The warning sign of future trouble – Martin Onovo

By Akoma Chinweoke

Chief Martin Onovo is not only a financial analyst but also the presidential candidate of Action Alliance (AA) in the 2011 general elections. He speaks on Nigeria’s rising debt stock.

The current national debt burden of Nigeria is a cause for serious patriotic concern and the present trend of national debt servicing cost is a clear warning sign of future trouble if not reversed.
Therefore, the Federal Government  must immediately evaluate and mitigate our rising national debt to prevent a debt crisis.

Therefore, it is paradoxical that with current national oil revenues, about  13 times the levels we had in 1984, we were not borrowing in 1984 and yet we were developing major infrastructure while we are borrowing so much now with the very high oil revenues and yet we are not developing major infrastructure. Instead, we are ‘privatizing’ public assets and yet borrowing much more! This looks like a template for national economic sabotage.

The rising national debt and debt servicing requirements are subverting development. Funds that could be applied to development projects and national infrastructure are being applied to service debts. If debt servicing requirement continues to rise at the current rate (20.3%) every year, then, the debt servicing cost will be as follows in the next five years:

YEAR     2014     2015     2016     2017     2018     2019
COST     (NB)    712     857     1030     1240     1491     1794
So, if our debt servicing cost continues to rise at the same rate, we would need over N1 trillion for debt servicing by 2016 and would require N1.8  trillion (40% of our 2014 budget) for debt servicing by
2019. This would completely erode the capital budget of Nigeria at the current level of N1.1 trillion.

This 2014,  N1.1 trillion (capital budget) + N712 billion (debt servicing cost) = N1.8 trillion.
By 2019, the requirement of N1.8 trillion for debt servicing will be the total of current capital budget and debt servicing cost.

Therefore, the country will have no capital budget by 2019 and government will be unable to fund any capital project at the current fiscal levels.

Consequences of increasing national debt
The consequence of increasing national debt includes:Rising cost of debt servicing. As the debt increases, the cost of debt servicing increases too; decreasing capital expenditure (assuming a constant cost of recurrent expenditure:); lack of funds for developmental projects (as debt servicing cost increases, less funds are available for developmental projects); lack of funds for critical infrastructure like power (as debt servicing cost increases, less funds are available for critical infrastructure);

decreasing national credit ratings as debt/GDP ratio increases, credit ratings decrease, higher cost of future loans (vicious circle: when credit ratings decrease, credit risk increases and so, credit cost must be higher); increasing dependence on creditors; national debt crisis and possible national bankruptcy (as debt servicing cost increases, it becomes more difficult to pay).

If  the debt  rises to a level where it is impossible to pay, then bankruptcy may follow and, above all,  under-development will naturally result from lack of funds for developmental projects.

Solution
The solution may be straightforward and may require the following immediate steps:Stop further borrowing; make budgets based entirely on conservative revenue estimates; establish fiscal discipline; follow budgets and supplementary budgets strictly; fight corruption; ensure that public education, empowerment, leadership by example and law enforcement are applied to control corruption;

improve productivity and apply all appropriate measures to ensure improvements in capital efficiency and productivity, increase external revenue from oil and other exports (agriculture, solid minerals, etc.) by diversifying the economy; reduce waste in government such as ten presidential jets, long convoys of cars, indiscriminate medical tourism, etc and, more importantly, good governance (increased prudence in public spending).
With these measures, we can control the risks that the rising national debt represents today.

Nigeria’s debt profile is critical and sadly different- Oyekoya
Prince Wale Oyekoya, Chairman,  Agric Group, Lagos Chamber of Commerce& Industry also shares his view on the nation’s rising debt stock

Generally, there is nothing wrong to borrow as other countries borrow to finance developmental projects and create employment, but Nigeria’s  case is critically and sadly different, coupled with the state of infrastructure not commensurate with its huge appetite for borrowing.

Nigeria’s debt profile had jumped from $48.36bn to $65.25bn between March 31′ 2013 and March 31, 2014 and the debt to Gross Domestic Product ratio slid from about 20 per cent to 12.79 per cent. This translates that, within a period of one year, the debt profile increased by 34.93 per cent. The dramatic decline in the debt to GDP ration is explained by the fact that following the recent rebasing of the nation’s GDP, the economy experienced a quantum leap of about 50 per cent, peaking at N510tn.

My reaction to the debt profile is mixed. First is that the earlier the country reduces it’s debt profile, the better if they have no meaningful usage for the borrowed money like improving infrastructure development and creating employment. Secondly, as earlier said, there is need to borrow more, especially from the external sources for the reasons stated above to improve the nation’s decrepit infrastructure and bring down the cost of doing business in the country. The borrowed money hase to be truly spent on what it is borrowed for.

Relating this to the agricultural sector, more money is needed to be injected into the sector and to be available to real farmers, and not to political farmers on a single digit interest rate. Mechanized farming will increase job creation to the youths and adequate food supply to the populace. It will reduce importation of food stuff  to our dear country which has become a dumping grounds for junk foods.

A lot of money that is supposed to go into agricultural development and infrastructure is being diverted to tackle insecurity. Until we are able to reduce insecurity, money will be going to fight insecurity as most of the food  comes from the troubled  northern states.

Also, a lot of money being borrowed by  government was going into financing big government and growing recurrent expenditure that stands at 75 per cent of our annual budget, instead of financing agriculture and infrastructure development.