At the last IMF/World Bank Annual Meetings in Tokyo, debt sustainability took the center stage as financial egg heads from all over the world gathered to deliberate on the way out of the sovereign debt crisis currently crippling the Euro Zones. At the seminar on debt sustainability, Abraham Nwankwo, Director General, Nigeria's Debt Management Office, DMO, was there and had a brief chat with some Nigeria journalist at the workshop.
States have embarked on aggressive borrowing through the capital market. Given that most of them have internally generated revenue (IGR) that are so low and as such depend on federal allocation and oil. Supposing something happens, how sustainable is the borrowing by the states?
The issue of borrowing is global. Borrowing is for regions, countries both developed and undeveloped. It is for states, provinces and households. So first of all, let me make it clear that it is specifically wrong, politically and methodically to single out states and start talking about states borrowing or not borrowing. We have to say that whether as an individual, family, school, organisation, company or country, you have to borrow responsibly. So let me make it clear that there is nothing that makes borrowing by a state sinful in itself. Every economic agent should borrow responsibly.
In the case of Nigeria, of course states borrow within acceptable limits .There are rules and guidelines and states follow those rules and guidelines. First of all, no state in Nigeria can borrow from the capital market without following the process of borrowing. There are guidelines that apply to every government entity that wants to borrow from the capital market and those rules have been there and are still there and they are being enforced by Security and Exchange Commission (SEC) through the Investment and Security Act as amended.
There are terms and conditions for any entity whether private or public that wants to borrow from the capital market. So, it is for SEC to ensure they monitor states or make sure that whoever wants to borrow comply with the various specifications in the Investment and Security Act 2007. Hence, the procedures, which private companies that wants to borrow from the capital market undergo is the same with that of the states in the hands of SEC.
Secondly, in the case of states, because they are government entities and sub nationals, they have additional regulations and monitoring guiding them as contained in the Fiscal Responsibility law in the Debt Management Office Act, and based on the authority given to the DMO and the authority given to the Minister of Finance in the Fiscal Responsibility Act, states are also enforced to comply with additional requirements beyond what is already provided in the Investment and Security Act.
So, linking states' ability to service their debts with their Internally Generated Revenue (IGR) of course is the prudent thing to do and that is what is being done. That is why the guidelines allows no state to borrow in such a manner that its total debt service on a monthly basis is more than 40 per cent of its monthly allocation from Federal Allocation.
What is taken into account is the fact that the money is essentially oil revenue. So, as a state, it is expected that your total debt service should not be more than 40 per cent of Federal allocation money. This means that the idea of sustainability of oil revenue has already been factored in. Everybody must realize that it has been taken into account that oil revenue is volatile and unstable.
What this means is that, states that already have internal generated revenue now have a buffer. The rule has been made such that every state must depend not 100 per cent on oil revenue. This is to account for the volatility and vulnerability of oil revenue. So if you have internally generated revenue it is being neglected and considered as a backup.
The second way to look at it is that every year DMO conducts a debt sustainability analysis and takes into account that oil revenue may drop to as low as $30 per barrel. It is on this basis that the DMO has an idea of the total debt owed by the country and looks at it and consider what could happen if oil revenue were to drop to as low as $30 per barrel.
This means the way we manage our debt or control it is such that the vulnerability or volatility of oil revenue is essentially taken care of. The second thing is beyond the figures - that is the value added. This is what I believe every country and states should be focusing on. What value do you generate in terms of productivity, growth and employment with the use of financial resources whether borrowed or not?
From the guidelines, I can say Nigeria's method meet the best standard in the world, but in addition, over the past few years, effort is being made so that emphasis is not placed only on the statistics. Emphasis should be on using resources effectively and efficiently so that you can use it to generate maximum growth, employment and eradicate poverty.
When you look at the discussion going on at the IMF/World Bank meeting, you can discover that all over the world, countries are battling with issues of debt sustainability and the like, but you can say that Nigeria is relatively lucky because even before the global financial crisis started, Nigeria has been on path of reform since 2004.We continued on that path of reform up till the time that the global crisis set in and that is why despite the global crisis, the country has not been badly impacted like other parts of the world.
If Nigeria had not been on the path of reform in 2004, when the crisis set in 2008 up till about 2011, it means that with the turbulence in the oil market it is possible for us to now be experiencing the serious impact too. But go and look at the statistics, we will see that even despite the turbulence our growth still averaged about seven per cent. There are few countries in the world that did better than Nigeria in terms of growth and stability during this turbulent period. The country has been minimally volatile and vulnerable. It continues to maintain stability and growth.
What is the lesson here?
The lesson to take is that Nigeria is not isolated from the global turmoil but because it has continued to maintain a path of reform its economy is stable. What it means is that we should take advantage of the situation and continue with the ongoing structural reforms by intensifying the processes.
Despite the period of growth and rising price of crude oil that the country is touted to be enjoying, why then is Nigeria still borrowing?
Can you tell me any country in the world that does not borrow? It is like saying that because Mitsubishi is producing and making sales it should not borrow. The economic fact is that for any country or business that is doing well it should be able do what can ensure its expansion and that includes borrowing.
It would borrow to build more factories to give it a competitive edge and make it dominate the global market. That is the rule. In the history of the economy of the world, borrowing I must say has played a significant part. Developed countries such as US, Germany, Japan and China are not left out in the exercise as every economy is looking forward to expanding its business and that means it must seek for fund through borrowing. So we must not look at borrowing as an absolute thing but relative to something.
So is that why Nigeria is embarking on another borrowing come next year?
Nigeria is not borrowing next year. Borrowing is done on a medium term based on the developmental project to be executed. That is why there is a budget to help decide how the available resources can be used to execute these projects. We should be praising the government for coming up with this medium term expenditure framework
How sustainable is the cost of servicing the mounting external and internal debts?
When you talk of debt sustainability it has to do with solvency and liquidity.
In fact, that explains why we do debt sustainability analysis every year. It is the duty of the public including the media to get a copy of the report and see whether the solvency and liquidity ratios are okay or not. After looking at it we must ask ourselves this question; what is the relation between our total debt - both domestic and external, with our revenue generation? These two things would lead to liquidity ratio and answer these questions. Every year we do debt sustainability analysis, which includes solvency and liquidity ratios.
So, if we are not going to be able to service our debt then it means we won't borrow. Nigeria borrows at fixed rate and that makes it easy to service our debt. Once we go to the bond market, we borrow at fixed rate. So upfront, you know how much you are going to pay because it is fixed. You don't borrow free of charge.
Even for external loan where borrowing is done on concessional terms you still have to pay service charge and commitment fee, which is very low, but it is these combinations that make it possible to know if you can service your debt. The issue is, do we have the framework for managing our debt?
It appears the private sector is being crowded out as a result of government penchant for borrowing?
What do you mean by crowding out of the private sector? Crowding out means you have a market where private sector is borrowing and the government too is borrowing. Before now, in Nigeria, there was no bond market, it is the government that tried to develop the market. So there is no justification for accusing the government of crowding out the private sector when in actual fact the bond market was not in existence until the government started it.
There was no way a three or 10 year loan could be gotten before now until the government created the bond market, which has made it possible to get a 20 year money from the market. It is wrong and mischievous to say that the government crowded out the private sector when in actual fact there was no bond market until the government developed it. The Government is now retreating by reducing its borrowing from the market since the past three years if one looks at the statistics.
It seems that the objective for which the borrowing is done hasn't been realised going by the fact that the projects are not visibly on ground?
We don't have to make conclusions if we have not done our investigations on this. If your revenue is less than your expenditure then you have to borrow. That is why there is a budget, but before the budget gets approved, stakeholders including the media and civil society organisations are called together to look at it. After then it goes to the National Assembly which considers the Appropriation bill before making it an Act.
They would have looked into the budget to see the expenditure and the revenue before taking action on whether to approve or not. At the end of the day, why would anybody say there are no feasible projects if the budget contains the expenditure both capital and recurrent? And the same budget tells you the difference between the two to decide how much to be borrowed. You can't come back and say you don't know where the bond money goes to.
There is always a contention between the National Assembly and the Executive on the execution of projects for which capital votes were made. So, why do we have 50 per cent implementation of capital budget every year?
I know you are aware that in certain years, the money meant for capital expenditures were returned. Every year, we know that every penny allocated for capital expenditures, which was not spent is returned to the treasury. If you are not able to spend, you should be able to account for what you did not spend.
Secondly, on the issue of capital budget implementation, Nigeria needs to improve on it and that is why measures are being put in place to make this possible. Last year for instance, I am aware that all Ministries, Departments and Agencies (MDAs) were tasked to start execution of projects in advance so as to make a significant per cent implementation of the budget feasible.
They were told not to wait until the funds were available. This is to encourage them to make preparations so that when the fund is made available, they can commence the implementation straight off. There are corrective measures that have been put in place to ensure that there is higher implementation of the budget.
Secondly, we must realise that the budgetary process is not completed until some months into the year sometimes up till April. So when you are talking of budget implementation in Nigeria, it is done for nine months and not 12 months as expected. That is why this year government is committed to working with the National Assembly to ensure the process is completed on time so that the implementation can start January of the New Year.
If the budget is not fully implemented after borrowing by the government don't you think this could have consequence?
I think there is no linkage. Of course when you borrow there is a cost on doing so. Each year you also look at the revenue generated and expenditure to be made even without borrowing at all. If what is expended is not up to what is set aside for project would it not be returned to be used the next year? I must say that borrowing is the way of helping you to boost your cash flow.
Shouldn't we have a penalty for non-implementation of budget especially by the MDAs?
I would not answer you either yes or no because it is not as simple as you think. But you can come up with that proposal so that Nigerians can look at it and decide whether it is good for them or not.