Is borrowing really a taboo?

The Nigeria Governors’ Forum (NGF) is reportedly planning to borrow the sum of N17 trillion from the pension fund for infrastructural development.
A communique from the 22nd NGF teleconference meeting stated that this borrowing decision stemmed from the willingness to adopt a proposal by the adhoc committee of the National Economic Council (NEC).

Also, it appears that the plan to borrow N2 trillion at 9% interest from the growing funds under the Contributory Pension Scheme, was in line with the recent proposal of the governor of Central Bank of Nigeria (CBN), Godwin Emefiele to access N15 trillion for national infrastructure funding through InfraCredit at a lower interest rate of 5%.

But then, government borrowing from the contributory pension scheme through investment opportunities did not just start today in Nigeria as this has been done previously in the past.
Earlier on, in 2019, many news media platforms reported that the Nigerian government planned to borrow a whopping 2 trillion from the domestic pension funds to fund infrastructural developments.

This sparked mixed reactions from the public as some saw it as a step in the right direction while many others, like the Nigeria Employers’ Consultative Association, NECA, saw it as “a threat to the Contributory Pension Scheme.”
So, this raises the big question: Is borrowing in itself really a taboo and a bad thing?
Well, asides the fact that Nigeria’s borrowing from pension funds did not just start today, the Nigerian government has been borrowing since the very inception, just like many other countries in the world today.
This is because naturally, borrowing in itself is allowed and even advised as part of policy options for external sources of finance. However, there are a few catches and underlying principles to the act of borrowing for not just nations but individuals as well.

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The first thing is to ensure that one has the basic capacity to spearhead such borrowing activities. For instance, if a person who barely has a million to his name plans to borrow in billions, how does such a person plan to fund such expenses whether on a short, medium or long term basis?
Perhaps the individual has viable opportunities capable of generating handsome returns in the near future, then there might be hope. But when there is no concrete and verified plan underway, such a step can be likened to having legs as humans and somehow planning to fly for mobility. Logically speaking, that can very well be a suicide mission.

The second principle is to ensure that interest and debt service payments are not burdensome. So, when borrowing, it is pertinent to seek funds from sources with as low interest payment as possible because that will help to reduce the cost of borrowing and the total amount to be paid back.
This brings to light the obvious trend that the Nigerian government does not necessarily prioritise borrowing at concessionary rates as evidenced by it’s high debt service payments over the years.
Data gotten from CBN and the Budget office of the Federation indicate that since Nigeria’s last recession in 2016, debt service to revenue ratio has been on an upward trend: 44.8% (2016), 64.1% (2017), 51.6% (2018), 54% (2019) and most alarmingly 96.9% between January and June 2020.
Third, it is often advised that a country’s public debt should be dominated by domestic borrowings within the country rather than foreign borrowings beyond national borders from other countries or organisations such as China World Bank, IMF and the likes.

This is because government borrowing within its own country is easier to control, hence the importance of Treasury bills and other government borrowing mediums where the government is guaranteed to pay back investors at relatively lower interest rates. Nonetheless, government must be careful not to overcrowd private sector lending activities. And so far so good, Nigeria seems to be relatively safe as domestic borrowings have always exceeded foreign borrowings although there have been a few times when the Federal Government’s borrowings from other nations have been alarming such as the massive loans from China in recent years.

The fourth non-negotiable principle is that borrowed funds must be channeled into productive sectors that will eventually yield enough revenue to eventually pay off debts.
Unfortunately, the Nigerian government has not had the best track record when it comes to judiciously using borrowed funds as tangible fruits are hardly ever realised from it’s borrowing sprees. Mere looking at the deplorable macroeconomic condition in the country is more than enough evidence – bad roads that have been worsening for decades among other infrastructural amenities, a highly epileptic electricity supply, decadent levels of security and deplorable living standards of most Nigerians.

These four major reasons are what makes the case of Nigeria worse off when compared to other countries. For instance, despite having a track record of incurring the largest external debt in the world (the United States Treasury Department puts its total national debt at $26.7 trillion as of August 31 2020), the United States remains a global leader. This is because it has been able to successfully manage its debt profile over the years as seen in the productively viable ventures that are still speaking for the country today.
Now, this brings the question: how feasible is the government’s borrowing plans from the Nigerian pension fund?

Legally speaking, the Pension Reform Act of 2014 does not provide room for direct borrowings as sought by the NGF. The act only provides for the investment of pension funds in viable investment options that would stimulate economic development such as bond investment for infrastructural projects.
However, for this to happen, certain conditions must be met as the pension fund administrators (PFAs) must carry out several risk analyses to decide if investing in such bonds meets expected yields and risk appetite. And sadly, it appears that most states are not compliant with the contributory pension scheme and are, by regulation, not able to benefit from pension funds by raising of bonds.

Moreover, even if there was a way to maneuver the legal constraints, records from the National Pension Commission (PenCom) reveal that pension funds are not even up to N17 trillion with 68% of this amount currently available funds in PenCom. The most recent quarterly (Q3) report from PenCom places the total pension fund portfolio at N11.57 trillion. This consists of almost N8 trillion from active retirement savings account (RSA), N934 billion from RSA retirees fund, N1.4 trillion from closed pension fund administrators (CPFAs), and N1.19 trillion from approved existing schemes (AESs) fund.
As such, the existing legal and financial constraints puts a big question mark on how realistic the borrowing plan from PenCom by the NGFs really is.

This is asides other push backs against the NGFs by various Nigerian individuals and bodies such as the Socio-Economic Rights and Accountability Project (SERAP). SERAP has pressurised President Muhammadu Buhari to urgently instruct the director-general and board of PenCom in stopping the 36 state governors from borrowing and/or withdrawing N17 trillion from the pension funds.
SERAP’s coercion was issued as a 14-day ultimatum for the President to reveal the steps being taken to halt this planned extraction of any money from Nigeria’s pension funds, or else the group would take legal court actions to coerce the Federal Government accordingly.

This pressure was due to SERAP’s concerns that the proposed borrowing from the pension funds would result in severe loss of retirement savings for millions of Nigerians.
Notwithstanding, on the other end of the scale are supporters of the Government’s plan to borrow from Nigeria’s pension. This includes the likes of Governor Kayode Fayemi of Ekiti State supported this borrowing plan of the Nigerian government as he emphasised that it was mainly for revenue-generating infrastructural development.

Short Bio
Favour Olarewaju is an Economics and Markets Analyst at BusinessDay Media Nigeria. In addition to writing content surrounding economic and financial issues, she is a researcher and pre-doctoral research fellow. She is also a masters’ degree holder from Covenant University, Ota, Nigeria. She is an active member of a charity organization known as Clothe A Person and strongly believes in making the world a better place by proffering solutions to societal problems through research analysis.