Nigeria’s fiscal rhetoric
Nigeria’s finance Minister Kemi Adeosun, and the head of the country’s Debt Management Office (DMO) Abraham Nwankwo reiterated, separately, two days agothe arguments that have been in made in support of the government’s fiscal direction.
Adeosun, in London, during the roadshow for the proposed $1 billion Eurobond was quoted in ThisDay, saying“we have a headroom, and we are very fortunate in that regard we have a very low debt to GDP ratio”. Nwankwo, in a rather expansive article on the back pages of ThisDay and the Leadership, made related arguments, supporting the case for borrowing.
In addition to the low debt to GDP ratio argument, the government has also sought to distinguish itself from previous administrations, arguing that it proposes to expend 30 percent of the national budget on infrastructure, compared to 10 percent in the past. (Never mind that this 10 percent ratio refers to the election and dwindling oil prices years of 2014 and 2015, which I have argued before were two lost years nationally). According to Nwankwo, “the debt would support economic growth and reduce unemployment by boosting aggregate demand”. He argued further, “the starting point is to note that the country has enormous idle capacity; therefore a well programmed and targeted debt capital injection will have high capital output ratio”.
This narrative therefore makes a compelling case for continued borrowing, especially foreign borrowing. However, I have three main concerns. First, there is no evidence that the touted capital expenditure of 30 percent is dramatically different from what happened in the past. There is therefore no assurance that “the targeted capital injection” will be realised, as intended by Nwankwo.
Second, the Eurobond and loans from the African Development Bank (AfDB) are part of the 2016 deficit plan of N2.2 trillion, and not some kind of dedicated funding for capital projects. So, these loans are not only fluid, butthe suggestion misleading. In the plan, therefore, capital expenditure is not expected to be near the N2.2 trillion deficit expected. I do not see that as a focus on capital expenditure.
Third, which is the reference GDP? Is it the 2014, 2015 or current GDP? And whether it is in US dollar or Naira terms. The answer to whether Nigeria has a low debt to GDP ratio lies in the reference GDP. The current GDP is considerably less than what it was at the end of 2015, compounded by the fact that the economy is contracting. Moreso, as I argued last week, the size of the economy does not pay back debt, revenue does. Indeed, Nwankwo admitted in his piece that “existing high debt service to revenue ratio” is high.
Now, my main argument today is a reiteration of arguments I have made in the past. Notwithstanding the progress made, none of theses measures and rhetorichas changed and will lead to changes in the fiscal structure of the economy. The fiscal structure is the major problem and the hindrance to our prosperity and development. It is the reason we have struggled to diversify our exports, why our productivityis low, and corruption rife.
The summary of this fiscal structure is that the federal government, which erroneously owns everything under our soil, sells oil from the Niger Delta, collect the revenues, monetises same and distribute among 36 States and 774 local government areas. Following which, all tiers of government, including the federal government expends virtually all on salaries and overheads. If 30 percent is indeed for capital expenditure in the federal government budget, it is naïve to think we have anything close to 10 percent on average in the States and the local government. Whereas, the 30 percent is the only form of expenditure for which wemere mortals in the private sector benefit from.
Admittedly, the government is doing something differently from the past in its pursuit of tax revenues. However, every sensible economist will tell you that this is a wrong time to embark on fiscal consolidation on the basis of taxation.
Therefore, all that has been done so far, is tweak here, incremental changes there, and there has been no fundamental changes to our fiscal structure and the way we are governed. These choices are convenient, and will not lead us into prosperity. Not only is the structure inefficient, and only masked by high oil prices sometimes, it is inequitable. Our current fiscal structure, as many have argued in the past, places greater premium on uniformity – in this case, that of poverty – than diversity.
In essence, each of Nigeria’s underlying economic problem over the years, can be traced to the most myopic of all structure of governance imagined. If productivity in the private sector is low, it derives from huge infrastructure gap and a governmentbureaucracy and style of governance that stifles investment, rather than support economic growth.
In conclusion, bear in mind that in any developing economy, especially in a large populated one like ours; thescarcestproduct is capital. If capital is scarce, and expensive, then it must reflect in our economic behavior and the way we treat capital. Over the years, oil revenue was supposed to be the capital we leverage for production, prosperity and development. In the same period, it has been used for consumption by all tiers of unproductive governance. It is that structure that needs to change. Therefore, no matter the good intentions, and the touted prudence, without complimentary fiscal reforms, we will soon realise that we have not started our journey to prosperity. I thank you.
Ogho Okiti