Nigeria : With squandered opportunities come heavy borrowing

With the safety blanket of oil ripped off, Africa’s largest economy will be looking to borrow N1.8 trillion in order tooffset the risk of an economic recession.

A revenue projection of N820 billion from oil in the 2016 budget, means the oil part of the budget slumped by half from a projection of N1.64 trillion in 2015. The slump is attributed to the plummeting price of crude in the international market which was prompted by an oil glut met with low demand.

Occasioned by this, the oil dependent nation is left with no option but to do some heavy borrowing to cushion a budget deficit which runs into almost N2 trillion.

“In the past, we had the means but not the will. Now we have the will but we no longer have the money to invest,” Kemi Adeosun said at an event held recently.

The Finance Minister, a member of President Buhari’s economic team, then highlighted the Government’s plan to reset the nation’s economy with structured borrowing, targeted investment and diversified growth, which had become imperative for a post-oil dependence era.

The Minister saidthe N1.8 trillion loan, which comprises a domestic borrowing of N984 billion and foreign borrowing of N900 billion, will be invested in the priority areas of Transport, Roads, Housing, Power and Health.

“We are committed to a countercyclical budget expenditure model. This has been a success in other nations, offsetting the risk of recession and creating an economy which is not based on either fragile consumer spending or over-reliance on oil,” Adeosun said.

In her presentation, Adeosun set out the four pillars of the economic plan which constitute achieving a real GDP growth of 4.2 percent in 2017; reducing the cost of governance and strengthen institutions; increase Government expenditure on infrastructure; and fund the budget deficit.

Diversification of the economy, growth of the non-oil sector, improvement in key socio-economic indicators, as well as jobs and wealth creation are targeted outcomes of strict adherence to pillars of the economic plan.

The OPEC member is looking to sell Eurobonds, apart from loans from multilateral agencies, as an avenue to source for funds, Adeosun said.

Questions had trailed Government’s plan to borrow a whooping N1.8 trillion at a time where international organisations like the International Monetary Fund (IMF) hold strong reservations on the Central Bank of Nigeria’s monetary policies.

“If we are borrowing almost 2 trillion naira we may need to source for some of that from the IMF, but you can be sure that this would never happen if the Government continues to shrug off the advice of the organisation to let the naira float,” a senior economist, who wishes to stay anonymous said to BusinessDay.

Bismark Rewane, Chief Executive Officer of Financial Derivatives Company, had also raised questions on the borrowing plan in an earlier conversation with BusinessDay.

“If we are going to borrow almost N2 trillion, where is the shortfall going to come from?… These are the things we should be talking about,” Rewane said.

However, the Finance Minister said that Nigeria might use money set aside for funding joint venture projects with foreign and local oil firms to make up any shortfall in the 2016 budget if government revenue projections are not met.

Cash calls would suffice for a Plan B if revenue projections fell short, according to the minister. Cash calls are the government’s financial obligations to joint venture projects between state oil firm NNPC and international and local oil companies.

“If the revenue doesn’t come in we have got 1 trillion (naira) in the budget for cash calls. We will not fund those cash calls from the budget.”

“We will force those cash calls out into the modified carrier arrangement and we will release that money back into the federation account. That’s where the fiscal buffer sits,” she said.

Digressing from the bane of sustained arguments above, experts who participated in a BusinessDay survey, predict that government’s spending for the year- the highest in the history of the country- is bound to stifle private spending in areas where Government purchasing is high. This scenario, they refer to as “the crowding out effect”. Over subsequent paragraphs, this effect is diagnosed.

PricewaterhouseCoopers (PwC), in a recent report on “Nigeria beyond oil” highlighted that “To implement the budget, the FG would need to look inwards to the real sectors of the economy such as agriculture, retail, and Information Communication Technology (ICT) these sectors in the short-to-long term are key to boosting other sectors like manufacturing.”

Flowing from the above, studies reveal a significant impact of credit to private sector on the real sector of Nigeria. This therefore suggests that the performance of the real sector is greatly influenced by credit to private sector. But as a crowding out effect looms due to projected government spending, economy experts establish a link between government spend and growth of the real sector.

The crowding out effect is an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending, according to Investopedia.

“Government will be favoured at the detriment of the private sector in assessing deposit-taking institutions loans. This is because Government borrowing is safe and a less risky investment. This may lead to the private sector having to pay premium interest rates,” the experts asserted.

Deposit-taking institutions in particular are well recognised for performing the crucial role of sourcing finance to support private sector consumption and investment in Nigeria.

Availability of investable funds plays a vital role in financing economic projects and activities that would promote economic growth and development. This is because access to credit enhances the productive capacity of private firms and enhances their potential to grow.

Irrespective of all said and done, it is most appropriate to conclude with the words of Adeosun, “With courage, discipline and open minds we begin our journey to build an economy whose resilience is not controlled by oil prices, but by our determination to reset the economy and finally give our people the chance they deserve.” Fasten your seat belts and make of the ride whatever you wish.

LOLADE AKINMURELE