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Debt overhang: A vicious circle in governance

By on March 23, 2011

Governance comes and goes with the personality involved. But financial recklessness has characterised governance in Nigeria, whereby a succeeding governor spends most part of his tenure and allocations on his predecessor’s debt obligation . The sitting one does the same and the vicious circle continues. Despite federal allocations gotten, state governors also borrow, with the borrowings in most instances not matching with projects on ground from.  BUKKY OLAJIDE examines the implications of domestic borrowings on the nation’s economy

AS this phase of the nation’s life passes in April this year, the external debt stock stands at $4.6 billion as at December 31 2010.

Creditors include the World Bank Group and Non-Paris (Bilateral and Commercial).

For the sub-national governments, that is, the states, the debt profile amounted to N4.6 trillion. Leading states in debt include: Lagos State, Kaduna State and Cross River State.

At the weekend, the Minister of Finance said that state governors are no longer permitted to enter into debt obligations that will continue after their terms in office.

The Minister of Finance Olusegun Aganga explained that governors would only be allowed to take loans that they could repay during their terms in office.

While decrying high level of wasteful spending in past governments, Aganga expressed that state governors should also confirm with the ministry before borrowing.

According to him, whether it is external borrowing from the global community or domestic borrowing by way of local bounds, or even commercial loans, the states can hardly enter into any loans without the knowledge of the Federal Government.

The government’s concern was genuine. The “Irrevocable Standing Payment Order” (ISPO) dictates that a succeeding governor must fulfil the debt obligation created by the former governor.

Analysts queried the ever-increasing domestic debt profile when there is nothing on ground to justify the debt. Some of these states collect revenue on monthly basis, yet they keep on until recently, there was no comprehensive sub-national debt strategy in place in Nigeria. The lack of coordination and regulation of sub-national borrowing has often resulted in excessive fiscal expansion, thereby creating problems for overall macro-economic stability.

This was caused by the peculiar fiscal federalism of Nigeria, which often emphasises fiscal autonomy at the expense of fiscal responsibility hence the need to tackle the issue of sub-national debt management.

Prior to this time, effective public debt management as practised today was virtually non-existent before advent of the Debt Management Office

There was inadequate debt data recording system and poor information flow across agencies with subsequent inaccurate and incomplete debt records as well as extreme difficulty in the verification of creditors’ claims due to conflicting figures from the various bodies handling the debt management function.

Above all, there was lack of consistent well-defined borrowing policies and debt management practices.

The Debt Management Office has among its other objectives, raising finance in the domestic market to cover the government’s borrowing needs at the least possible cost and within a prudent degree of risk.

The sub-national debt management strategy includes; facilitating the development of capacity and competence for effective public debt management at the sub-national level, through the provision of support for the establishment and operation of Debt Management Departments in the states.

However, with both foreign and domestic loans standing at an increasing level, financial analysts who spoke to The Guardian pointed to the fact that a rich country like Nigeria should not be found borrowing at all.

In 10 years of democracy really, about N34 trillion was generated from the oil sector. The oil sector accounted for 89.3 per cent while non-oil sector including solid minerals generated 10.8 per cent of the gross revenue.

Nigeria produced 8.1 billion barrels of crude oil in the 10 years and in some of the years, the country exceeded budget estimates.

With this estimates, at least, a state in Nigeria will receive not less than one trillion naira in these years of democracy and yet nothing to show for it and to crown their financial recklessness, they will still borrow.

Despite the abundant resources and windfall earned from it, Nigeria is still found among the poorest of the world because it was hindered by mismanagement of fund.

The large subsistence agricultural sector has not kept up with the rapid growth in population, therefore, a country that was once a large exporter of food now imports some of its food products.

While 80 per cent of Nigeria’s energy revenues are accrued to the government, Nigeria’s economy is highly inefficient. Infrastructural facilities are in bad shape and its human capital is underdeveloped.

This was why the world Bank estimated that as a result of corruption, 80 per cent of oil earnings benefit only one per cent of the population. This is why foreign observers refer to the co-existence of vast wreath in natural resources and extreme personal poverty in developing countries like Nigeria as the resources curse.”

In his opinion report, a legal practitioner, Barrister Eze Onyekpere quoting a portion of fiscal Responsibility Act:

“Government at all tiers” shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonably long period of amortization.

He explained in 2010, the sum of N132.31 billion was expected from Signature Bonus and nothing came from that source at the end of the year. The circumstances leading to the failure of the accrual of that source of revenue is closely linked with the uncertainties surrounding the reforms articulated in the Petroleum Industry bill which is still pending before the National Assembly.

To still include Signature Bonus as a source of funding the deficit in 2011 when the challenges militating against its realization have not been resolved may amount to mere wishful thinking. NITEL’s privatization appears to have gone awry as the preferred bidder and core investor has been unable to raise and pay the initial deposit of 30 per cent of the bid sum. This makes it unlikely that the proceeds expected from the privatization will accrue.

He explained further that the International Bond of N75bn, which was included as a source of deficit funding in 2010 did not materialize in the course of the year although steps have been taken to float the bond. Considering that the year 2010 is ended and government has started the process of floating this bond, which would materialize in 2011, it would have been more appropriate to list International Bond as a source of funding the 2011 deficit rather than leaving it for 2010, a year that has already ended.

“Domestic borrowing is listed as a source of funding the deficit to the tune of N865.24billion in the Revenue and Expenditure Framework1.  At N150 to a dollar, this amounts to $5.768bn.  But N865.24bn exceeds the recommendation of the DSA 20112 on money to be raised from domestic sources. The DSA recommends a maximum sum of N639billion to be borrowed from domestic sources and $2.84billion from external sources. Although, this is less than the N1,346.58 borrowed in 2010, the implication is that the public sector will continue its crowding out effect on access to credit by the private sector and banks will continue to be risk averse.

However, this figure on domestic borrowing in the Revenue and Expenditure Framework do not tally with the figures stated in the Borrowing Programme for 2011 which is also part of the Documents Accompanying the 2011 Budget to the National Assembly. The Borrowing Programme states in page G-2 that:

“The planned borrowing from External and Domestic sources by the Federal Government during the 2011 Fiscal year is as following: External Sources-US$1,209million; Domestic Sources-N64.54 billion”

The Borrowing Programme further stated that an additional N370.37billion would still be raised during the year for the purpose of refinancing maturing bonds and restructuring of short term instruments. There is the need to reconcile the figures in the Borrowing Programme and the Revenue and Expenditure Framework.

Further, the total external debt figures in the Borrowing Programme do not seem to tally with the reality of facts. The House of Representatives is reported to have approved the request for the procurement of $3.7billion loans which are contained in the 2010 Borrowing Programme.


Source : Guardian