Nigeria’s impending debt default: A looming African disaster
In 2018, a BusinessDay editorial sounded the alarm about the prodigious growth of Nigeria’s debt profile at a time when government revenues were either flat or shrinking. In a response very typical of the present administration, the Debt Management Office fired off a dismissive rejoinder questioning BusinessDay’s financial knowledge and insisting that all is well because Nigeria’s 19 percent debt-to-GDP ratio is significantly lower than that of countries like the USA, which owes 104 percent of its GDP.
What the shallow window dressing attempt failed to account for was that in a country like Nigeria whose economy is largely divorced from government revenues courtesy of oil receipts, it makes little sense to base any borrowing decision on the debt-to-GDP ratio. According to data from Heritage Foundation, Nigeria’s tax-to-GDP ratio in 2012 was 6.1 percent, compared to an OECD average of 34.2 percent.
This clearly indicates that in the absence of a tax compliance miracle in Nigeria’s largely informal and cash-based economy, no sincere government can claim to raise revenue for debt servicing through taxation. A much better measure would be the debt-to-revenue ratio, and this is where the bad news really begins.
Stagnant revenues, rising debts
A couple of weeks ago, I had a long conversation with the inaugural CEO of Asset Management Corporation of Nigeria (AMCON), Mustafa Chike-Obi. Among the many insights he provided into the precarious state of Nigeria’s public finances, what caught my attention was the revelation that the government and the supposedly independent CBN are colluding to provide a distorted picture of Nigeria’s fiscal situation.
While the widely accepted idea is that Nigeria’s debt-to-revenue ratio is about 70 percent – an already shocking figure for a government with no revenue expansion in sight – this figure is in fact significantly understated. According to the ex-AMCON boss, the government arbitrarily refuses to add some categories of debt to its overall computation. Such debts include AMCON’s debt stock, the backlog of subsidy payments owed to petroleum marketers, debts owed to electricity GENCOs and DISCOs and debts owed to contractors at various government levels.
If these figures are included in Nigeria’s overall indebtedness as they should, Nigeria’s debt-to-revenue ratio right now he says is touching 90 percent. What is more, the debt stock keeps on growing and he predicts that by 2023, Nigeria’s entire government revenue will be swallowed up by debt repayments. At this point, the government will be forced to default, which comes with catastrophic implications.
In the event of a debt default and the inevitable IMF bailout, Nigerians would be forced to relive the Structural Adjustment Policy era of the 1980s all over again, complete with loss of currency value, crippling austerity cuts, steep tax hikes and ultimately the third and most devastating economic recession yet in Nigeria’s history.
(As an aside, Muhammadu Buhari could end up becoming the first world leader to plunge his country into a recession three times in three different terms as Head of State. He would also become the first ever Head of State to leave an austerity mess for two different successors to deal with, but I digress.)
In the interim, rather than do all in their power to stave off the impending default scenario, the government and the CBN only seem invested in prolonging the ongoing charade for as long as possible. For instance, as pointed out by Chike-Obi, the CBN is currently breaking the law by extending about N7 trillion worth of financing to the federal government. It is actually permitted to advance the government only 5 percent of the previous year’s revenue, which should be about N350 billion – 20 times less than what it is currently doing.
Being that this is Nigeria, such ‘creative accounting’ on the part of an institution that is supposed to be a regulator barely raises an eyebrow. The government thus uses a mix of bond issuances, illegal CBN advances and dwindling oil receipts to keep its pretense of normalcy going, using new borrowed funds to service old debts in the time-honoured fashion of a country that is quarter to default. It also banks on the fact that it can get away with indefinitely postponing payment of its huge backlog of domestic contractor debt, AMCON liabilities, and DISCO/GENCO debt.
This means that if you are a contractor waiting for a due payment from the government or a power sector investor waiting for the relevant ministry, department or agency to pay you what it owes, you will more likely than not be owed indefinitely. Only the most important debts (read ‘Eurobonds’) are treated with any sort of priority. All the while, said government keeps on multiplying itself and getting bigger and more expensive to operate, while the inevitable demise of this state-sanctioned Ponzi scheme draws closer.
Misdirecting the conversation: A Buhari masterclass
For anyone who has followed the Nigerian news cycle since May 2015, it comes as no surprise that the response of the current administration to these and other incontrovertible facts illustrating its stark fiscal failure is either a pointed silence or an attempt to insult our collective intelligence by manipulating statistics and insisting that it is pursuing some sort of genius economic vision that we are too stupid to see. For anyone with a functioning pair of eyes and an IQ above 80, it is painfully obvious that the Emperor in Abuja is strutting around stark naked, but for a variety of reasons, only a few people stick their heads out to state the obvious.
At a time when the national economic conversation should be about rapidly improving our competitiveness in a non-oil field to boost productivity, exports and government revenue via reasonable tax policies, the president’s team has successfully misdirected the discourse into an endless debate about whether banning food imports will help local production. Despite being repeatedly and comprehensively showed up by superior arguments showing that comparative advantage and not jingoistic national pride should be the basis for macroeconomic decisions, the message out of Abuja continues to flog the dead horse of agricultural protectionism because it is a highly emotive theme that gets our blood pulsing if nothing else.
Whether it is the CBN effectively banning milk imports or the president issuing something that sounds suspiciously close to an order (that he has no legal authority to give) to the CBN on the same tired topic of agricultural autarky, this is the current administration’s substitute for actual economic policy.
It is the same tired preference for form over substance that one will recognise from the flurry of loud media trials and “UNDER INVESTIGATION BY EFCC” signs scrawled in red paint across properties in Ikoyi that inevitably led to the grand total of zero high profile corruption convictions after four years of rigmarole. Nigeria is objectively worse than four years ago and fast deteriorating, but at least some people got a day out in the sun.
This is also the game that was played recently with the public announcement of certain AMCON debtors, ostensibly for being major contributors to Nigeria’s indebtedness. In reality, these people that the government alleged were responsible for 67 percent of AMCON’s N5 trillion debt burden (N3.35 trillion) were actually responsible for about N600 billion cumulatively – just over 12 percent of the said amount. Not for the first time in the current administration, the government put out a blatant lie specifically designed to misdirect public attention, insult our collective intelligence and derail an important conversation about Nigeria’s debt crisis.
Recognising the severity of our situation and understanding that our government now apparently has the same ethical standards as a team of pubescent Internet trolls, it is more important now than ever before that those of us who can see through the smoke and mirrors continue to speak out about Nigeria’s fiscal situation. It is the single most important economic issue facing us now – everything else is a distraction. How bad are things in layman’s terms? I will let Mustafa Chike-Obi answer that himself:
“With the situation of things right now, if they gave me a job, I wouldn’t take it.”