No prospect of transformation without government borrowing
We saw the observation by Babatunde Fashola, the federal minister for power, public works and housing, at the recent gathering of the Nigerian Economic Summit Group in Abuja that the private sector has limited capacity to cover Nigeria’s huge infrastructure gap. For the power sector alone, the annual investment requirement could well be as much as N3trn. Fashola’s realism is welcome, and underpins our view that the FGN, with partners, has to play a leading role as borrower.
The latest implementation report from the Budget Office of the Federation tells us that FGN capital expenditure reached N1.44trn in 2017. The table is headed spending as at December 2017 although the detail itemizes expenditure in 2017 as well as “2017 in 2018”. There are higher figures in official circulation, notably for the different concept of capital releases. However, we have to remember that not all the capital spending is deployed for the infrastructure, soft or hard. FGN spending is inadequate for filling the gap.
The deposit money banks (DMBs) could play a transformational role. They could be said to have risen to the challenge in the sense that they are sizeable holders of FGN paper and that the FGN devoted 22 per cent of its spending to capital items in 2017 according to the budget office. Such an argument indulges the banks, however: the planners are looking for their direct lending and know well that loan books are predominantly short term in nature.
In their defense, the DMBs do not have the long-term liabilities to match a major expansion of their long-term assets. There are other factors of their own making. The skills are not in place for such an expansion. We have to ask also why their take-up of the CBN’s many credit initiatives has been modest (even though the apex bank is taking most of the risk upon its own shoulders).
The monetary policy committee has long been calling for the DMBs to diversify their loan books. The calls have been made for the benefit of SMEs and productive sectors of the economy rather than the infrastructure but are nonetheless instructive. They have sought to employ moral suasion and have mooted schemes based around banks’ capital reserve requirements in an effort to change lending behaviour.
The response of the DMBs has been muted. A different approach would be mandatory credit guidelines set by the regulator (the CBN). Historically this has not delivered in Nigeria. It was successfully deployed in East Asia in the 1960s and 1970s but is decidedly out of fashion.
Foreign investors are would-be partners of the FGN in addressing the infrastructure gap. FDI (gross) has slowed to less than 1 per cent of GDP (or US$3.5bn in 2017), and is directed at manufacturing, telecoms and other services. FPI on the same basis amounted to US$8.5bn last year, and was on a rising trend in the New Year. The main attraction has been FGN paper. What is missing other than the FGN’s maiden sukuk is long-term and ring-fenced borrowing specifically for the infrastructure. A possible model is KenGen, the Kenyan electricity generator that is listed on the Nairobi Stock Exchange and a regular issuer of local currency-denominated bonds.
These partners have a role to play but the onus ultimately rests with the FGN. Some of Nigeria’s newer development partners such as China and Turkey have become more involved, and could become more so if the FGN provides guarantees. This cannot replace direct borrowing, however.
Multilateral agencies, the international financial media and sundry commentators warn of the rising indebtedness of African governments, seen most recently on the news that the FGN has the go-ahead from the legislature to raise US$2.7bn from fresh Eurobond sales. They have identified a clear trend, and cite the extreme case of Mozambique where the debt burden is now greater than that preceding relief in the 1990s and early 2000s granted under the Heavily Indebted Poor Countries (HIPC) initiative. The warnings are valid but we should not forget that they are delivered from the comfort of the developed world where the hard and soft infrastructure are already in place.
We have to address a broader objection, not always spelt out in full, that some sovereigns such as Nigeria should cap their borrowing because the monies will be poorly deployed (or worse) and the development of the economy will go into reverse. The experience of the 1970s and the 1980s warrants this thinking. Yet the East Asian “miracles” were made possible by very heavy state borrowing to fund education and the transformation of the infrastructure. If Nigeria is to migrate in developmental terms, it has to go down this route.
If the FGN was able to collect taxes equivalent to, say, 20 per cent of GDP, it would not find itself caught in this dilemma. The vice-president said last week that the ratio has improved from 6 to 8 per cent. Yet the culture of paying tax will change slowly and non-oil revenues cannot fill the vacuum in a hurry. This has been recognised in the draft 2019-2021 Medium term expenditure framework. For now, FGN borrowing has to fill a large part of the infrastructure gap, and we have to hope for a signal improvement in delivery.
GREGORY KRONSTEN
Kronsten is the Head, Macroeconomic & Fixed Income Research, FBNQuest Capital Ltd.
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