Nigeria’s total debt has almost doubled in three years from N12.6 trillion in December 2015 to N22.71 trillion as at March 2018, according to the Debt Management Office (DMO). However growth in Africa’s largest economy has failed to match counter cyclical spending, designed to stimulate an economy in recession.
The Federal Government has resorted to issuing debt in a bid to boost economic growth after the economy slid into its first recession in more than two decades in 2016. But while sovereign debts have kept rising, growth has remained elusive. The country was only able to record a growth rate of 1.95 percent in the first quarter of 2018, after growing at less than one percent in 2017.
Latest data from the DMO shows that Nigeria’s debt stock grew by almost a trillion naira over the three-month period through March 2018 and if that is maintained, it could swell by an extra N4 trillion by year-end 2018, taking total debt to GDP to 24 percent from 13 percent in 2016.
The debt trend doesn’t suggest a crisis at first glance as the ratio is relatively low, after all, the United States- arguably the largest economy in the world has debt to GDP of over 100 percent.
But the worry in Nigeria’s case, is that much of that spending is going to fund consumption, while badly needed infrastructure spending is taking the back seat.
“You borrow to fund infrastructural projects, but in Nigeria’s case, debt is used to fund consumption, like subsidizing petroleum products,” Bismarck Rewane, an economist and CEO of advisory firm, Financial Derivatives Company said from the commercial capital, Lagos.
Despite jacking up capital expenditure in the 2016 and 2017 budgets to 30 percent of total expenditure, actual spending has been about half of the target, while recurrent expenditure was consistently overshot.
In 2017, actual capital spending came to N1.54 trillion as against the budgeted N2.17 trillion, representing just 20 percent of total expenditure. In 2016, N1.8 trillion was allocated in the budget, but only N1.2 trillion was spent, which was about 18 percent of total expenditure.
“Underperforming revenue targets, caused by lower than planned oil and non-oil revenues, disrupted spending plans and capital expenditure had to bear the brunt,” a government source said on condition of anonymity.
“It was difficult to channel borrowings into capital projects, as recurrent expenditure is less flexible and constitute payments that must be made,” the source said.
Some N2.86 trillion was budgeted for capital expenditure (capex) in this year’s N9 trillion budget and analysts say that another under-implementation is on the cards regarding achieving that target amid the upcoming elections and over ambitious revenue targets.
On the other hand, the budget for recurrent expenditure was N2.64 trillion in 2016, but the government spent 47 percent more, chalking up N3.88 trillion at the end of the day.
“Fragile economic growth is at loggerheads with the government’s Keynesian motivated plan to stimulate economic activity by boosting spending, after growth contracted for the first time in 25 years in 2016,” one business leader said.
The economy may have snapped five quarters of negative growth and is gradually expanding again, however that is down to the recovery in the oil sector.
In GDP per capital terms, the economic contraction is far from over. The government’s response to a contracting economy was to adopt an expansionary budget, jacking up the 2016 budget – a N6.06 trillion outlay- to the highest in naira terms.
The 2017 and 2018 budgets have followed suit, but some argue that the impact has failed to live up to expectations.
There are two ways of stimulating a receding economy in John Keynes style depending on a country’s level of development, according to Johnson Chukwu, Group managing director and CEO of Financial advisory firm, Cowry Assets. During the Great Depression of 1929-33, the United States stimulated growth by investing in infrastructure from highways to power, in the more recent recession of 2007, growth was stimulated through a combination of recurrent spending via cash handouts to vulnerable families, tax cuts and fiscal stimulus.
“For Nigeria, government spending should be targeted at capital projects, rather than recurrent, given the country’s level of development,” Chukwu said by phone. Nigeria’s infrastructure deficit- which will require up to N25 trillion ($80 billion) over 5 years according to some independent estimates- is a nightmare for businesses.
For instance, the country’s installed power capacity of 7,000 megawatts is less than a quarter of the required capacity to meet the needs of some 180 million people and is only 17.5 percent of South Africa’s 40,000mw- which it generates for its 55 million people.
Not only has a penchant for subsidies by the government, on electricity and petrol, hindered the inflow of private capital, it has put a massive drain on public revenues.
“Nigeria needs to increase its investment to GDP ratio, which is 15 percent of GDP or less,” Charles Robertson, chief economist at Moscow-based investment bank, Renaissance Capital, said in an emailed response to Business Day.
“It needs to be 25 percent of GDP. Nigeria will struggle to increase government investment when so much money is spent on the fuel subsidy,” Robertson added.
