2018 budget shortfalls, others may raise debt to N25 trillion

• Real capital expenditure less than 27%
• Deficit financing to exceed N2 trillion

Shortfalls in the 2018 budget may worsen the nation’s debt status, pushing it to N25 trillion by the end of the year.Though the huge amount is far from the debt threshold when compared to a Gross Domestic Product (GDP) of $363 billion in 2017, it is three times more than the 2017 (N7.4 trillion) figure and about four times that of 2016 (N6.1 trillion). Notably, it costs about 45 per cent of the nation’s revenue.

The 2018 fiscal plan, recently signed by President Muhammadu Buhari, appears to be without a clear statement on the way forward for the price of petrol and supply. This could pose challenges in due time.Buhari has already indicated interest in using a supplementary budget to restore the alleged cuts in the provisions for development projects initiated by government. While these will attract hundreds of billions more, the N9.12 trillion already signed into law is reeling under the burden of about a N1.65 trillion net deficit, after factoring in the planned sale of national assets valued at about N300 billion.

According to FSDH Research, the budget deficit financing activities of the Federal Government may lead to an increase in yields in the domestic market from current levels. Already, the government has struck a deal with the World Bank worth $2.1 billion for projects contained in the budget, aimed at improving electricity, governance and empowering women. This comes with a potential to raise the borrowing above $3 billion, even from other sources.

Recently, Nigeria’s debt was put at N22.7 trillion for the first quarter of 2018. This means that debt deals in the second quarter of the year are yet to be aggregated. Put together, these may plunge the country to an all-time high of N25 trillion.For the Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, the continued debt programmes at both international and domestic ends would mean that corporate bodies and governments may soon start borrowing at higher interest rates, particularly from the domestic market.

Besides, with Nigeria’s foreign exchange earnings still hugely dependent on crude oil, the country remains predisposed to price shock, while international lenders will be pricing our debts, based on our existing weak revenue base. This is costly.Nigeria’s total public debt increased to N22.71 trillion in Q1 2018 from N12.6 trillion in Q4 2015. But it was mainly driven by external debt accelerated by the devaluation of the naira in the last three years.

At N15.96 trillion, he said the domestic debt accounts for 70.28 per cent of the total public debt. But with the deficit debt plan of N793 billion, domestic components of the borrowing, as well as the unknown value of the supplementary bill, it is obvious that both the debt stock and debt service bill will be significantly impacted.He noted that the company’s research analysis showed that the ratio of domestic interest payment to the Federal Government’s revenue from the Federation Account Allocation Committee (FAAC) was 79 per cent at Q1 2018, against 60 per cent average in the last two years.

This shows that gains made in recent months from increased revenue mobilisation have not been sustained, even as he warned that measures to grow non-oil revenue will have to be accelerated, to achieve and sustain a comfortable debt-service-to-revenue ratio below 30 per cent.The rising debt service bill, an indication of increasing debt obligations of about N2.014 trillion, representing about 22 per cent of the total budget is also worrisome, given the weak revenue mobilisation, especially as it nears the capital expenditure provisions at about N2.4 trillion.

Besides, the capital expenditure represents only 26.6 per cent at about N2.4 trillion. This is contrary to claims that it is more than 30 per cent of the total budget arrived at by the addition of Statutory Transfers of about N456 billion.While the budget is the highest in naira term, it is however, one of the lowest in the last 10 years, when denominated in dollar terms, and might not be sufficient to stimulate the much sought-after strong economic growth.

The Director, Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI), Dr. Vincent Nwani, said the comparison of the country’s debt with the GDP and international debt threshold is deceitful.Expressing worry that the nation is gradually slipping into monumental debt overhang, he advised that attention should be on the ratio of interest payment to revenue, which currently is “over 50 per cent, yet we pride ourselves as having a low debt.”

He also flayed the situation where the capital component, particularly that of the 2018 budget, is almost at par with the amount for debt service bill.According to Nwani, it is difficult to believe that the country is really investing in infrastructure when access roads to ports for the purposes of exporting and importing products are in deplorable conditions.

A fiscal governance activist, Eze Onyekpere, said the challenge with Nigeria’s borrowings in the name of deficits is that they do not seem to be impacting on the stock of capital formation.“The deficits and borrowings are expected to be spent on the stock of capital that improves the ease of doing business, boosts livelihoods and upgrades social indicators. This is not happening.

“The debt stock has increased by over 90 per cent since the Buhari presidency. This is not the best way to go within a space of three years. It is not sustainable and the administration should rethink this strategy of purportedly funding capital projects,” he said.The Chief Executive Officer of Cowry Asset Management Limited, Johnson Chukwu, said the problem with the debt is not about the GDP comparison, but rather interest payment cost. Currently, this is about “45 per cent debt service-to-revenue ratio.”He said: “Any more that would push it to 50 per cent would mean that the cost of borrowing is crowding out social and economic investment for development. That is a bad situation.

“Implementation has always been the bane of our policy environment. There are a lot of projects, but it might be difficult to say when they will be delivered. I only know that the more these infrastructures are delayed, the more difficult it would be for economic diversification.“At the moment, a lot is still being determined by oil. But for us to have an economy determined by real sector, we need power. But that is not quite certain,” he added.