economy. One of the areas where we can tap into capital is the Housing/property market. Eighty percent (80%) of Nigeria’s businesses rely on land and housing as collateral. Unfortunately, the slow administration of the Land Use Act in terms of consents and permits has meant that the banks have not accepted untitled property as collateral. This has caused incalculable damage to businesses in need of capital. A recent study shows that the housing inventory of Nigerian property exceeds six trillion dollars. Nigerian property and housing market is dead capital because 80% of them have no title or bad title and therefore not good as collateral for bank loans. So creating the proper legal framework to make dead capital fungible (easily transferable) will create an instant credit market and enable Nigerians to borrow on their property. A Land Use Administration Act will introduce new rules to make the consent process more efficient and give confidence to banks to accept title documents as collateral. This process will create an instant credit market to drive the economy and will easily contribute at least 5% to GDP.
Government stimulus intervention
Because of COVID-19, the economy has taken a very big knock. It is the responsibility of government (like most western countries) to reboot the economy by supporting businesses with a business support fund of at least 50 trillion. We applaud the government for the injection of funds to support the economy. We note the following:
- Nigeria Economic Sustainability Plan (NESP), 12-month, 2.3 Trillion Naira ‘Transit’ Plan between the Economic Recovery and Growth Plan (ERGP) and the successor plan to the ERGP
- Ministry of Trade and Industry, MSME Survival Fund, The Guaranteed Off take Stimulus Scheme and the Credit Support to MSMEs and Priority Sector and
- Central Bank of Nigeria N10 billion loans and grants approved for various groups and organisations for pharmaceutical and healthcare-related research, under the COVID-19 intervention scheme.
- The Special Public Works programme expected to engage 774, 000 Nigerians to cushion the effect of COVID-19 pandemic.
It is a good start but not enough. The Government should look to ways and means by the CBN to inject at least 50 trillion into the economy. Government can intervene through a National Credit Guarantee Agency to support viable business proposals so they Business can easily access credit. Major economies of the world run on credit. The key is that the creditor is assured that he will be paid by government guarantee. Another key institution is the Development Bank (DBN). Nigeria has a Development Bank, but unfortunately undercapitalized. The DBN needs to be properly capitalized to boost the economy.
Enabling Business Environment
The factors listed above will not work without an enabling business environment. The first step is to have an efficient legal and regulatory system. For instance, the Nigerian judicature is based on the 1875 Judicature Act. The consequence is that cases take too long to resolve. It takes between 5 to 20 years to resolve simple contractual disputes. Investors, both local and international, will not invest in a country where simple contractual disputes take between 5 to 20 years to resolve. We must give urgency to this sector and reverse legal failure. A speed of justice policy will reduce delays. In this regard, the National Assembly must consider enacting the Administration of Civil Justice Bill to ensure efficient administration of civil disputes. Also, new methods of dispute resolution should be considered such as Alternative Dispute Resolutions, small claims courts, traditional and customary arbitration. Quasi-judicial administrative tribunals can be established for sectors, following the UK example. In England there are many administrative courts for Telecommunications, Taxation, Transportation, Insurance, Education, Financial Services, Trade, Investments, etc.
Discipline of Execution
Nigeria has a plethora of laws, regulations, guidelines and Executive Orders. The challenge is lack of implementation of these laws and regulations. Unless rules are enforced, Nigeria will not easily overcome recession. A vigorous government policy is needed to implement diversification, strong trade policy and access to credit etc. There needs to be timelines and harmonization of work of the various government agencies ministries. Nigeria can generate 10 million Jobs and over N100 trillion with full compliance with policy implementation. This will help to mitigate the impact of the impending recession. The President must take charge and ensure vigorous implementation.
The story about diversification of the economy is an old argument going back 30 years and in fact, the Nigerian economy is actually diverse but the problem is lack of government consistency which has meant that although we have diversity, no revenue flows out. We can only succeed if the twin administrative tools of power of focus and discipline of execution are applied. This presentation is made from the point of view of a development lawyer. It is up to the economists to draw what they can to mitigate the impending recession.