Business leaders caution FG over unproductive borrowing in 2022 budget

Business leaders in Africa’s biggest economy are raising red flags over the government’s incessant recourse to borrowing to finance overheads and personnel costs.

The government plans to spend just as much as it did in the whole of 2016 on overheads and personnel costs alone in 2022, having budgeted as much as N6.83 trillion as non-debt recurrent expenditure. Debt service costs will gulp N3.61 trillion, taking the total recurrent expenditure to N10.44 trillion.

That falls short of the government’s revenue target of N10.13 trillion, which analysts say is unrealistic going by past trends of revenue collection.

“It is imperative for the government to exercise caution in borrowing and work diligently to lower recurrent expenditure,” said, Segun Ajayi-Kadir, director-general of the Manufacturers Association of Nigeria (MAN).

Kadir advised that deliberate efforts should be made to facilitate reforms that will drastically reduce the high recurrent expenditures and borrowings of government.

“MAN, therefore, expects that the Government will give priority consideration to complement the current trend and performance of vital macroeconomic indicators with a deliberate effort at taming inflation to maintain price stability in order to meet the expectations of the proposed budget,” he said.

The figure for personnel costs and overheads alone represents 41 percent of the total 2022 budget of N16.39 trillion.

Although the government plans to raise N10.13 trillion in 2022, they have constantly borrowed to attain the unrealistic yearly revenue targets in recent years.

This has continued to push up the cost of debt servicing, which has tripled since 2015 to N35 trillion as at June 2021, according to data from the Debt Management Office (DMO).

Ide John Udeagbala, national president of the Nigerian Association of Chambers of Commerce, Industry Mines and Agriculture (NACCIMA) said that the upward swing in government borrowing to finance the budget is worrisome.

“While it is an accepted fiscal option across the world for countries to resort to borrowing to finance shortfalls in their budgets, there must be caution in what component of the budget that will be financed by the loan,” Udeagbala said.

“A sustained debt profile requires that borrowed funds must be used for critical infrastructure projects that will enable payback of these loans,” he added.

To reduce the high recurrent expenditure and get more out of the budget, the business leaders urged the government to consider other alternative options of funding.

Read also: Nigeria’s 2022 Budget: Where is the Money Going?

“Most of the items for which more funding was sought are recurrent expenditures and while we understand the government may be under pressure regarding these recurrent expenses, it is not best practice to borrow for consumption,” said Chinyere Almona, director-general, LCCI in a statement

Almona said that since revenue fundamentals were weak, the government needs to examine other sources to generate resources to fund the budget rather than debt financing

“The Federal Government should focus more on non-interest asset-linked securities, as these unlock revenue and growth in the long term, furthermore, the private sector should be allowed to invest in some infrastructure projects that are commercially viable to generate revenue,” Almona said.

To preserve more revenue in the long term while curbing wasteful spending, Almona urged that there should be a strong corporate governance framework and strict monitoring mechanisms to supervise spending by the Government Owned Enterprises (GOEs), some of which are regulators of some sectors.

Data tracked by BusinessDay and obtained from the Budget Office shows the government has spent the bulk of its budget on recurrent expenditure since the beginning of 2016.

Between 2016 and 2020, the Federal Government spent a total of N34 trillion. BusinessDay’s analysis of the numbers shows recurrent expenditure accounted for the bulk with 82.35 percent while capital expenditure, which is critical for a developing country with a gaping infrastructure deficit like Nigeria, accounted for a mere 17.65 percent.

In the period under review, the government spent N28 trillion on recurrent expenditure, which includes personnel, overhead, and debt service costs. Personnel costs accounted for the single largest expenditure item under recurrent expenditure bringing into perspective the ever-contentious issue of Nigeria’s high cost of governance which has drawn the ire of several Nigerians.

After spending so much on personnel costs and debt servicing, the Federal Government could only spend N6.22 trillion in the same period on capital expenditure.

“Borrowing is not bad in itself, it is the purpose of the borrowing that matters,” said Abiola Rasaq, financial analyst.

“The reality of Nigeria borrowing to fund recurrent expenditure is not sustainable,” Rasaq said.

“Looking at debt-to-GDP ratio may be misleading; it’s more apt to consider the debt service capacity. In the first half of the year, the country has had to use over 90 percent of its revenue to service debt, a strong signal of the inability of the country to keep this trend of borrowing,” he added.

The Buhari-led government has constantly stated that debt is the only credible route to catalyse economic growth and development.

In September, President Buhari requested the approval of the Upper Chamber for a plan to borrow $4billion and €710million to fund infrastructure projects, adding to a series of borrowings that have characterized the fiscal policy of the government.

The nation’s external debt stock could hit over $36 billion if the National Assembly approves the $4.054 billion new borrowings requested by Nigeria’s government.

The country plans to spend 22.5 percent of its projected revenue in 2022 budget to service debt for the period, but with the fiscal deficit likely to print higher, the government may have to borrow even more.