By Simeon Ebulu
The cost to Nigeria of maintaining its external and domestic debts is now a matter of serious concern, not only to the government, but also to the citizenry. With a budgetary provision of 25 per cent for debt servicing alone, experts fear its just a matter of time before the country sinks into a debt trap. The Director-General, West African Institute for Financial and Economisc Management (WAIFEM), Dr. Baba Yusuf Musa, in this interview with Group Business Editor, SIMEON EBULU, on the sidelines of the just-concluded International Monetary Fund/World Bank Group Annual Meetings in Washington DC, points the way out of Nigeria avoiding a debt conondrum.
You have these debts at this level, but we also discovered that our revenue profile is also going in the opposite direction. So, how do we balance that if we’re accumulating debts and revenue is plummeting?
What I’m saying is that when you want to look at the level of volatility, or the concern that everyone is making regarding the level of public debt in Nigeria, when you look at it against the Gross Domestic Product (GDP), of course, you’ll see that we are highly sustainable. But the moment you want to look at it against revenue, then you see that Nigeria is at a very high risk. Of course, in the World Bank’s classification we are considered as a country of moderate risk of debt distress. But technically, the best way to assess Nigeria’s debt profile is to look at it against the revenue because you need the revenue to pay the debt service, you don’t pay the debt service with the GDP. When you look at it, the link between the GDP and the capacity to repay, it doesn’t really tell the story, but when you look at it against the revenue, that’s when you see that our debt situation requires some moderation.
What’s the way out?
The first solution that one could suggest is to increase the level of our revenue mobilisation. The tax to revenue ratio in Nigeria against African countries or Sub – Saharan African countries, when you look at it, we are among the countries that have the lowest level of tax to GDP ratio. And the sub – Saharan African average or the low income countries’ average is around 22 percent, that of Africa is on the average about 15 per cent, but Nigeria is still in the single digit; I think it is about eight per cent. That means we really have a gap in that area. Now, we have instituted so many reforms of taxation but I think in my view, we need to really look at it deeper than the way we have been approaching it. It is not enough to just tell … for instance, say the Nigerian Customs Service, say you are increasing their target from X amount to X plus something amount, that every year you are giving them a higher target. I think the target is good enough but it is not sufficient condition.
The linkage is, if we block the leakages, the leakages should be enough to raise the revenue that we require in Nigeria, and we might not really have the need to borrow once we have a net revenue that we can mobilise domestically. It is also a measure of sustainability, so we have a big window which we can increase, and once we use that window and raise our tax to GDP ratio, even if it is to a level of ten percent or twelve percent, I believe the amount of surplus that we would have would drastically reduce the domestic borrowing that we’ve been having over the years. So, one of the strategies would be for us to look inwardly and see how we can increase the mobilisation of tax within the country. Many analysts feel that we should have a register of not only civil servants but the informal nature of our economy, we need to have a register of those businesses so that we can capture them in the tax net. But beyond the informal sector who are involved in the day-to-day businesses, there are other areas where we can also, at least mobilise some greater revenue.
Now, how many landlords actually pay rent in the capital cities, if we are to say the truth, how many of them actually pay tax … They are quite a few that actually pay tax. I know in Lagos they have made effort, at least to capture an element of those ones, but beyond Lagos, how many states have those kind of institutional arrangement, there are very few states. No wonder you see that Lagos is the state that has the highest Internally-Generated-Revenue in the nation. So, I think if we can adopt the strategy of Lagos, many more states can mobilise the domestic revenue, and in fact, the Federal Government would also have some relief.
Is it not worrisome that both the federal government and the states are piling up debts at the same pace and time?
I think that when you look at the quantum of debt of the states vis-a-vis the federal government, the states are still far lower than that of the Federal Government. Although, with the states, I think the level of indebtedness vary from state to state. But as you rightly pointed out, when you compare their strengths in terms of revenue mobilisation, even with the little quantum of debt that they have, you still find that their sustainability is a bit of a concern. Now the issue is that in Nigeria, no state is allowed to borrow externally, all of them are allowed only to borrow through the central government. So, what happens is that the central government borrows and then lends it at the same time, and before a state borrows, the Ministry of Finance and the Debt Management Office usually conduct a debt sustainability analysis to see if the state has the capacity to pay those debts. Now, but that relates more when it comes to issuance of domestic bonds by the state. So, the institutional arrangements for borrowing or issuance of bonds by the states, for now, looks good enough because it requires that every state that wants to issue domestic bonds must undergo the debt sustainability analysis, they also have to tie it to projects. Besides that also, the consortium of banks that normally sell the bonds on behalf of the states or mobilise the debts on behalf of the states also take part in the monitoring of the states. So, as far as analysts are concerned, I think they feel that is good enough, but, do we have those kind of arrangements at the central level? That is where the question is, because, in the case of the central government, bonds are issued by DMO on behalf of the central government, and once the revenue is mobilised, except for the project ones- which are tied directly to the project, those other ones go straight into the general pool of the federation account, and the traceability of those ones to the project poses a bit of a concern.
How do we classify some of these external loans?
Now, you see, when you talk about external loans, there are three categories of loans from external sources. There are loans that we consider as multilateral loans. Those are the loans that you obtain from multilateral institutions like World Bank, the African Development Bank, Asian Development Bank, Islamic development bank, and all the multilateral institutions. And even among the multilateral institutions, there are some that we group into two. There are those that are called concessional loans, there are some that are call semi-concessional loans. The concessional loans are the ones that we obtain from the world bank, we also obtain part of it from the African development bank. Those ones are borrowed at much cheaper rates compared to the semi-concessional loans. The concessional loans usually with the current rate, we obtain them at about 0.5 percent interest, and it Is to be paid over a 35-year period, and so those ones are loans that are considered as concessional loans; But the semi-concessional loans are cheaper than commercial loans, again, those ones are paid over a period of 15 to 25 years. So, they are the preferred loans.
The World Bank as I mentioned provides it, multilateral institutions also provide those set of loans.
That is the first category of the loans. The second ones are the commercial loans. The commercial loans are those ones that we obtain through the London club, which are commercial loans that Nigeria goes and sometimes obtain them, usually, I think the last ones we got it I think at 8.5 percent or so, and it is to be paid over 15 years period. So that is the second category of the loan. The third ones are the bilateral loans. Now the bilateral loans are in two forms. There are those ones that you obtain from the Paris club, and there are some that you obtain from the non – Paris club, which are the ones we are talking about from China, NEXIM Bank, from India and some other countries. So among these three categories of loans, the most preferred type of loan is the one that you obtain from the multilateral institutions. Basically, they are cheaper, those ones are also project tied. The only disadvantage of them is that their disbursement proper is usually slow so you don’t get them as fast as the commercial loans and as fast as the bilateral loans.
The advantage of those loans is that they are traceable to projects. Their disbursements are slow because they have a tight condition, that they do not give the money to the countries except the countries utilise the money. For instance, they monitor. The world bank would monitor the utilisation of the loans. They give the money in trenches. So, the probability of misusing them is actually very low.
Like the proposed $3billion loan for power projects?
So, if Nigeria is obtaining that kind of loan from the world bank, be rest assured that the money would be utilised for that; for the purpose of what it is meant for. And these are loans that are as cheap as gifts because you are paying it over 35 years, you are paying the interest as low as under one percent, of course you have five years of grace, so you don’t even start repaying the loan until after five years. So, those are the kind of loans that if a country can obtain, they should be the preferred loans. The second category which is the commercial loans are the loans that you obtain but sometimes they are tied to projects, but many times they are not tied to projects. Those are the ones that many analysts are concerned about. But the worst ones are the ones that relate to the Paris club. If you recall our experience with the Paris club creditors where we had to pay so much to get debt relief, and those ones are not project tied, so the probability of obtaining those kind of loans and utilising them for other things is higher than the multilateral loans. Now we have also quite some amount of money that we borrowed from the other bilateral or the non-Paris Club, principally China; those ones are also project tied.
The World Bank has expressed concern about Nigeria’s borrowing from China. Why?
Now, I had the same concern when I saw that we were borrowing from the Chinese creditors. But most recently when I went through some of the documents I realised that the loans are actually project tied and they also improve on the disbursement pattern. Most of the loans that we obtained from China at this moment are being monitored well for the projects that they are tied to. So, I think the perception that we had, the previous perception prior to the creation of the Debt Management Office. But after the creation of the DMO in the year 2000, I think the government tried to build a much robust, or better institutional arrangement at least to monitor the utilisation of the loans that we’ve been having. So, in terms of external borrowing, it appears that the government is utilising the money properly and they are all project tied.
Why is the domestic quotient of Nigeria’s debt becoming problematic?
If you look at the amount of domestic debt that we have, it is about $56.6 billion as at June, which is twice the amount of money that we have borrowed externally. The interest rate that we pay on the domestic loan is far above that of the external. The average interest rates that we pay in the external debts at this moment is below seven percent (I think five percent), if you add the multilateral debt and the commercial debt together it’s below seven per cent. Average interest rates that we pay on domestic debt now is above 17 per cent, I think they are in the range of 20 per cent.
Now, if you look at the total debt service that we paid annually over the last three years, we have been paying over N1.3 trillion in debt service which I think is too huge and is not in a sustainable path. If you add the N1.7 trillion that we paid in 2018, and then we paid about N1.5 or N1.4 trillion in 2016, then we paid almost N1 trillion in 2015. When you add the total, it is more than the $3 billion that the Federal Government is taking from the world bank. So I think our strategy should be that the federal government should find a way of reducing the domestic debt. Some of us have recommended that we should re-profile the debt. Re-profiling the debt means you borrow at cheaper rates from external and then clear up the domestic debt so that your debt service would drastically fall from 17 per cent to perhaps less than 10 per cent; to a single digit, to reduce the burden that you pay in terms of debt service.
Now, Nigerians are concerned about external borrowing following the experience that we had prior to 2005 when we received debt relief. But as I mentioned to you we have a good institutional arrangement for a public debt management, and the public debt has changed from the way it used to be. Now we do what we call active debt management. What it means is that even if we borrow externally, we are not going to hold the debt to maturity. So what it means is that at any point in time, you look at your portfolio, you try to balance your portfolio against the existing macro condition and the constraints that you have. So you can borrow from the external at this moment when the interest rate is generally low, offset the domestic market where you are paying high interest, and as you progress you do not need to hold the debt to maturity. So what you do is that if you reduce your domestic exposure and of course reduce your debt service payment, you can then reduce interest payments because what is happening now is that the high interest rates which Nigeria experiences even in the domestic market are as a result of the central government borrowing. The central government borrowing drives the interest rates, when the central governments stops borrowing, we would see that interest rates would start crashing. We have seen it among almost all ECOWAS countries, where governments reduce borrowing, interest rates crash.
Same thing in Nigeria, when you look at the portfolio of the domestic, more than 80 percent of it is owned by the commercial banks, they are the ones buying the interest. So, if I’m a bank manager at this moment, I can lend out my money to the central government which is almost risk free and earn 17 per cent, why do I need to lend to the real sector.
So it is in that regard that we look at it and say that even the domestic borrowing that we are doing is crowding out the private sector, because the banks feel it is easier for them, and cheaper to lend to the government rather than lending to the real sector. So with this arrangement that we have, we see now that the government is crowding out the private sector.
Your interest reduction strategy is at variance with the government’s propensity to continue borrowing?
No but, you see, obviously, at any point you have to have a strategy as a government. Given the current debt situation that we have, our strategy first should be to reduce the interest payments that we’ve been making, or that we’ve been paying over the years. Once we reduce the interest payments, we would at the same time increase revenue, so the need to borrow would be reduced. But then going forward, you tie your borrowing to projects that are commercially viable, that will be able to pay back whatever we borrow. So our strategy should be to borrow only for projects that have commercial value that can pay back the loan.
There’s been calls for diversification of the economy. In what context do you think this would be impactful?
Diversification implies that we would increase our revenue. By diversification what we are saying is that we are not going to remain with a single source of revenue which is the oil, but rather other sectors would also start providing, or at least contribute revenue to the nation. That will also ultimately reduce the need for us to borrow.
What is the underlying factor behind the Beneficial Ownership Register?
You know we are signatories to the current account liberalisation policy Once you are signatory to current account liberalisation, at the Central Bank, you allow free flow of fund into the country and out of the country but at the same time, there’s this financial taskforce against money laundering which require that when money is coming in or when money is going out, you have to have a trace of origin and I think one of the issues that was raised when the mutual evaluation came to Nigeria, you know we have this mutual evaluation that West African countries do among their countries, against money laundering. The prerequisite is to have that register that shows that if money is flowing into the country, you know the trace of where it comes from, otherwise laundered money can easily be filtered into the country, if someone also steals you can also take it out. One of the requirement of meeting the theft recommendations is to have the register to obtain and know who is sending what, otherwise if you just allow any money to come in without knowing it’s trace of origin, then it would be difficult and the United States has been raising that issue for a very long time. They have closed a lot of correspondence banking to Liberia, Sierra-Leone and the Gambia. Right now most of the money in those countries, they cannot receive and cannot be sent out because of the sanctions that the United states put in regards to this. So I think Nigeria is taking preemptive actions to ensure that at least we know any money that comes in and at least we can account for it.