The pending debt problem: Crunch time for Nigerian politics

It has been a tough couple of years for the Nigerian economy. We have lurched from crisis to crisis, from the fuel crisis to foreign exchange chaos. Although we are still technically in recession we have somewhat found our way around those problems, albeit temporarily. There does however seem to be another crisis lurking around the corner: the debt crisis.

Since the debt forgiveness deal struck by the Obasanjo administration, which saw most of our debt paid up or written off, we have embarked on what can only be described as a debt bonanza. At the time of debt forgiveness our foreign debt was just over $3.5bn with federal government domestic debt at ₦1.75tn. In the 11 years since 2006 our foreign debt has quadrupled to $13.8bn while domestic debt had risen seven-fold to almost ₦12tn as at March 2017.

Of course, the absolute values do not tell the entire story. Over the same period our GDP has quadrupled as well. Many are quick to point out that our debt to GDP ratio is still relatively low with external debt to GDP even lower. The debt to GDP ratio dropped from about 15 percent in 2009 to about 10 percent in 2014, although it has since risen to 18.6 percent as at the end of 2016. The statistic gives the impression that, relative to our peers, we have little debt. There are problems with this thinking. First, the large reduction between 2009 and 2014 was not driven by the government paying down the debt but by the GDP rebasing exercise which dramatically increased the size of GDP. The absolute amount of debt actually increased over the period.

Secondly, and more importantly, government revenue has not increased in tandem with GDP. For advanced economies, it is often taken for granted that tax revenues and therefore government revenues move in tandem with GDP. Higher GDP means higher taxes, making the debt to GDP statistic a useful measure for gauging debt sustainability. For Nigeria, however, government revenue and GDP do not appear to be linked. The four-fold increase in GDP over the last decade and a half, did not result in a four-fold increase in government revenue. This means the debt to GDP statistic is likely meaningless.

If the debt to GDP statistic is meaningless then how do we judge debt sustainability? The debt to actual revenue and debt servicing costs paint a better picture, and the picture does not look good. Since 2006, after the debt forgiveness deal, debt to revenue has risen from 68 percent to 270 percent in 2014, before the effects of the oil price crash. As at the end of 2016 the debt to revenue ratio had hit 400 percent depending on which measure of actual revenue you use. To put that context the debt to revenue ratios of the highly independent EU countries, Greece and Italy, were 580 percent and 312 percent in 2014 respectively.

The debt servicing costs tell the same story. The portion of actual revenue that went towards servicing already existing debt has increased from 7.7 percent in 2006 to 66 percent in 2016. If we are to judge by the trajectory of the more meaningful debt sustainably statistics then we are well on our way to a debt crisis.

The change of regime from the PDP to the APC does not appear to have changed the trajectory either. If anything, the new regime has put its foot on the pedal and accelerated towards insolvency. Faced with a collapse to oil prices and subsequent government revenue, the government opted to ramp up spending to help “get the economy out of recession”. The two years of the APC admin have seen concurrently record deficits, with the spending plans set to continue to 2018. Regardless of the merits, or not, of the spending policy, a consequence has been an acceleration to what increasingly looks like a debt crisis.

There are those who argue that since the bulk of the government’s debt is domestic, about 74 percent as at March 2017, it can always be inflated away. This argument hides two important issues regarding inflating away the debt. First, it is not costless. Inflating away debt comes at the cost of higher inflation, eroding the purchasing powers of almost everyone who carries out transaction in the domestic currency. Secondly, even inflating away debt is not an exercise that can go on in perpetuity. The central bank has already been implementing lots of underhand financing of the federal government, with claims on the federal government increasing by over 900 percent in the last four years, to N6.5tn. Even on that front the central bank is already reaching its limits.

Falling into a debt crisis of course implies long term pain for the Nigerian economy. A pain that we have experienced in the not too distance past. Between 1976 and 1990, Nigeria’s debt stock rose from about $1.3b to over $33bn, continuing to rise to before peaking at $34bn in 2004. At its peak in 1986 debt servicing costs were equivalent to over 38% of all exports. The debt crisis, combined with other policies, contributed to the crippling of government policy and the Nigerian economy resulting in two decades of zero growth.
Here we are again, at the cusp of another debt crisis. The question now is how do we avoid it? The combination of high debt to revenue ratios, and low debt to GDP ratios shows where the solution lies: increasing tax revenue. The government has rightly acknowledged it. Since the APC regime came into office increasing tax revenue has never been far from the lips of policy makers. More recently, the government has launched its VAIDS program with the hope that it will increase voluntary tax compliance.
The unfortunate reality however, is that raising taxes has never really been a technical problem or a capacity problem. Raising taxes has always been a political problem and one that requires a political solution. The Nigerian economy is skewed in the sense that there are few medium and large businesses, which the federal government is relatively good at collecting taxes from, but many small and micro businesses, which are mostly informal and which the federal government is not very good at taxing. Taxing farmers and barbers, and traders and real estate agents is no easy task.

The current tax code creates no incentives for states and local governments, who are the parties most likely to be able enforce tax compliance, from helping increase tax compliance. Local governments get just about 1 percent of corporate taxes collected from business in their domains and almost nothing from personal income taxes. It is unlikely that they would assist in any tax compliance efforts. In fact, some state governments actively work against the formalization of informal business as that would actually reduce the tax revenue they generate from them.

If the federal government hopes to raise additional revenues from taxes and dodge another decade or two of a debt crisis, then it is going to have to implement tax reform. The politicians, who hold all the keys to this reform, are going to have to demonstrate that they are mature enough to realize the risks the country faces and act to implement reform accordingly. Whether that will happen is anyone’s guess.

 

Nonso Obikili

Nonso Obilkili is an economist currently roaming somewhere between Nigeria and South Africa.