With her continued dependence on oil as the main stay of her economy, analysts fear that market volatility of commodities may once again put Nigeria on a familiar path; BENJAMIN UMUTEME writes.
There have been several warnings from both within and outside Nigeria that the country’s debt was growing at a disproportional rate to its income.
At the just-concluded World Bank/IMF Spring meeting in Washington DC, USA, the international finance bodies reiterated the call on the country’s authorities to go slow on its borrowing, saying the percentage Nigeria allocates to debt servicing is unsustainable.
Though Nigeria’s fiscal and monetary authorities have always come out to defending its borrowing plans, it is obvious that the mood swing in the oil market may just about give credence to IMF’s warning.
The IMF report
In its Regional Economic Outlook for Sub-Saharan Africa with the theme: “Recovery Amid Elevated Uncertainty,” released on April 19, 2019, the International Monetary Fund stated that “The global expansion is losing momentum, including in key trading partners such as China and the euro areas; trade tension remain elevated; global financial conditions are volatile and have tightened somewhat relative to October 2018; and common prices are expected to remain low.”
“Debt vulnerabilities remain elevated in some countries. Weakness in public balance sheet also weighing on countries’ external positions, with reserve buffers below levels typically considered adequate in more than half of the countries of the region.
“At the same time, high non-performing loans continue to put a strain on financial systems, while weaknesses in public financial management systems are manifesting themselves in large domestic arrears with potential effects on growth and domestic financial systems.”
The report further stated that policy uncertainty still posed serious drawback to Nigeria’s economic recovery.
The Bretton Woods Institute also stated that there is need for the government to consolidate its revenue base so as to create space for higher capital and priority spending.
Presenting the report, the director, African Department of the Fund, Mr. Abebe Selassie, also urged the federal government to be more efficient in its spending even as he said while a tight monetary policy is important, adopting a unified market determined exchange rate would also strengthen Nigeria’s banking sector resilience.
“Addressing structural challenges to boost diversification business environment, governance power sector reform, public investment efficiency, health and education, financial inclusion, and gender equality,” he said.
The IMF notes that the familiar challenge of addressing human and physical capital investment needs is being complicated by declining fiscal space and less supportive external environment.
Nigeria’s debt challenge
The Fund further underscored the need to accelerate reforms and calibrate the size and pace of policy adjustment to ensure that any shift in policies is consistent with credible medium-term macroeconomic objectives, available finding and debt sustainability.
The Debt Management Office (DMO) in a recent report revealed that Nigeria’s total Public Debt rose to N24.387 trillion or $79.437 billion as at December 31, 2018, representing a year-on-year growth of 12.25 per cent.
The World Bank Group and the International Monetary Fund (IMF) had warned the federal government over its excessive borrowing.
The African Development Bank (AfDB) had also warned that Nigeria remained at moderate risk of debt distress.
With the debt presently standing at N42.39 billion, Nigeria is walking a tight rope as it is determined to continue to borrow for capital project execution.
Meanwhile, the country’s debt profile continues to generate concern despite assurances by fiscal authorities to the contrary that there is no cause for alarm.
Data revealed that a total of N3.49 trillion in domestic debt servicing payment between January 2015 and September 2017 was made by the federal government.
In the same period, the country paid a total of $1.07 billion (about N326.69 billion) to service foreign loans obtained by both the federal and state governments.
This shows the wide gap between the size of the domestic borrowing and foreign borrowing, which has seen the government spend much of its revenues.
Interestingly, most of the payments are for interests incurred on the funds borrowed monthly by the federal government using the instrument of FGN Bonds.
In 2018, N2.2 trillion was spent on debt servicing while N2.3 trillion has already been allocated for the same in 2019.
Oil market volatility
The report said the volatility and uncertainties in the commodity market continued to pose a challenge to policy makers saying that as the recovery continue beyond 2019, it will not be enough to create the much needed jobs.
As an oil-producing country that derives 90 per cent of its revenue from the same, volatile oil prices continues determine how the economy runs.
In mid 2014, the negative impact of volatile oil prices was evident as prices crashed to less than $30 per barrel from a high of $114 causing the economy to go into recession as revenue was almost wiped out resulting recession.
Luckily for the country, an upward swing in the price of crude quickly put an end to the recession.
However, over supply of crude to the market and production disruption continued to threaten the market as prices moved from $86 per barrel down to $50 and back to $60 before moved to about $70 due to trade tension and Iran sanction coupled with the crisis in Venezuela.
All these added to the OPEC cut has made it difficult for Nigeria to meet its 2.3 million barrel per day production quota. The implication is that Nigeria’s budget revenue projection is affected and by extension budget implementation.
Weak saving culture
For a very long time, Nigeria’s inability to save continues to haunt the country as it had to resort to loans to help it recover from recession.
Former minister of finance Mrs Kemi Adeosun repeatedly said “Nigeria will continue to borrow to reflate the economy.” Commenting on the call by the World Bank, she insisted that the federal government “will spend its way out of recession, whether it worked or not is another matter entirely.”
Records over the years showed that after exiting its debt under the tenure of Olusegun Obasanjo as president, Nigeria’s foreign reserve rose to over $40 billion before it rose to over $60 billion under late President Umaru Yar’Adua before once again dropping to less than $35 billion with the Excess Crude Account at about $2.07 billion.
Many analysts have continued to lament that despite the huge amount the country raked in from high price of crude the country failed to save or set aside monies in the ECA.
There have been issues regarding federal government’s inability to save. Speaking to journalists in one of the Federal Accounts Allocation Committee meeting in Abuja, the chairman of the forum of finance commissioners, Timothy Odaah, said it was impossible for the states to set aside monies for the ECA when they had issues that needs money.
Odaah, who also doubled as the Ebonyi state commissioner for finance, when he was reminded by newsmen of the importance of saving for the rainy day, said “we need this money as the rainy day is already here.”
Even former minister of finance and coordinating minister of the economy, Dr. Ngozi Okonjo-Iweala, in her book alluded to the fact that the Jonathan administration could not save as governor kicked against the idea of keeping money aside as they had contending needs that required money.
Treading the same path
The inability of the federal government to save for the ‘rainy day’ in the time of plenty has come back haunt the country.
This was even more evident when the country went into recession as there was nothing to fall back on as the foreign reserve dipped to as low as $22 billion.
Even President Muhammadu Buhari on several occasions lamented the inability of the preceding administration to save in spite of the huge amounts it raked in from crude oil sales.
However, that seems to be changing as the President Buhari-led federal government has made concrete effort to change the narrative.
Every month, it continues to put money into the Excess Crude Account just as it put it last year plunged back monies into the Sovereign Wealth Fund being managed by Nigeria Sovereign Investment Authority (NSIA).
But Prof. Uche Uwaleke of the Nasarawa State University, Keffi, believes over-reliance on oil has become the country’s Achilles heels.
According to Uwaleke, government’s inability to diversify the economy continues to pile more pressure on the country as long as there is oil market volatility.
For the Nigeria first professor of the capital market, seeking new ways to diversify the economy will help the country tackle shocks that might arise from the oil market.
According to him, government should scale down hugely overheads and also seek ways to finance some of its infrastructure projects through private sector investments through Public Private Partnerships (PPP).
The director of the Emerald Energy Institute, University of Port Harcourt, Prof. Wumi Ile Dare, urged the federal government to quickly develop other sources of revenue independent of oil.
He said: “I think this administration is trying to diversify the economy by looking into agriculture, tourism and other sectors. The federal government has been investing in the agriculture sector and this is reducing our import bill on rice, wheat and other imported food items.
“This is a step in the right direction and should be sustained to shore up our non-oil revenue base. We must also work towards adding value to our agricultural produce before export; this is a better way of attracting additional revenue which will insulate our economy from oil price volatility.”
Similarly, Olabisi Onabanjo University, of the Department of Economics at Ago Iwoye, Ogun state, while acknowledging government’s efforts to promote agriculture said “it must be intensified through technologically-advanced method of production which will speed up production.”
“The industrial sector must also be genuinely assisted to expand and improve on capacity utilisation. These, among others, will reduce our dependence on oil and gas revenues,” he said.
For Abuja-based development economist, Odilim Enwuegbara, the government needs to industrialise the economy as “we cannot do this unless we make it difficult for imported goods to enter this country, unless we make the cost of imported goods very high by devaluing the naira. We should place high tariffs on imported goods to encourage local production.”
