Two weeks ago, the federal finance minister was reported to have argued against further borrowing by her government. Speaking at a business forum in Abuja, Mrs. Kemi Adeosun apparently said that “We cannot borrow any more, we just have to generate funds domestically enough to fund our budget and mobilise revenue to fund the necessary budget increase”, or some words to this effect. At about the same time, in a section titled “Deteriorating public finances in Sub-Saharan Africa”, the World Bank (“Global Economic Prospects – A Fragile Recovery – June 2017), described the region’s “interest-to-revenue ratio” as “sustainable, helped by the high share of concessional borrowing”. Nigeria, however, was a notable outlier, with the “federal government’s interest-to-revenue ratio (rising) from 33 percent in 2015 to 59 percent in 2016”.
Thus, almost overnight, the domestic discussion around the Buhari administration’s burgeoning appetite for borrowing has moved to the fore and centre of national concerns. Interestingly, in making this transition from a staple of “experts’” rumination to the top of the chatter across speakeasies’ and shebeens’, this theme looks to have dropped a familiar denominator: the size of the economy. Some have even argued that it is the absence of this denominator from popular discussions of the economy’s domestic debt burden that has made the latter topical. In essence, our large (and growing) public debt no longer looks manageable without the now familiar reference to the (large and compensating) size of the economy.
There is a pachyderm in the room, all right. Unsure, at this point, whether it is a hippopotamus, rhinoceros, or an elephant, there is no doubt that it is large and its eventual effect potentially ruinous. True, we are back to that point, 12 years ago, when similar worries over the sustainability of the country’s external debt burden persuaded the Obasanjo administration to negotiate a Policy Support Instrument with the Paris Club of creditor nations that included “debt cancellation estimated at US$18 billion (including moratorium interest) representing an overall cancellation of about 60% of its debt to the Paris Club of around US$30 billion”.
We are also at the point, 10 years ago, where the threat of “fiscal dominance” was a sufficient worry to persuade government to strengthen the Central Bank of Nigeria (CBN) by granting it both goal and tool independence. Fiscal dominance arises when poor fiscal policy leads to a huge debt burden (as in our present circumstance), and when worries over the cost of servicing the domestic portion of this debt is big enough to prevent the monetary authority from raising interest rates to deal with exchange rate pressures (again, as is currently the case with the CBN’s rate-setting mechanism).
Within this context, ought we to worry that estimates of central bank lending to the federal government over the last 2 years is circa N7tn? Does it matter that the Central Bank of Nigeria may have become the single biggest holder of sovereign domestic debt instruments? And how? Besides, with arguments at the beginning of the year that by the second quarter, domestic price increases should soften (as the base effect from structural price increases in the first quarter of 2016 wore off) proving heroic, should we worry that sticky domestic prices are now simply the consequence of too much money chasing after far fewer goods?
Onerous, though, all of these burdens may be, they pale in comparison with the picture that emerges when we bother to confront the fact that all that we have borrowed in the last 24 months have not been used to boost the economy’s productivity, nor increase its production capacity. Instead, as I recently argued, under the last two federal administrations, the economy’s supply curve has slipped leftward inexorably and very sharply. We are then confronted with the prospects, over a medium-term that will soon be on us, of paying down both principal and coupon on this borrowing binge off a near comatose economy.
Would it matter that by the time we start re-paying these debts global interest rates may have resumed their northwards movement? Maybe not for “concessional borrowing”. Still, a less accommodative global monetary policy space will take its toll on this economy in months to come.