Nigeria: Borrowing to Pay Salaries Violates Fiscal Responsibility Act, Teriba, Others Tell FG

19 June 2022

-Canvass debt issuance tied to assets, not revenue

-Warn against leveraging taxation to raise funds

Experts in fiscal policy and public finance, including the Chief Executive Officer of Economic Associates, Dr. Ayo Teriba, have faulted the decision of the federal government to borrow to fund its recurrent expenditure, stressing that such a decision flagrantly violates Section 41 of the Fiscal Responsibility Act, 2007.

Rather than violating the fiscal regime, the experts urged the federal government to adopt a cost-effective approach of generating revenues by issuing asset-backed debt and not revenue-based debt. They argued that the country's revenue base could not service its total debt stock.

The Chief Executive Officer of Economic Associates, Teriba; the Fiscal Policy Partner of PwC Nigeria, Mr. Taiwo Oyedele, and the Chief Executive Officer of Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf stated these in separate interviews with THISDAY.

The Acting Accountant General of the Federation (AGF), Chukwuyere Anamekwe, had at the fourth retreat for members of the technical sub-committee on cash management held in Abuja said that Nigeria was borrowing money to pay salaries.

The AGF had said: "Due to dwindling revenues, the treasury had to resort to other sources to augment for the payment of federal government public servants. It is absurd. Ordinarily, we shouldn't borrow to pay salaries."

In their reactions, the fiscal policy experts spoke against the federal government's resolve to borrow to meet its basic recurrent obligations.

Speaking on the legality of the federal government's decision, Oyedele argued that not only that "borrowing to pay salaries or generally for recurrent expenditure is against the law, it is also not sustainable as it may lead to a debt trap which could quickly spiral out of control."

He premised his position on Section 41 of the 2007 Fiscal Responsibility Act, which according to him, clearly defines what federal, state and local government could borrow domestically or externally.

Section 41 (1)(a) of the Act stipulates that the framework for debt management during the financial year shall be based on certain rules.

According to this section, "the government at all tiers shall only borrow for capital expenditure, human development and to undertake critical reforms of significant national impact, provided that, such borrowing shall be on concessional terms or at relatively low-interest rates and with a reasonably long amortisation period subject to the approval of the appropriate legislative body where necessary."

As provided by the law, Oyedele explained that the country's fiscal responsibility regime only allowed the governments at all levels to borrow to fund capital expenditure, human development and critical reforms of significant national impact.

He insisted that the federal government's borrowing "will negatively affect Nigeria's sovereign credit rating and increase the borrowing rate for the government as well as the private sector, and in turn may affect economic growth and push more people into poverty with the attendant implications for social insecurity."

Oyedele challenged the federal government "to urgently review its expenditure efficiency and priorities. Only recurrent expenditures that are expedient should be incurred most prudently.

"It is important to cut waste and corruption and all forms of inefficiencies. Implementing the Oronsanye report and limiting petrol subsidy to only deserving poor are critical steps in this regard just as the government must reform the tax system to curb evasion, widen the tax net and expand the tax base for sustainable revenue generation."

While also pointing at the illegality of the federal government's resort to borrowing for funding recurrent expenditure, Teriba specifically canvassed a more pragmatic approach to increasing the tax burden on the citizenry.

Teriba faulted the federal government's approach to borrowing, which according to him, was fiscally imprudent, regressive and unsustainable in the light of global development.

He also pointed out that tying debt to tax revenue was no longer tenable due to what he attributed to the impact of the recession, COVID-19 and devaluation ruined the income base of the people.

The economist advised the federal government to issue debt based on assets, which according to him, did not require the debtor country to pay back and service their debts.

Teriba further urged the federal government "to adopt what Brazil, India, Saudi Arabia and now Egypt did. But Brazil and Saudi Arabia started doing it in 2015 or 2016.

"Nigeria should issue debt based on assets. Tax is not a viable way forward in an economy where recession, COVID-19 and devaluation have ruined people's income base.

"Other countries are giving tax holidays right now. Many other countries are even borrowing to pay subsidies. When other countries are subsidising their people, we cannot tax our people. We do not have the income at all," Teriba explained.

He tasked the federal government "to securitise its assets. Nigeria is rich in assets. Nigeria should only issue debt that is asset-based or asset-backed. Saudi Arabia will borrow the total public debt of Nigeria within two years. But they are issuing mostly Sukuk."

"The advantage of Sukuk is that it is linked to assets. They are not promising to pay interest. They are simply inviting people to invest in their assets to get profits or dividends. Nigeria is not issuing any debt-based on assets. Its assets are all idle," he added.

The economist explained how Saudi Arabia listed 1.99 per cent of its interests in Aramco recently after establishing the market value of the state oil company.

While Saudi Arabia is still holding 98.01 per cent of its state-owned corporation, Teriba revealed that the Middle East country realised over $29 billion from the deal.

In the same way, the economist suggested that the federal government should establish the market value of the Nigerian National Petroleum Corporation (NNPC), its subsidiaries, rail lines and power transmission lines, among others.

"We should list every company not sell them, but just to establish their market values. With this, we will know the worth of assets. The advantage of knowing the worth of our assets is that we do not sell them. But we use them to raise funds.

"We should start issuing Sukuk on revenue-generating assets. We will get billions of dollars from those assets today. We will never have to repay it. We will never have to service it because the investors will be looking at the assets for profits and recovery of principal."

Corroborating Teriba's position, Yusuf said the way out of this fiscal conundrum "is to come up with more creative ways to reduce and rationalise government expenditure and boost revenue.

"Government needs to muster the courage to act on the audit reports to correct these lapses. The economy is bleeding profusely from petrol subsidies, which may rise to about N5 trillion by the end of the year.

"Although it is a politically difficult matter to handle, especially at a time like this, it is an issue that needs to be urgently tackled. The subsidy regime is unsustainable. It is therefore imperative to cut the cost of governance," Yusuf added.

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