Section 11 (3) (d) and (e) of the Fiscal Responsibility Act requires the Medium Term Expenditure Framework to contain a Consolidated Debt Statement setting out and describing the fiscal significance of the debt liability of the Federal Government and measures to reduce any such liability. This column this week reviews whether the Medium Term Expenditure Framework 2022-2024 met this requirement.
The MTEF states that: “The ratio of Nigeria’s Total Public Debt as a percentage of GDP remained sustainable at 21.61% as of December 31, 2020. Also, the ratio was below Nigeria’s country-specific Debt Limit of 40% (2020 to 2023), and below the revised World Bank/IMF’s recommended threshold of 55% for Nigeria’s peer group, and ECOWAS convergence threshold of 70 percent”. Before analysing this assertion on the sustainability of our debt, it is imperative to detail the quantum and level of indebtedness and the resources dedicated to debt service between 2015 and 2020. In 2015, Nigeria’s debt stood at N12.603trillion and increased in 2016 to N17.360trillion, which is a 37.7% increase. In 2017, 2018, 2019 and 2020, it moved up to N21.725trillion, N24,387trillion, N27.401trillion and N32.915trillion, being increases of 25.15%, 12.25%,12.36% and 20.12% respectively. This shows that Nigeria’s debt has been increasing in double digits year after year since 2015. The highest increase occurred between 2015 and 2016. Between 2015 and 2020, Nigeria’s public debt has increased by 161%. The debt has increased at a yearly average of 37.74%. On the quantum of resources dedicated to debt service in 2015-2020, a total sum of N11.679trilion had been used for debt service. This is a yearly average debt service payment of N1.946trillion. This can be compared to the total sum of N8.319trillion, dedicated to capital/developmental expenditure within the period which amounted to a yearly average capital expenditure of N1.386trillion. This is the factual background to the MTEF’s position on consolidated debt.
The Consolidated Debt Statement affirms the Medium Term Debt Management Strategy 2020–2023 as the governing policy strategy. The MTEF states that the MTDS focuses on the development of an optimal borrowing structure to fund the government’s financing gap and needs, taking into consideration borrowing options, cost of borrowing and the associated risks with borrowing. Under the MTDS, the proposed portfolio composition is 70% for domestic debt and 30% for external debt while total debt as a ratio of the GDP has been increased from 25% to 40%; an average tenure of debt portfolio is a minimum of 10 years. It proposed up to five per cent of the GDP in sovereign guarantees for private companies executing public projects and; Promissory Notes are to be issued to settle Government Arrears, Ways and Means Advance at the Central Bank of Nigeria, and the Debt Stock of five State-Owned Enterprises.
You may recall that the Consolidated Debt Statement setting out and describing the fiscal significance of the debt liability of the Federal Government is expected to propose measures to reduce any such liability. However, the MTEF’s proposals are about measures to increase the liability (debt as ratio of GDP increased from 25% to 40% and up to five per cent of GDP in sovereign guarantees for private companies executing public projects, etc.). The MTEF had earlier stated under Monetary Policy Objectives and Strategy that: “The rising level of domestic debt is another key factor that could threaten the achievements of the targets on the macroeconomic indicators. The rising public debt has a high likelihood to cause a waning investors’ confidence in the domestic financial markets with far-reaching implications on key variables such as interest rate and exchange rate”. Even the earlier proposal under the “Fiscal Policy Objectives and Strategies” to consider setting other prudential limits like Debt Service/Revenue Ratio to ensure sustainability of FGN’s debts did not receive attention in this section.
In 2020, the Federal Government’s retained revenue was N3.937trillion while debt service was N3.342trillion. Debt service was 84.8% of retained revenue in 2020. Between January and May 2021, its retained revenue was N1.844tn while the debt service was N1.802tn. Debt service was 97.7% of retained revenue in the first five months of 2021. In the final analysis, the Consolidated Debt Statement did not meet the requirement of describing the fiscal significance of the debt liability, neither did it put forward measures to reduce the liability. It only made a case for more borrowing in contradiction of the requirements of the FRA.
There are alternative measures to reduce direct sovereign borrowing including borrowing for GOEs and providing sovereign guarantees. The case for Public Private Partnerships which was made in passing in the MTEF should be mainstreamed and a list of candidate projects prepared with a realistic timeline for implementation. To ensure the success of the PPPs, government policy must be consistently implemented through fidelity of contracts. Negotiations for the PPPs must be done transparently and with the public interest at heart while the terms must be available in the public domain before approval. Nigerians must not be faced with a fait accompli where negotiated terms are screwed against the public interest with persons charged with negotiating in the public interest enriching themselves at the public expense. Furthermore, the capacity to initiate and see through the PPPs must be built in the Ministries, Departments and Agencies of government especially in the Infrastructure Concession Regulatory Commission.
Projects to be built with borrowed funds should be preceded by cost benefit and sustainability analysis. The idea of embarking on projects for political rather than economic reasons should be discontinued. Where feasible, user fees, cost recovery and revenues streams should be identified and firmed up early to ensure that projects funded from debts can pay off the debts in the medium term without reliance on the consolidated revenue fund.
Finally, the fixation of the FGN on debt as ratio of GDP is outdated and has no relationship with Nigeria’s current economic realities. The size of the GDP is not used in debt service and payment. A situation where a greater part of the GDP is not contributing to taxation and government revenue calls for great caution in using the usual debt-GDP semantics.
