Nigeria’s path to economic prosperity may lie in prioritising equity financing over debt, according to experts surveyed by BusinessDay. This is as the government has taken an interest raising debt rather than equity over the last five years as revenues collapsed.
At the root of Nigeria’s preference for debt is that it is the easier alternative of the two funding options. Equity requires disciplined planning, honesty, time tested officials, economic reforms and consistent government policies that can inspire investors’ confidence.
Debt on the other hand requires far less rigour and a basic commitment to repay.
The problem however is that the room for more borrowing is fast diminishing, which has made it ever more important that the government goes the harder and more demanding route of raising equity rather than binge on debt.
In the first quarter of 2020, the government spent a remarkable 99 percent of revenue servicing debt, as low oil prices and the coronavirus pandemic crimped government earnings.
Data obtained from the Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) report by the Federal Ministry of Finance, Budget and National Planning showed that in Q1 2020, Nigeria incurred a total sum of N943.12 billion in debt service while the Federal Government retained revenue was put at N950.56 billion.
This means that about all the revenues generated from both oil and non-oil sources were used to meet debt service obligations.
What is worse is that Nigeria has little to show for its rising debt stock.
While the Federal Government’s debt stock has tripled to N28.6 trillion in the last five years, economic growth has been stuck at around 2 percent when not contracting.
The rising debt level is not the only problem. The other worry is that most of that debt, in their huge sums, may not have been channelled rightly, mostly gulped by recurrent expenditure and more recently, debt servicing. This may help explain why the debt hasn’t translated to economic growth.
The country’s Debt-GDP ratio below 30 percent suggests the country is in a healthy debt position.
However, for Nigeria, a better indicator of debt sustainability is the debt service-to-revenue ratio, which has risen to worrying levels of 99 percent as at Q1 2020.
Nigeria’s debt stock has risen on the back of lower revenues.
Revenues have dwindled along with the global price of oil. From as high as $110 in 2014, oil is closer to $40 currently, more than half of 2014’s price. The government expects oil revenues to fall 80 percent this year.
In the first half of this year, the country earned N950.5 billion compared to a prorated budget of N1.9 trillion, representing a 52 percent shortfall.
Oil revenue was N464 billion, representing a shortfall of 30 percent when compared to budget while non-oil revenue was N269 billion, representing a shortfall of 40 percent.
While the experts arrived at a consensus that Nigeria needs private capital to resuscitate the economy post COVID-19, the government may not be entirely sold to the idea.
The newly revised budget shows little signs of ambition to attract private capital through privatisation.
The N5.6 trillion 2020 budget deficit will be financed mainly through debt totalling N4.6 trillion. Bilateral and multilateral draw-downs will provide the second largest source of the deficit with N387 billion, while draw-downs from Special Accounts will total N260 billion.
Privatisation’ proceeds are expected to rake in just N126 billion and no details of the assets to be privatised were provided. It was cut by 50 percent from an earlier estimate of N256 billion.
The lifeline of ‘Equity financing’
The problem of lower revenue and rising debt burden begs one question. Why borrow so much when you can raise equity, which is much cheaper?
Equity financing involves raising private capital either by privatisation of government assets or concessions.
This seems a better path if Nigeria must boost economic growth and development while avoiding a debt trap.
Experts narrowed down to a few equity financing options available to Nigeria from repositioning pension funds, attracting Foreign Direct Investment (FDI), unlocking capital through Joint Ventures (JV) and unlocking dead capital.
Repositioning pension funds
Nigeria had pension assets worth N10.8 trillion as at May 2020, according to data from the Pension Commission.
Although that is a small fraction of GDP, the money has not been deployed the best way possible.
This is as about 70 percent of the total pension funds sit in government debt instruments from bonds to treasury bills.
Pension fund managers have long complained about the dearth of investable assets in a country that requires billions of yearly investments to bridge a yawning infrastructure deficit.
“There is something wrong in building longer funding via pension funds and only to lock them up in treasury bills and bonds,” says one source familiar with the pension industry.
“So, in part, Nigeria’s challenge has to do with public assets worth trillions of Naira wasting but which can be freed and turned into investable assets,” the source said.
“Records show that as you free these assets as was done during privatisation, investment capital will come. There are simply no credible large ticket investible assets in Nigeria at the moment,” the source added.
Boosting FDI
A look at the National Bureau of Statistics (NBS) report on Nigeria’s capital importation reveals how Nigeria is losing FDI – a more patient capital essential for economic growth in developing countries which allows for the transfer of technology, uplift competition in domestic input market, contribute to human capital development and contribute to corporate tax revenues in the host country.
Analysis revealed that since 2014, Nigeria’s FDIs have declined annually at an average rate of -16 percent through 2019. In 2014, Nigeria received FDI worth of $2.27 billion. However, in 2019 FDI stood at just $934 million, representing a 59 percent decline against 2014.
Also, on a quarterly basis, Nigeria’s foreign direct investors have consistently reduced their exposure to the Nigerian market yearly. In 2019 for instance, average quarterly investment stood at $233.58 million against $569 million in 2014.
More importantly, among peers in Sub-Saharan Africa, Nigeria is losing FDI battle. In 2019, South Africa attracted on the average $1.3 billion while Egypt $3.5 billion in FDI, according to the World Bank data.
The underperformance of Nigeria in this regard has been blamed on bad government policies, policy inconsistency and uncertainty, and the reluctance to implement market-friendly reforms that will open the economy to investment.
To boost Nigeria’s FDI, Nigeria must be ready to speed up reforms in key sectors of the economy like the power sector and collapse its multiple exchange rates to a more market reflective rate.
More importantly, how Nigeria treats some of its largest FDIs from oil companies who are being accused of owing billions of dollars in back taxes and telecoms giant, MTN who has been on the receiving end of a number of hefty fines, is surely not the best way to sell the country to potential investors.
Unlocking dead capital
Dead capital is an economic term relating to property that are informally held, and not legally recognized. It is estimated that about 95 percent of property in Nigeria is in this class. Generally, uncertainty of ownership diminishes the value of assets, and the ability to lend or borrow against it.
According to estimates by global consulting firm, PricewaterhouseCoopers (PwC), Nigeria holds, at least, $300 billion or as much as $900 billion worth of dead capital in residential and agricultural real estate.
The estimate, according to them, was based on Nigeria’s population figure of 180 million and 36 million households of which 95 percent of household dwellings in the country have no title.
According to PwC, unlocking this dead capital in Nigeria will expand the size of the economy by more than double from $445 billion to $1,045 billion and will be a breakthrough to bridge the country’s wide housing shortage of over 17 million units.
In his presentation at BusinessDay Knowledge Sharing (Lecture) Series in Lagos, Chudi Ubosi, an estate surveyor and valuer, affirmed that only 5 percent of real estate assets in Nigeria is in formal mortgage, meaning that 95 percent of the country’s real estate assets are dead assets or capital.
According to the PwC report on unlocking dead capital, the conversion of dead capital to live capital through structural reforms would help convert most of the capital in the informal economy which is currently valued at 65 percent of GDP into the formal economy. This will also increase capital for infrastructure in the sector and increase economic activity.
Nigeria must unlock value from its dead assets. The Federal Government owns stakes in companies, owns lands and other assets which are wasting away and can be unlocked to attract domestic and foreign capital. These assets can be sold, securitised or leased to generate revenue and unlock growth in the economy.
Idle Oil fields
Inactivity in untapped oil fields presents another glorious opportunity for Nigeria to tap into its huge potentials and cement its place as largest producer and exporter of petroleum in Africa and one of the ten largest producers in the world.
Nigeria has seven basins, namely Anambra, Benin, Benue, Bida, Chad, Niger Delta, and Sokoto, all with a total of 390 oil blocs. 211 of these blocs are yet to be allocated by the Federal Government.
In Anambra, 12 out of 19 blocs have not been allocated; in Benin, 39 out of 50 are idle; in Benue, 41 out of 43 have remained inactive, while none of the 17 blocs in Bida has been allocated.
In Chad basin, 40 out of 46 blocs are open; in the oil-rich Niger Delta, 34 out of 187 blocs are still idle, while Sokoto’s 28 blocs remain unallocated.
Another scary facts include an Owowo oil reserve field discovered in October 2012 by United States’ oil giant, ExxonMobil Corporation, with about one billion barrels of oil in the Owowo field, offshore Nigeria, capable of spinning whooping oil revenue that has however been abandoned.
According to energy experts, the field would have boosted Nigeria’s effort in increasing her crude oil reserves from the current 36 billion barrels to 40 billion barrels target, which was set for 2010, but could not be achieved as a result of lack of investment in exploratory activities.
The only other significant investment in the pipeline is the Zabazaba development project by Eni, an Italian multinational oil and gas company. The project would add 150,000 barrels/day if it comes online, but a Final Investment Decision (FID) has not been reached on the project.
What experts are saying
Ayo Teriba
Teriba, the CEO of consulting firm, Economic Associates, says Nigeria should explore equity financing options and reduce focus on debt.
“In every companies’ balance sheet, there are assets and not limited alone to debts. As a country, we must broaden the focus beyond revenue and debt. Do we not have assets?” Teriba said at a recent webinar.
According to Teriba, the Nigerian federal government owns stakes in redundant companies that can be sold to private investors and has idle lands and other assets which are wasting away that can be unlocked to attract private capital.
Teriba gave Saudi Arabia and India, both of which plan to privatise some of their critical sectors to raise funds to boost the economy, as worthy examples Nigeria can emulate.
“Saudi Arabia for instance, plans to raise about $200 billion through the privatisation of 16 sectors ranging from healthcare, airports to education.
“There is also headroom for unlocking liquidity from state-owned assets to meet shortfalls in Nigeria. Nigeria’s massive non-financial assets are convertible into financial buffers.”
Muda Yusuf
Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI), says equity financing is the way out of Nigeria’s rising debt and tepid economic growth.
Yusuf suggests that the Nigerian government should draft policies that would attract domestic and foreign private sectors and encourage them to part with capital for equity.
“We should be looking more in the direction of equity financing. But for this to happen, the policy and regulatory environment must be right,” Yusuf states.
Jesmin Rahman
An important policy area for Nigeria is to enhance domestic revenue mobilisation, according to Rahman, the IMF’s Mission chief to Nigeria.
At 8% of GDP, domestic revenue levels are one of the lowest in the world whether we compare it to SSA or oil exporters, these are very low.
These revenues are also low compared to the minimum threshold required for government to play an effective role. This is an undisputed area where action is needed but of course right now is not the time to raise taxes. Nigerian government started to take important steps prior to covid-19 in the finance bill in terms of increase the VAT rate and it will be very important once the covid-19 crisis passes to renew focus on that.
If Nigeria is to raise its revenue in any meaningful way, it has to move on very many fronts. It needs to increase tax efficiency, rates need to increase for VAT which is again one of the lowest in the world, and excise needs to be broadened. As we know from experiences in other countries, this is a very challenging job, it takes several years of concerted and sustained effort to make any kind of gain in revenues.
Kelvin Atafiri
Atafiri who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector said Nigeria has many untapped financial potentials in the oil and gas sector.
“There are many idle fields waiting for private investors, but then policy inconsistencies are still a major factor,” Atafiri said.
