With the announcement that the Federal Government is planning to borrow about N2 trillion from our pension contributions, the fear and worry of many Nigerians as to the security of their retirement livelihood have escalated. Are the fears and worries justified or not, it depends on who you ask? A 56-year-old friend, an employee in one of the firms summarized his feelings as follows: Recalling the litany of problems such as poor and fraudulent management of the previous pension scheme, we cannot but worry and fear that our contributions might be frittered away by the federal government. The enactment into law of the 2004 Pension Reform Act and the subsequent 2014 reform provided the needed relief and encouragement for Nigerians to once again trust and contribute in the growth of a reliable pension sector. We pray and hope that the Federal Government does not dissipate all the efforts and hard work that have been poured into building a good pension sector in the last 16 years, my friend concluded.
With total assets under the Contributory Pension Scheme of about N10 trillion naira, it can be said that good progress is being made in the growth of the Pension sector. Nevertheless, while growth in the contributions is necessary and important, what is more important is the way the contributions are protected and invested to create sustainable return on investment. To make it simple, pension contributions are just savings that are transferred to Fund Managers to properly manage to ensure long term good returns to the contributors especially upon retirement from active work.
According to PENCOM, of the total contributions of about N10 trillion, 70 percent have already been invested in federal government securities such as Federal government of Nigeria bonds, treasury bills, agency bonds, sukuk bonds and green bonds. In simple terms, it means that about N7 trillion of the N10 trillion have already been given to the federal government or that the federal government has already borrowed about N7 trillion of our N10 trillion contributions. When asked why it should be so, one is told that government securities are very safe as the government cannot fail. Interesting I have read about government failures with the experiences of some Latin American countries not too far to learn from. As if the amount already borrowed is not too much and risky, we are being told of another plan to borrow additional N2 trillion to bring total federal government borrowing to about N9 Trillion, about 90 percent of our total N10 trillion contributions. It seems that our pension contributions are just contributions for the federal government to use. Basic credit risk management states that risk concentration should be avoided in loan administration. To make matters worse, it is even rumored that the N2 trillion will be borrowed at a low interest rate using government fiat!
To be honest, when a critical review of the few economic policies of the present federal government is done, one is left very confused and shocked as to the incoherence of some of the policies especially when examined within the sphere of well tested and correct macro-economic principles. As this planned borrowing is a further debt in addition to over N26 trillion already owed and another $ 29 billion to be borrowed, the question is where are we headed to with all these borrowings? Who and when will the debts be repaid? It will be nice to read and examine the debt repayment plan of the government.
It is like the more we shout of the impending debt crisis, the more the government is determined to borrow more with the pathetic reason that we are still within the 25 percent Debt to GDP ratio. As such, the government seems to be on a borrowing extravaganza increasing the total public debt from about $65 billion in 2015 to the current $85 billion (over N26 trillion) as at 30th September 2019. Even with such unjustifiable and unsustainable increase, we are told not to worry! Relax, we are just about 19 percent of Debt to GDP ratio, so we can borrow more and most likely from China given their concessionary loans with low interest rate of about 1.5% as compared to commercial loans from Europe and North America at about 6-8 percent. Interestingly, it seems that as the concessionary loans are also drying up with the current target of our pension contributions, a friend asked.
Moreover, in discussing our debt situation, a most important factor that the government prefers to avoid is the cost of debt service. A situation where we use about two third of our revenue for debt service cannot be described as appropriate and sustainable. In the N10.59 trillion 2020 budget, while recurrent expenditure is allocated N4.49trillion, capital expenditure is N2.47 trillion with debt service at N2.43trillion. I am referring to the cost of servicing (not repayment) the debt, just interest payments only! This is a country where all the economic development and growth indicators all point south. Poverty and unemployment are increasing, population and insecurity escalating and yet we are just borrowing mainly for public servants and politicians to consume. With the way we are borrowing, the caution of Benjamin Franklin that ‘he that goes borrowing, goes sorrowing’ will soon be our situation.
While there is no doubt that we need over N100 trillion to address our infrastructural challenges, the doubt is the approach of the government. After the N2 trillion Pension Fund, where next will we borrow from. Given our development challenges, haphazard approach is not the solution. What we need is a properly formulated and executed national economic development strategy with clear long-term financing options. Of the total global investible funds, over 20 percent earn negative interest. The question and focus should be the reasons why these funds are not coming to Nigeria. How can a country of our size and potential attract less than $1 billion in FDI in 2019? These are key issues that should be focused on to attract the needed finance and investment for our sustainable development and growth.
Franklin Nnaemeka Ngwu
Dr. Ngwu is a Senior Lecturer in Strategy, Finance and Risk Management, Lagos Business School and a Member, Expert Network, World Economic Forum.