Rejoinder to Kemi Adeosun: Walking into a debt crisis by @nonso2

If you have been observer of the Nigerian economy in the past few years you must have read about the pending debt crisis. The story has been brought to the front burner again recently with the request by the federal government to sell $5.5bn worth of Eurobonds. The question on every observer’s lips is “Will this be the decision that finally tips the government into bankruptcy?”, or is this just yet another false alarm by doomsday conspiracy theorists. To address the fears the minister of finance published an Op-ed, trying to deconstruct the reality of the debt situation. So, should we be worried?

First a bit of background on the debt strategy of this government. Since the oil price crash of 2014 the revenues collected by the federal government have been significantly below expectations. In response to this revenue shortfall, the federal government decided on a strategy of increasing spending, to boost economic output, financing this increased spending by issuing new domestic and foreign debt. On the face of it the strategy makes sense. Increase debt when there are revenue problems and decrease debt during the boom years when revenues exceed expectations. Taking that into account, issuing new debt when view in isolation made sense.

Theory unfortunately is always different from reality. Nigeria had raised new debt during the boom years. The debt stock increased from N5.3tn in 2010 to N9.5tn in 2014, despite record high oil prices. As the famous saying went, “we were borrowing to pay salaries” in-spite of record high oil prices. The minister rightly points to this as the backdrop of the current debt problem. The previous government did not follow the responsible debt rule of limiting debt expansion during boom years.

However, this information has been common knowledge since 2015. Everyone knew we were borrowing to pay salaries. Everyone knew our spending was out of control and that it was unsustainable. Everyone knew something was wrong. Trying to pin the blame on the not so good debt behaviour of the previous regime is akin to taking control of a car that is heading towards a cliff and saying, “oh well, the previous driver did not drive so well anyway”.

The reality is that, despite the knowledge of the debt situation, the federal government has gone one a debt binge not seen since the years before the 1980s crisis. Between the middle of 2015 and the last official debt statistic, the federal governments debts have increased from N10.4tn to N16.6tn, a 60 percent increase in just two years. The increase cannot be blamed on the devaluation either as much of the debt is domestic debt and the external debt stock has also increased from $10.3bn to $15bn, an almost 50 percent increase. To put this into our analogy, “the driver not only got into a car heading for the cliff, but put the foot on the accelerator”.

Of course, the minister recognizes this, defending that position by saying according to their forecasts “in the short term, there would be an acceleration in the accumulation of debt and an increase in debt servicing costs”. The hopes on resolving this are pinned on increasing tax revenue. As the plan goes, an improved economy would lead to increased tax revenues and that should, according to the minister, help get the debt under control. The thing is, as everyone also knows, the fortunes of the Nigerian economy are not really connected to the tax collection efforts of the federal government.

A stronger economy does not imply that tax revenues will increase. The data also continues to support that view with non-oil tax revenue looking as flat as the Jos plateau. Could tax revenue miraculously increase in the next few years? Maybe. But Maybe not. I know where I’d place my bets but more importantly for the minister, what happens if tax revenues don’t significantly increase? The reality of the government’s fiscal position now is that 60 percent of revenue is used just to service existing debts, at least if the last budget implementation report is anything to go by.

My advice to the minster is this: rather than try to point fingers at the previous administration, and yes they have to take some of the blame, address the reality of the debt situation and let it be clear to all parties, that if something does not change soon we are really going to have a bankrupt government.

Spoiler alert: the major “something” that needs to change is the government’s spending habits. If government spending does not slow quickly then they might as well check into bankruptcy court right now. Ironically, the minister hit the nail on the head on the real challenges to slowing spending and preventing a debt crisis: POLITICS. In her words,

“Politically, it offended the principles of the All Progressive Congress” and that is all that needs to be said.

 

Nonso Obikili is an economist currently roaming somewhere between Nigeria and South. The opinions expressed in this article are the author’s and do not reflect the views of his employers.