Debt servicing may derail 2018 budget

Lekan Sote

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President Muhammadu Buhari presented the 2018 budget proposals to a joint session of the Senate and the House of Representatives amidst claps of applause and hums of disagreement last week Tuesday. In real terms, the N8.612tn “Budget of Consolidation” is N5.74tn if you consider the roughly 33 per cent devaluation of the naira – from N199 to N305 to the dollar – in May 2016.

One positive of the budget, however, is the plan to reduce the more expensive domestic debt to favour relatively cheaper foreign loans. This reduces the burden of debt servicing, and free bank credits for business. But the resultant use of foreign exchange to service foreign loans hikes exchange rate. You can’t win it all.

When foreign exchange becomes less available, and more expensive, the law of supply and demand will apply. It leads to further depreciation of the naira, a ploy by a sly government to devalue the national currency by other means.

As you know, when supply is low, and demand is high, the price of a commodity spikes. A visit to Alade Market in Lagos will convince you that the US dollar is not exchanged at the N305 rate decreed by the Central Bank of Nigeria.

By the way, Nigeria’s domestic lending market is hostile to local businesses because of the steep interest rate floor which the Monetary Policy Committee of the CBN fixed at 14 per cent. When you add the spread by the banks, interest rate goes out through the roof.

Of course, everyone knows that scarcity of funds is a result of government’s use of Treasury Bills and other financial instruments to remove what it calls excess liquidity. Again, lower supply, relative to demand, raises the cost of capital.

When you add the steep interest rate to the 12.4 per cent inflation rate threshold of the 2018 budget, you will discover that the odds are seriously stacked against domestic business entities; their cash flow will buy less than the inventory needed to run their operations.

No soothsayer needs to convince you that Company Tax accruable to government is going to be low. The Senate President, Bukola Saraki, observes: “The economy will not grow despite the current efforts by the Federal Government to revive it, if the interest rate charged by banks remains high… It is inconceivable that businesses can survive on a 25 to 30 per cent interest rate regime.”

Accountants and financial advisors often suggest that a loan provides leverage for a company to trade with other people’s money, and increase its profit. However, such leverage could spell doom to a company whose business is not thriving.

Did you know that with the Debt Management Office report that current total debt portfolio is N19tn, and government’s plan to spend N2.014tn to service debt, acquire additional N1.699 trillion loans, and pay N220 billion into the sinking fund to retire some debts, Nigeria is not quite making plans to grow its economy soon?

When you deduct for the N2.652tn capital expenditure, and the approximately N2.234tn  earmarked for debt servicing, whatever else remains in the 2018 budget goes into overheads. It’s easy to deduce that Budget 2018 is a Direct Expenses conspiracy that will not help the economy achieve the projected 3.5 per cent growth.

Government planners should have gone with (albeit unpalatable) 1.9 per cent growth rate projected by the IMF for 2018. Even then, the economic growth is not organic, as it is limited to the petroleum sector, an essentially upstream business.

The projected total proceeds of N11.983tn expected to go into the federation account, out of which N6.387tn should be oil revenue, may not be realistic after all. Recall that government admitted that there was a revenue shortfall of about 14 per cent in 2017.

Capital projects will even fare worse because a portion of the N2.652tn earmarked for capital projects will be going into settling debts owed to contractors. This booby-trap, euphemistically described as statutory transfer, is a first line priority charge to the Consolidated Revenue Fund of the Federation.

Catherine Patillo of the International Monetary Fund also says that two-thirds of Nigeria’s tax revenue go to service debts. Her colleague, Tobias Adrian, avers, “Despite low interest rate, (foreign) debt servicing… has also created new financial risks.”

The cash crunch may get worse with renewed threats of economic sabotage from the Niger Delta militants and the consequent threat to oil revenue. The Organisation of Petroleum Exporting Countries has hinted it may impose production cuts on Nigeria. And you may have heard that oil glut already left cargoes of Nigeria’s crude oil unsold.

Inflation, a depreciated naira, lower than expected revenue, debt servicing, and expected delayed passage of the Appropriation Bill by the National Assembly will lead to paucity of funds for Budget 2018’s capital projects. Government’s intention to transfer uncompleted 2017 capital projects to 2018 is another way of admitting paucity of funds.

The shortfall of revenue expected from the non-oil revenue generating agencies of government will not be reversed soon. The requirements of the Fiscal Responsibility Act will not persuade them to make their statutory remittances.

Despite reports that Nigeria moved 24 notches up the World Bank’s Ease of Doing Business Report partly due to ease of paying taxes, the infrastructure cannot guarantee the profitability for businesses to consistently pay taxes.

Also, the tea leaves aren’t reading “optimistic” for the sale of government assets either. The “lemon” power generating and power distributing companies that government sold to private investors are turning out to be bad deals.

It is however commendable that most of the capital spend is going into electricity, roads, housing, railways, waterways, and irrigation resources. It may be too little, even too late; it is however in the right direction. If there is a will to do the needful, a way will be found sooner or later.

However, what should have been the preferred path to Nigeria’s economic emancipation is not in the current slow, middling, debt-acquiring, and debt-servicing approach. This takes good money away from the economic system.

The way out is in a rather radical, even rash, approach of substantially dipping into the nation’s foreign reserves to provide adequate infrastructure to galvanise the sagging economy. There is no danger of depleting the foreign reserves in one fell swoop; it takes some time to commission and complete turkey projects.

And those who prefer the private sector approach to providing infrastructure must be reminded that local investors who take the infrastructure gauntlet will still approach the CBN for foreign exchange, unless they have foreign partners with the purse of royalty.

The idea of using the foreign reserves to acquire infrastructure, instead of servicing debts, is more tempting with the thought that the foreign loan that Nigeria is about to take may be funded from Nigeria’s own foreign reserves with J.P. Morgan Chase, Credit Suisse, and BNP Paribas.

That’s like entertaining Abu with his own money, or “Kaf’owo Abu s’Abul’alejo,” as the Yoruba would put it. It’s not different from the way government issues Treasury Bills to borrow its own money from banks.

Budget 2018 will divert funds for capital projects into debt servicing, further depreciate the naira, prevent businesses from accessing bank credits, and not much grow the economy.  No more, no less!

– Twitter @lekansote1

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