The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Dr. Baba Yusuf Musa, is very much at home with the economics and financial data of Nigeria and other ECOWAS nations, given his regular consultative interface with several global institutions including the World Bank and the International Monetary Fund (IMF) on sub-Saharan African economy.
In this interview conducted at the 2019 annual meetings of the World Bank Group in Washington DC, USA, Musa raised serious concerns at the level of Nigeria’s debt, warning that government’s increasing focus in debt service obligation would choke efforts to provide needed infrastructure for the citizens among other constraints. He also advocated the reprofiling of Nigeria’s debts to reduce the impact of domestic debt servicing which he said is frustrating government’s effort to create jobs and provide infrastructure
Why Nigeria’s domestic debt becoming problematic
If you look at the amount of domestic debt that we have, it is about $56.6 billion as at June 2019, which is twice the amount of money that we have borrowed externally. The interest rate that we pay on the domestic loan is far above that of the external loans. The average interest rates that we pay in the external debts at this moment is below seven percent (I think five percent), if you add the multilateral debt and the commercial debt together it’s below seven per cent. Average interest rates that we pay on domestic debt now is above 17 per cent, I think they are in the range of 20 per cent.
Now, if you look at the total debt service that we paid annually over the last three years, we have been paying over N1.3 trillion in debt service which I think is too huge and is not on a sustainable path. If you add the N1.7 trillion that we paid in 2018, and then we paid about N1.5 or N1.4 trillion in 2016, then we paid almost N1 trillion in 2015. When you add the total, it is more than the $3 billion that the Federal Government is taking from the World Bank. So, I think our strategy should be that the Federal Government should find a way of reducing the domestic debt. Some of us have recommended that we should re-profile the debt. Re-profiling the debt means you borrow at cheaper rates from external and then clear up the domestic debt so that your debt service would drastically fall from 17 per cent to perhaps less than 10 per cent; to a single digit, to reduce the burden that you pay in terms of debt service.
Now, Nigerians are concerned about external borrowing following the experience that we had prior to 2005 when we received debt relief. But as I mentioned earlier, we have a good institutional arrangement for a public debt management, and the public debt has changed from the way it used to be. Now we do what we call active debt management. What it means is that even if we borrow externally, we are not going to hold the debt to maturity. So, what it means is that at any point in time, you look at your portfolio, you try to balance your portfolio against the existing macro- economic conditions and the constraints that you have. You can therefore borrow from the external at this moment when the interest rate is generally low, offset the domestic market where you are paying high interest, and as you progress you do not need to hold the debt to maturity. So what you do is that if you reduce your domestic exposure and of course reduce your debt service payment, you can then reduce interest payments because what is happening now is that the high interest rates which Nigeria experiences even in the domestic market are as a result of the Federal Government borrowing and that is what is driving interest rates Anytime the Federal Governments stops borrowing, we would see that interest rates would start crashing. We have seen it among almost all ECOWAS countries, where governments reduce borrowing and interest rates crash.
Same thing in Nigeria, when you look at the portfolio of the domestic, more than 80 percent of it is owed commercial banks, because they are the ones buying the treasury bills. So, if I’m a bank manager at this moment, I can lend out my money to the Federal Government which is almost risk free and earn 17 per cent, why do I need to lend to the real sector.
So, it is in that regard that we look at it and say that even the domestic borrowing that we are doing is crowding out the private sector, because the banks feel it is easier for them, and cheaper to lend to the government rather than lending to the real sector.
With that arrangement, we see now that the government is crowding out the private sector.
Balancing your interest reduction strategy with government’s desire for more borrowing
No but, you see, obviously, at any point you have to have a strategy as a government. Given the current debt situation that we have, our strategy first should be to reduce the interest payments that we’ve been making, or that we’ve been paying over the years. Once we reduce the interest payments, we would at the same time increase revenue, so the need to borrow would be reduced. But then going forward, you tie your borrowing to projects that are commercially viable, that will be able to repay whatever we borrow. Our strategy as a nation should be to borrow only for projects that have commercial value that can repay the loan.
Nigeria’s debt sustainability
When you want to look at the level of volatility, or the concern that everyone is making with respect to the level of public debt in Nigeria in relation to the Gross Domestic Product (GDP), the country is in a comfortable position and highly sustainable.
However, the moment you want to index our debt against current levels of revenue, then you see that Nigeria is at a very high risk of entering another debt trap soon.
Of course, in the World Bank’s classification we are considered as a country of moderate risk of debt distress. But technically, the best way to assess Nigeria’s debt profile is to look at it against the revenue because you need the revenue to do your debt servicing since you cannot pay the debt service with GDP. So when you look at it, the link between the GDP and the capacity to repay, it doesn’t really tell the story, but when you look at it against the revenue, that’s when you see that our debt situation requires some moderation.
Way out of Nigeria’s debt crisis
The first solution that one could suggest is to increase the level of our revenue mobilisation. The tax to revenue ratio in Nigeria against African countries or Sub – Saharan African countries, shows that Nigeria is among countries that have the lowest level of tax to GDP ratio.
For most low- income countries, the average is around 22 percent, and that of Africa is about 15 per cent, but Nigeria is still in the single digit; I think it is about eight per cent. That means we really have a gap in that area. Now, we have instituted so many taxation reforms, but I think in my view, we need to really look at it deeper than the way we have been approaching it. It is not enough to just tell the Nigerian Customs Service, for instance we are increasing your target from X amount to X plus something amount, and in that every year you are giving them a higher target. I think the target is good enough but it is not sufficient condition to achieve the target of revenue growth.
But I think that the linkage should be that if we block the leakages in the system, the saving should be enough to raise the revenue that we require in Nigeria, and in fact we might not really have the need to borrow once we have a net revenue that we can mobilise domestically.
It is also a measure of sustainability, so we have a big window through which we can increase our revenue, and once we use that window and raise our tax to GDP ratio, even if it is to a level of ten percent or twelve percent, I believe the amount of surplus that we would have would drastically reduce the domestic borrowing that we’ve been having over the years. So, one of the strategies would be for us to look inwardly and see how we can increase the mobilisation of tax within the country. Many analysts feel that we should have a register of not only civil servants but the informal economy such that we would be able to have a register of those businesses so that we can capture them in the tax net. But beyond the informal sector that is involved in day-to-day businesses, there are other areas where we can also, at least mobilise some greater revenue.
Now, how many landlords actually pay rent in the capital cities, if we are to say the truth, how many of them actually pay tax … They are quite a few that actually pay tax. I know in Lagos they have made effort, at least to capture an element of those ones, but beyond Lagos, how many states have any kind of institutional arrangement to capture revenue from tenement rate, I believe there are very few states. No wonder you see that Lagos has the highest Internally-Generated-Revenue in Nigeria. So, I think if we can adopt the Lagos strategy to help many more states to mobilise domestic revenue, and in fact, the Federal Government would also have some relief.
Why states, Federal Government debts are rising
I think that when you look at the quantum of debt in some states vis-a-vis the Federal Government, the states are still far lower than that of the Federal Government. Although, with the states, I think the level of indebtedness vary from one to another. But as you rightly pointed out, when you compare their strengths in terms of revenue mobilisation, even with the little quantum of debt that they have, you still find that their sustainability is a bit of a concern. Now the issue is that in Nigeria, no state is allowed to borrow externally, all of them are allowed only to borrow through the Federal Government. So, what happens is that the central government borrows and then lends it at the same time, and before a state borrows, the Ministry of Finance and the Debt Management Office usually conduct a debt sustainability analysis to see if the state has the capacity to pay those debts. But that relates more when it comes to issuance of domestic bonds by states. So, the institutional arrangements for borrowing or issuance of bonds by the states, for now, looks good enough because it requires that every state that wants to issue domestic bonds must undergo the debt sustainability analysis and they also have to tie it to projects.
Besides that also, the consortium of banks that normally sell the bonds on behalf of the states or mobilise the debts for them also take part in the monitoring of the states. So, as far as analysts are concerned, I think they feel that is good enough.
However, I don’t think we have those kinds of arrangements at the central level. That is where the question is, because, in the case of the Federal Government, bonds are issued by DMO on behalf of the central government, and once the revenue is mobilised, except for those which are tied directly to projects, others go straight into the general pool of the federation account, and their traceability to project poses a bit of a concern.
Classification of external loans
Now when you talk about external loans, there are three categories of loans from external sources. There are loans that we consider as multilateral loans. These are loans that you obtain from multilateral institutions like World Bank, the African Development Bank, Asian Development Bank, Islamic Development Bank, and all the other multilateral institutions.
And even among the multilateral institutions, there are some that we group into two. There are those that are called concessional loans and there are some that are call semi-concessional loans. The concessional loans are the ones that we obtain from the World Bank, and part of it from the African Development Bank. Those ones are borrowed at much cheaper rates compared to the semi-concessional loans. The concessional loans usually with the concessional rate, of about 0.5 percent interest, and they can be paid over a 35-year period. Those ones are loans that are considered as concessional loans. But the semi-concessional loans are cheaper than commercial loans, again, those ones are paid over a period of 15 to 25 years. So, they are the preferred loans.
The World Bank and multilateral institutions as I mentioned provide those set of loans.That is the first category of loans.
The second ones are the commercial loans which are those we obtain through the London Club, which are commercial loans that Nigeria goes and sometimes obtain. I think the last ones we got it was at 8.5 percent or so, and it is to be paid over 15 years period. So that is the second category of the loan.
The third ones are the bilateral loans. Now the bilateral loans are in two forms. There are those ones that you obtain from the Paris Club, and there are some that you obtain from the non – Paris Club, which are the ones we are talking about with China EXIMBank, from India and some other countries.
So, among these three categories of loans, the most preferred type of loan is the one that you obtain from the multilateral institutions. Basically, they are cheaper, those ones are also project tied. Their only disadvantage is that their disbursement proper is usually slow so you don’t get them as fast as the commercial loans and as fast as the bilateral loans.
The advantage of those loans is that they are traceable to projects. Their disbursements are slow because they have tight conditions, that they do not give the money to the countries except the countries utilise the money and it is monitored. The World Bank would monitor the utilisation of the loans. They give the money in trenches. So, the probability of misusing them is actually very low.
Nigeria’s $3billion loan request for power project
Yes if Nigeria is obtaining that kind of loan from the World Bank, the lender must be rest assured that the money would be utilised for the purpose it is being sought; for the purpose it is meant for. And these are loans that are as cheap as gifts because you are paying it over 35 years, you are paying the interest as low as under one percent, of course you have five years of grace, so you don’t even start repaying the loan until after five years. So, those are the kind of loans that if a country can obtain, they should be the preferred loans. The second category which is the commercial loans are the loans that you obtain and sometimes they are tied to projects, but many times they are not tied to projects.
Those are the ones that many analysts are concerned about.
However, the worst set of loans are the ones that relate to the Paris Club. If you recall our experience with the Paris Club of creditors where we had to pay so much to get debt relief, and those ones are not project tied, so the probability of obtaining those kind of loans and utilising them for other things is higher than the multilateral loans. Now we have also quite some amount of money that we borrowed from the other bilateral or the non-Paris Club, principally China; those ones are also project tied.
World Bank’s concern about Nigeria’s borrowing from China.
Now, I had the same concern when I saw that we were borrowing from the Chinese creditors. But most recently when I went through some of the documents and realised that the loans are actually project tied and they also improve on the disbursement pattern. Most of the loans that we obtained from China at this moment are being monitored well for the projects that they are tied to. So, I think that was the perception we had, prior to the creation of the Debt Management Office. But after the creation of the DMO in the year 2000, I think the government tried to build a much robust, or better institutional arrangement at least to monitor the utilisation of the loans that we’ve been having. So, in terms of external borrowing, it appears that the government is utilising the money properly and they are all project tied.
Making economic diversification initiative more impactful
Diversification implies that we should increase our revenue base. By diversification what we are saying is that we are not going to remain with a single source of revenue which is the oil, but rather explore other sectors that would also start providing, or at least contribute revenue to the nation. That will also ultimately reduce the need for us to borrow.