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INTERESTED IN NIGERIA CRUDE OIL
Friday, 10 May 2019 23:49

NIGERIA'S DEBT SERVICE OVER 50% OF REVENUE

Written by Femi Ogunkolati

 

Nigeria's  Minister of Finance, Zainab Ahmed, in a act of wanton financial abracadabra and using as justification the metric established in the Fiscal Responsibility Act has said that Nigeria’s debt which currently stands at about N24.3tn is sustainable. She said that the country’s debt, which is about 19% to Gross Domestic Product(GDP), is low if compared to the likes of Ghana, Brazil, South Africa, Egypt and Angola. Quite why she chose  this seemingly random group of countries to base her comparison is unclear.

She  went on to say, “In the borrowing, we are still at 19 per cent to GDP; our borrowing is still low. Fascinating that the Nigerian finance minister seeks to rely on the one metric that has the least relevance whilst choosing to ignore far more ominous signs of an impending debt trap. Nigeria’s total debt stock as of December 31, 2018, stood at N24.387tn. The figure swelled by 12.25 per cent  year on year. Nigeria’s 2019 budget, presented by President Muhammadu Buhari in December and yet to be approved by lawmakers, envisaged the government issuing about 1.65 trillion naira ($4.6 billion) of new debt, half of which would be in foreign currency. The debt in real terms rose by  N2.66tn from December 31, 2017, to December 31, 2018. 

Director General of the DMO, Patience Oniha, said the funds were borrowed to fund projects, to finance budget deficit and to refinance maturing obligations. Particularly, some foreign debt was used to refinance treasury bills because of the short tenor of the bills, adding that borrowing from abroad had also helped to stabilise the local currency in the last two years. 

Concerned by  what it deems as the reckless accumulation of debt, the International Monetary Fund (IMF) has consistently warned Nigeria of the consequences, particularly of the servicing costs which could consume substantial amount of government revenues. The Nigerian authorities have long viewed the IMF as part of the problem and blame them for the catastrophic Structural Adjustment Program (SAP) which was foisted on Nigeria in the 1980’s and was pretty much responsible for wiping out the Nigerian middle class. Indeed the IMF have painted a  precarious picture of the nation’s economy.  According to the IMF, Nigeria spends more than 50 per cent of its revenues on servicing debts, a situation that does not give room for other necessary expenses.

The IMF have cautioned that " Although Nigeria’s debt to Gross Domestic Product remained low at between 20 and 25%, Nigeria spends a high proportion of its revenue on debt servicing as a result of low revenue generation". The Finance Minister has belatedly acknowledged this,  stating, “What we have is revenue problem and when revenues perform at the aggregate rate of 55 per cent, it hinders the ability to operate in our budget".

 Despite the growing clamour and the distinct possibility of Nigeria being sucked into a debt trap, the finance Minister is still an advocate of maintaining the ‘fuel subsidy’. She said that the current subsidy arrangement which was in the form of under recovery by the Nigerian National Petroleum Corporation  (NNPC)was far better than what was practised when oil marketers were paid fuel subsidy directly. She maintained it is more cost effective, cheaper and easier to monitor . Though  on the other hand she accepts they  have not found a formula that works for Nigeria and the subsidy  is still work in progress .But “ there is no intention to remove fuel subsidy at this time.”

Though the Petroleum Minister Dr Ibe Kachikwu seems to think that the subsidy regime currently being practised is effectively subsidising Nigeria’s neighbours as consumption jumps from 35 million litres per day to 54 million litres in the space of a year. He calculates the cost of subsidy as USD$3.85 billion per annum or almost a quarter of total net receivables of the government for the year.

 

Fuel subsidy has always been a contentious and complex issue in Nigeria. It has created scandals, encouraged smuggling, corruption, inefficiency and diverted resources from critical areas of the economy. Whilst most economic commentators advocate the removal of the subsidy, there will be winners and losers. The Finance Minister in her interview after the spring meeting in Washington with the World Bank and the IMF seemed to suggest that the fuel subsidy would stay in Nigeria until the Government could structure adequate buffers to deal with the effect of the removal of subsidy, including an incremental approach.

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