‘There must be transparency in execution of projects government has borrowed money for’

Following the recent Eurobond issuance by the Nigerian Federal government, which was oversubscribed by investors, KAYODE FALASINNU, CEO, AVA Capital Group, believes investors still have confidence in the Nigerian Economy. In this interview with HOPE MOSES-ASHIKE, he urges the government to eliminate policies (monetary and fiscal) that hinder private sector investment in infrastructure development within the country. Excerpts:

With a total debt stock of N35.465 trillion as of June 30, 2021, an amount that is growing with each passing day, and has been serviced with N11.679 trillion within five years, there seems to be no end in sight yet for the borrowing spree by the Nigerian government. What is the way out especially in these difficult economic times?
Nigeria’s huge debt burden is of significant concern right now given its huge debt service outlay, the seeming stagnant state of the economy, its anaemic income generating capacity and the consistent increase in recurrent expenditure whilst existing inadequate infrastructure is mostly rapidly dilapidating. In the 2021 budget, N3.12 trillion was allocated to debt service, accounting for 24 percent of the annual budget. The total debt stock reported by the Debt Management Office (DMO) represents an 8 percent increase from the debt stock value of N33 trillion as at December 31, 2020. According to the Federal Ministry of Finance’s budget implementation report, the debt service-to-revenue ratio was approximately 98 percent for the fiscal period January to May 2021. These numbers are dire and are justifiably of extreme concern.

The way out of this isn’t something that is either novel or complex, it is something that we have talked about consistently as a nation over the years but have not been able to do, there is the urgent and imminent need for a diversified revenue base via the revival of the country’s lagging non-oil sectors. This can be achieved by creating an enabling environment for business and entrepreneurs through implementation of effective policies that enhance domestic production and promote import substitution. Sectors such as manufacturing, agriculture, information technology, financial services and natural resources are extremely important to improve income generation and diversify revenue. The Government must create an environment where business can thrive and create incentives for FDI in the country. Whilst this sounds cliché, it simply needs to get done for us to see improvement in the economy and be able to comfortably service our debt whilst improving the lives of Nigerian citizens.

There have been arguments in some quarters that the bulk of the federal government’s borrowing is going into recurrent expenditure, rather than capital expenditure. What is your view on this borrowing habit? Do you think this is sustainable in the long-term?
While recurrent expenditure is a necessary cost at all levels of government, borrowing to fund recurrent expenditure is just sub-optimal fiscal policy and outrightly unfortunate. Generally, the use of debt should mostly be focused on building infrastructure and enhancing the economy through investments in key sectors including education, health care and energy amongst others.

In the 2021 budget N5.65 trillion was allocated to non-debt  recurrent expenditure whilst N3.12 trillion was allocated to debt servicing. On the other hand, the capital expenditure budget allocation was N3.85 trillion, constituting approximately 29 percent of total 2021 budgeted expenditure, this was only 2% more than the money allocated to personnel costs.
The high budgetary allocation to recurrent expenditures is not sustainable in the long term and the government must immediately start focusing on investing in those things that would enhance the quality of life for Nigerians in the short, medium and long term. A growing population and a stagnant economy where inflation has been significantly high (especially food inflation) coupled with high unemployment cannot spend all its earnings and borrowings on recurrent expenditure items most of which consist of unnecessary expenses, a bloated personnel cost and huge debt service costs. To fund recurring budget items, the federal government must ensure expenses are managed in a sustainable way whereby revenue is at least 2-3X expenditure. That way the government can service the existing debt conveniently whilst also addressing the infrastructure dearth in the country.

In a letter to the Senate, President Buhari sought the approval to obtain $4 billion and €710 million loans to address critical projects approved by the Federal Executive Council (FEC). In the letter, the president said the projects listed in the external borrowing plan are to be financed through sovereign loans from the World Bank, French Development Agency, EXIM Bank and IFAD in the total sum of $4.054 billion and €710 million and grant components of $125 million. Do we need more borrowing or intensify our efforts to service debts? Can the government sustain its borrowing?
Do we need to borrow more? Perhaps we do given the state of the economy, the need for investment and infrastructure.

However, a company in dire need of funds and must borrow has to first cut down on its cost while ensuring that all funds are spent judiciously to maximize return on the borrowed monies being invested so it’s able to service the debt. It is no different from what we should do as a nation. It is imminently important that we cut our spending (especially those frivolous items we see annually in our budget that cost multiple billions) and focus on investing in key sectors of the economy. It is also important the government has a strategy to engage some of our debtors to start to explore the potential of debt forgiveness given the impact of the pandemic on the Nigerian economy. Finally, there must be transparency in the execution of the projects the government had borrowed money for such that the funds are optimally deployed to the projects and all potential leakages are blocked.

 In the past five years, the federal government had committed a total of N11.679 trillion into debt servicing, while N8.31trillion was expended on capital/development expenditure between 2015 and 2020. Are you impressed with the amount committed for debt servicing or there is a need to raise the amount? N8.31 trillion was expended on capital expenditure, with this in mind would you say there is huge improvement in infrastructure? Do you think there are returns from the huge investments made in these capital projects?
I think the issues around these are 2-fold. The first thing is our current debt service to revenue ratio is too high and unsustainable. In Q1 2021, the ratio was 99 percent, that is an exceedingly high ratio that indicates that our borrowings have done little to improve our revenue earning capability. This is a huge disservice to us that must be imminently corrected if we are going to build a healthy future for ourselves and future generations.

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The second thing is I do not see the value of 8.31trillion spending on actual infrastructure or development expenditure in the country. Whilst we are seeing an enhanced rail service, there is not a lot of evidence of other investment in significant infrastructure or in any of the other key economic sectors. Health care, education, water, power and other key sectors have not tangibly improved over this period, hence the need to be more disciplined in development/infrastructure spending to ensure that we are getting value for every dime spent.

The 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper,” revealed that the sums of N2.254 trillion and N2.951 trillion went into debt service in 2019 and 2020, respectively. What is your view on this?
My view is the same, borrowing whilst not a bad thing has to be focused on activities that can boost revenue earning capacity in the short, medium and long term. A lot of analysts focus on our Debt to GDP ratio and highlight that some developed countries have higher ratios than we do. The important thing to note here is the quality of our GDP is not the same as developed countries. This is because whilst we do have a huge population, a lot of economic activity occurs on a subsistence basis with little revenue generating potential for the government thereby having little effect on the Government’s ability to effectively service its debt. Hence a more relevant ratio is the debt service to revenue which is currently too high. The immediate focus has got to be revenue diversification via enhancing other key economic sectors and fostering a friendly business environment attractive to investors and entrepreneurs.
What policy interventions will you suggest addressing the present debt burden facing Nigeria?
A prudent and sustainable approach towards financial management is imperative to establish a sustainable economic plan for the country. The Federal and State governments need to heavily lean into the Public Private Partnership model to spur infrastructure development. This has a three-pronged effect of reducing current high levels of public sector funding, ensure efficient management of assets and potentially increase Foreign Direct Investment
Further to the above, policies that facilitate increased supply of import-substituting commodities and exportable goods would drive decline in the country’s borrowings. The government must participatively involve itself in growing the supply side of the economy by aggressively driving public and private sector investment initiatives in the agricultural, services, industrial and other sectors.
How can we restore confidence in government borrowing considering the fact that much of federal government spending is on recurrent expenditure instead of capital projects?
We believe investors still have confidence in the Nigerian Economy following the recent Eurobond issuance by the Nigerian Federal government, which was oversubscribed.
The current administration can enhance investors’ confidence and allay concerns surrounding the country’s economic situation by firstly easing and/or eliminating policies (monetary and fiscal) that hinder private sector investment in infrastructure development within the country.

Secondly, the current administration has a number of robust policies and programmes within the agricultural and services sectors. Ensuring awareness and effective adoption from end to end will also restore investors’ confidence in the economy.  You must understand, a healthy economy implies enhanced Government revenue such that there are no concerns about Government’s ability to settle its debt obligations.
Whilst we are seeing an enhanced rail service, there is not a lot of evidence of other investment in significant infrastructure or in any of the other key economic sectors

What are the key capital projects governments can invest in to raise capital to service debts?

You must understand, every effort of the government to promote an enhanced economic climate for business and investors ultimately has a direct impact on government revenue. This also goes for enhanced infrastructure especially relating to transportation and power. Improved ease of access to the market and consistent power supply will improve the bottom-line for businesses and thus their ability to hire more staff who pay taxes, earn more profit which will get taxed and attract more businesses into the country. More revenue for the government means a better debt service/revenue ratio. A major problem is the ‘overregulation’ of some businesses by the various tiers of government that ultimately stifles business and makes conditions even more herculean for established and new entrepreneurs to thrive.

With the present economic outlook, what is your forecast of the economy in the remaining quarters? Can we sustain the present economic growth, or do you perceive a decline in growth rate?

While GDP grew marginally by 0.51% year-on-year in Q1, we saw a more impressive rebound of 5.01% in Q2. Whilst NBS is yet to release Q3 numbers, we expect that the year-on-year figure  for Q3 and Q4 will be decent as the global and local economy seems to be finally rebounding from the impact of the Covid-19 pandemic and vaccine administration seems to be getting more successful with more people getting vaccinated.

Whilst I do not imagine a decline in GDP if we do not have another Covid-19 wave as a result of vaccine resistant variant, we do need a more aggressive growth to attract the kind of investment needed to drive further growth and development. I think the Nigerian government should be targeting double digit growth in 2022 and enacting policies (fiscal and monetary) that would ensure the achievement of this.

What are the major headwinds facing the investment climate in Nigeria?

The major headwinds adversely affecting the investment climate in the country are high inflation, exchange rate instability and insecurity amongst others. With inflation at 17% which is an improvement from earlier months, an FDI has little incentive to invest given the negative spread or negative real return on investment in the country. Also exchange rate instability remain a huge deterrent to foreign direct investment in the country. We need to adopt a foreign exchange policy that fosters confidence in the Nigerian economy. Finally, insecurity and incessant news around the criminal activity of cattle rustlers, bandits and kidnappers are a huge problem with respect to attracting investment especially in the less commercial states and cities in the country. A conscious effort to tackle and successfully alleviate these problems is important for Nigeria to once again be an attractive economy for investors both locally and internationally.

 Can you make a comparison between the foreign direct investment (FDI) inflow in 2020 and 2021?

Despite the pandemic and the impact in 2020, FDI increase by 4% to $2.4 Bn in 2020 from $2.3Bn in 2019. However in 2021, according to the National Bureau of Statistics FDI fell to $77.97 mn in Q2 2021 from $154.76 mn recorded in Q1 2021 , a decrease of 49.6 percent. This figure is also dire when compared to Q2 2020 where FDI inflow was $148.59 million. The lull in FDI in the economy is directly a result of the seeming inconsistencies in the Foreign Exchange policy coupled with increased concerns around insecurity across the nation.

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