Bailout: Can debt be good? (1)

At the last count, the debt owed by Nigerian state governments to deposit money banks (DMBs) was in excess of N600bn. The dire state of most state governments’ finances was evidenced by their inability to pay workers’ salaries in some cases for more than six months in arrears. Unable to wriggle out of the financial cul de sac, the federal government under President Buhari had to yield to the insolvent state governors’ plea for a financial bailout through an innovative and unprecedented debt rescheduling mechanism facilitated by the Debt Management Office which saw bank short-term loans being converted to long-term bonds. Also as the lender of last resort, the Central Bank of Nigeria has weighed in with the injection of N338bn as loan to state governments to exclusively pay workers’ backlog of salaries in fulfilment of President Buhari’s promise to ease the pain of unpaid salaries to civil and public servants.

This is ironic because as the existing state governments’ debts to DMBs are being restructured into long-term credit, the state governments are booking new debts with the CBN which invariably means that the states will be laden with debts. Strikingly, if you add the over N600bn legacy debts that state governments owe the money market to the fresh N338bn being injected by the CBN, the total credit to the 27 financially distressed states will be in the neighbourhood of N1 trillion and that is quite significant.

With the federal government budget for 2015 being a little over N4 trillion, the estimated N1 trillion total credit to state governments would amount to roughly one-quarter of Nigeria’s proposed annual expenditure. Interestingly, the N1 trillion exposure pales in size when compared to the leveraged position of the same state governments to the bond market, of which Lagos alone is exposed up to the tune of a whopping N500bn and states like Edo owe a little over N11bn and Kogi less than N1bn.

As immediate past Lagos State governor, Babatunde Fashola, has tried to explain to those who are criticizing the seeming huge debt stock that he piled up despite the fact that Lagos’ IGR is in the N20bn-per-month region, Lagos has adequate assets to justify the debts incurred. Put succinctly, the debt bonds are somewhat proportional to the capacity of the state with a monthly N20bn IGR and N500bn bond stock; same for Edo with less than N2bn monthly IGR and N11bn bond stock.

Although the bailout has a legion of critics, such as those who posit that the measure is putting the manufacturing or real sector in peril as credit to the sector may be stifled, the need for the insolvent states’ economies to be reflated to generate growth cannot be discountenanced. More so if the debts are procured to fund infrastructures such as schools, hospitals, housing, electricity and potable water which are critically needed. Imagine the number of people that would be lifted out of poverty in Edo State when Governor Adams Oshiomhole deploys the $15 million the state recently borrowed from the World Bank for investment in road construction, erosion control, building of hospitals, schools and markets amongst many other infrastructures and amenities!

As if racing against time, in less than 100 days after taking office, following the rescheduling of inherited state debts, Governor Ifeanyi Okowa of Delta State has also minted about 1,350 jobs for youths through an agriculture and enterprise-based skill acquisition scheme that hallmarks his campaign mantra – SMART initiative. The ability to achieve such a feat with meagre resources, in a lean period like this, demonstrates that Nigerian leaders can think out of the box to deliver democracy dividends when ‘their back is against the wall’.

Recently, Africa’s richest man, Aliko Dangote, in a meeting with the visiting United Nations Secretary General Ban Ki-Moon, lamented that Nigeria is the only country that impressive growth in GDP did not translate to growth in prosperity for citizens. I don’t know if that assertion is quite correct as GDP growth not tallying with prosperity of the masses has in the past decade become a critical concern of development strategists in global development finance institutions. In fact, high GDP not reflecting prosperity is an existential reality in some Latin American nations and even now in India where the economy is believed to have had an impressive growth of 7.4 percent without impacting on the wellbeing of a critical mass of Indians.

While I have no idea what might have caused the situation in India, in the case of Nigeria, the reason growth did not translate into prosperity for the masses, in my view, is simple. A few rich people cornered the wealth through privileges like grants and waivers, hence the economy grew by 5 percent yet the wealth did not trickle down or percolate to the hoi-polloi. This assertion is underscored by the fact that if Nigerian GDP growth had emanated from robust productivity owing to manufacturing and other real sector-centred economic activities, the GDP growth would have had positive impact on society. Instead of organic growth, dodgy import duty waivers running into hundreds of billions of naira granted to rice merchants by the Ministry of Finance, dubious special grants in equally humongous sums of money extended to industrialists with phantom factories by the CBN, and intervention funds running into several billions in the aviation, textile and agriculture sectors are responsible for the GDP growth. When you add the estimated N3 trillion annual petroleum subsidy and leakages from crude oil for refined products swaps carved out for oil barons in the mix, then the reason there is growth in the GDP while there is no prosperity for Nigerians becomes more explicit.

Magnus Onyibe