In an interview published in a national daily (not Vanguard) on Monday, November 6, 2017, a former Deputy Governor of the Central Bank of Nigeria, Prof Kingsley Moghalu, exercised his inalienable freedom of expression on some national issues, especially in the areas of youth empowerment, citizens’ obligation to pay taxes, unemployment, leadership and public policies. As a former public official and academic, Prof Moghalu, more than qualifies to voice his enlightened opinion on these and many more socio-economic subjects of concern.
In one of his submissions during the interview, Prof Moghalu expressed worry over the debt burden of Nigeria, calling for it to be “completely overhauled”. He said, “I see that the government recently requested the approval of the National Assembly for US$5.5 billion in borrowing. If you consider that more than 60 per cent of revenues earned by Nigeria are already going into debt servicing, you can see that we are going into dangerous territory”.
As a citizen of Nigeria, Moghalu has the right to be concerned about the country’s fiscal management. However, basing such concern on a general statement sentiment is a bit naïve for somebody of his calibre.
“All the foreign loans that were taken in the past have not significantly improved economic growth and development in Nigeria”, he stated, adding that, “We have to worry about whether or not this is not a politically-inspired move, considering that the government is facing difficulties and may want to be seen to be staying afloat”. Indeed his own statement appears to be politically motivated as it was rather shallow with no real economic analysis and no new suggestions other than what the Government is already doing such as spending on infrastructure to create jobs.
For one, the present administration does not “want to be seen to be staying afloat”. Only last week, the Minister of Finance, Mrs Kemi Adeosun, expressed confidence that the Federal Government’s current revenue and debt management strategy would mitigate the nation’s debt service risk, culminating in the cutting of debt service costs by about N168 billion per annum and fast track development. If we add the fact that Nigeria recently fought its way out of economic recession through sound fiscal and monetary policies, the insinuation that the nation’s current debt profile is politically inspired would have been completely dispelled.
It is no longer in doubt that revenues from petroleum alone cannot sustain growth and development in Nigeria. In fact, as reflected in the 2017 budget, oil revenue has now become grossly inadequate in financing the budget at federal level while many State Governments have complained about their inability to meet their recurrent expenditure due to shortage of revenue. As is the case, with many countries, the Federal Government is facing difficulties in funding critical infrastructure because of impact of the sharp drop in crude oil prices. Last September, Saudi Arabia, the world’s leading oil producer, raised $12.5 billion from its second dollar bond sale this year as the kingdom bolsters its finances amid an economic overhaul.
It is understandable why Nigerians respond apprehensively to plans by Government to borrow to finance projects. This fear emanates from two sources: the terms of servicing such debts and the purpose of borrowing in the first place. However, borrowing in itself is not out of place in any society, especially if it is for delivering capital projects. There are essentially three ways of financing a variety of mega, large, medium and small capital projects. These are capital reserves, pay-as-you-go and debts (borrowing). The first two, point to revenues from resources and taxes.
This mode of financing involves paying in advance. Capital reserves are savings used to accumulate funds from revenue or other sources overtime for future projects. Paying for capital projects is especially desirous when other partners are involved in the project, such as counterpart funding for development projects.
Pay-as-you-go provides funds for capital projects using current revenue and/or fees or other sources. This is mainly used to finance utility renewal projects, something that all taxpayers benefit from such as water, electricity, and hospitals. Pay-as-you-go is the most common method of financing projects in Nigeria, while it is the least method in many developed economies. This method of financing projects, however, ensures that Government’s borrowing capacity is preserved for important projects and instances where it is too costly to use pay-as-you-go.
Borrowing to finance capital projects accounts for somewhere around 40 percent of the payment method in many developed economies. Careful borrowing allows payment over a longer timeframe and ensures that more residents and businesses that benefit from the project actually participate in paying for it.
When used strategically and within best practices for responsible borrowing, capital debt allows government to continue to build and renew infrastructure on a regular basis and add to it when necessary to accommodate growth while maintaining good fiscal health.
In essence, sovereigns borrow, and Nigeria’s debt management strategy has been well articulated. Thus, what is expected of a former Deputy Governor of the Central Bank of Nigeria are new economically sound ideas that will add value to the President’s economic reform agenda rather than populist un-researched statements.
Omokwe wrote in from Abuja.