The Federal Government has proposed an ambitious budget of N6.08 trillion for the 2016 fiscal year. The budget has N1.84 trillion deficit financing targeted mainly at infrastructure development to be funded through borrowing. The Debt Management Office (DMO) which is constitutionally empowered to explore local and international funding sources to see effective funding of the budget, needs government backing to achieve this feat, writes COLLINS NWEZE.
That President Mohammadu Buhari presented a proposed N6.08 trillion 2016 budget to the joint session of the National Assembly, is no longer news. What far thinking stakeholders are looking at is how the government will finance the budget to achieve its developmental objectives and put the economy right on path of sustainable growth.
The budget focuses on funding infrastructure, which entails the provision of tangible assets like housing, power (electricity), transport, education, communication, and technology, on which other intangibles can be built. It also seeks to protect the poor with a social safety net including scholarships and food provision in schools.
The budget has revenue projection of N3.86 trillion, with oil related revenues expected to contribute about N820 billion or 21 per cent, while tax collection and public expenditure reforms in Ministries Departments and Agencies (MDAs) will account for the rest.
The budget is clearly consistent and is part of the three-year Medium Term Expenditure Framework (MTEF). The budget seeks to stir Nigeria off the path of oil dependence by focusing on non-oil revenues by broadening the tax base and improving the effectiveness of the country’s revenue collecting agencies. However, the renewed drive to boost non-oil revenues may not be sufficient to cover the gap from lower oil revenues.
And that is where the Debt Management Office (DMO) led by its Director-General, Dr. Abraham Nwankwo steps in. The budget has a deficit financing that requires an additional N1.84 trillion for capital expenditure, which must be funded through borrowing from local and international markets by the DMO.
The capital expenditure represents over 30 per cent of total expenditure while Nigeria’s debt profile is expected to hit 14 per cent of Gross Domestic Product (GDP). Dr. Nwankwo said Nigeria’s low debt to GDP ratio means the country can borrow more to fund budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.
The DMO is expected to source the additional N1.84 trillion for capital expenditure, N984 billion of which will come from local investors and N900 billion from international investors.
In a report titled: ‘Budget 2016: Changed budget, Changed People, Changed Leaders’, Managing Director, Financial Derivatives Company Limited, Bismark Rewane said the spending and revenue estimate is based on the Keynesian model of countercyclical spending to stimulate growth.
Rewane said significant spending on infrastructure and security will complement reforms in agriculture and solid minerals.
He said budget deficit of N2.2 trillion is projected which constitutes 2.16 per cent of Gross Domestic Product (GDP), and is considerably higher than the deficit of 0.79 per cent of GDP in the 2015 budget.
Michael Albert, an economist based in Abuja, said if Nigeria is to borrow to fund the budget, the DMO is going to be responsible to perfect the borrowing process to ensure efficiency and positive feedback from investors. He said the debt office should be strengthened to enlighten the public on the benefits of such borrowing to the economy.
“We have chances of borrowing more to fund capital projects. It better to borrow to fund projects and allow the people enjoy benefits of democracy that come with effective execution of identified and financed capital projects. Although saving to fund such projects is another option, but is not feasible at this period of low crude oil prices,” he said.
For Albert, government is expected to enlighten the public and educate stakeholders on what the country stands to gain by borrowing to fund capital projects.
“I expect the government to ask the DMO to source for the funds because the debt body has the expertise and experience to carry out the task. Besides, both domestic and external debts for Nigeria currently stand at N12.11 trillion which gives us the needed room to borrow more,” he said.
Infrastructure needs
The Africa Infrastructure Country Diagnostic (AICD) Report for 2011 estimates that Nigeria requires sustained spending of $14.2 billion per annum over the next decade in order to address the infrastructure challenge.
The above scenario, clearly shows that as a result of the huge funding requirement for present and future infrastructural development and its attendant impact on survival and growth of businesses in Nigeria, traditional funding methods can no longer suffice as the traditional fund providers, different levels of government, do not have such resources at their disposal. Therefore debts may simply be the solution to bridging the infrastructure funding gap.
Benefits of borrowing
The DMO captures the benefits of using debts to fund projects more succinctly. “If you want to build a railway from Lagos to Aba, there are two options. Firstly, you can save up the money for 10 years, before starting the project. The second option is to borrow and build the railway, and within 10 years, generate enough revenues to offset the debt,” DMO’s head, Policy Strategy and Risk Management, Joe Ugolala said.
He sees the second option as more plausible as it captures the inherent benefits of borrowing to build infrastructure that is in the interest of the economy. He explained that for one to borrow, there must be that inherent capacity to repay, whether the debt came from internal or external sources.
He explained that the Federal Government has the capacity to borrow from outside to fund budget, and support specific projects including infrastructure.
He said that despite challenges with external and internal economic volatility, the DMO is committed to supporting opportunities for employment generation. “We are more than ever committed to doing what we know how to do best, democritisation of public debt. We need to use debt to tackle poverty. We are committed to employment generation. Now that things are tight, we need to show that we are resilient people. We need to reassure ourselves that we have what it takes to achieve a sustainable growth,” he said.
He called for the democratisation of public debt management system, adding that Nigeria’s debt to Gross Domestic Product (GDP) ratio is still low. “The rebasing of the economy shows it has grown rapidly, and that the larger the economy, the larger the debt. There must be optimum relationship between the equity and debt,” he said.
Ugolala, said there is so much demand for infrastructure because of its immense benefits to the economy. Speaking on external and domestic borrowing guidelines for the Federal and State Governments and their agencies, he explained that the National Assembly has a role to play in government’s borrowing plan.
Firstly, the National Assembly is to approve the borrowing programme for every succeeding year and approval of overall limits, for the amounts of consolidated debts of the Federal, state and local governments, to be set by the President on the advice of the minister.
Other borrowing
guidelines
The National Assembly is expected to grant prior authorisation in the appropriation or other Act or Law for the purpose for which the borrowing is to be utilised. “The Federal Government may borrow from the capital market, subject to National Assembly’s approval. Government at all tiers shall only borrow for capital expenditure and human development on concessional terms,” the debt guidelines said.
Any government of its agencies can only obtain external loans through the Federal Government and such loans must be supported by Federal Government guarantee. “No state, local government or federal agency shall, on its own, borrow externally. State governments and their agencies wishing to obtain external loans shall obtain Federal Government’s approval-in-principle, from the Federal Ministry of Finance,” it said.
However, the borrowing proposal must be submitted to the Federal Ministry of Finance and the DMO for consideration, and must state the purpose for which the borrowing is intended and its link to the development agenda of government.
It must also state the cost-benefit analysis showing the economic and social benefits to which the intended borrowing is to be applied; cash-flow statements of the Ministries, Departments and Agencies (MDAs), to ascertain their viability and sustainability. There must also be copies of the state’s Executive Council’s approval and the resolution of the State House of Assembly.
Also, all banks and financial institutions requiring lending money to the Federal, State and Local Governments or their agencies, shall obtain the prior approval of the Minister of Finance and shall state the purpose of the borrowing and tenor.
Economy diversification
Dr. Nwankwo said diversifying the country’s source of revenue will make its public debt profile more sustainable. “So, it is an appreciation from the point of view of those global financial institutions that the Nigerian economy is moving to the next level and has been reclassified by the International Monetary Fund (IMF) to borrow,” he said.
He allayed fears that Nigeria’s delisting from the Global Bond Index by JP Morgan will harm the economy. He said there was no cause for alarm and that the economy is still attractive to investors despite the JP Morgan action. He said should Nigeria need money from both local and international investors, it will get it.
Dr. Nwankwo said there is nothing wrong in borrowing, and that as a nation, Nigeria can borrow to fund budgets or carry out key developmental projects. He called for the democratization of public debt management system adding that Nigeria’s debt to Gross Domestic Product ratio is still low.
On the economy, Dr. Nwankwo said government has no choice than to diversify the economy away from oil. “There is still a broad resources base for diversifying and industrialising the economy. With appropriately structured financing, Nigeria should be able to programme a trajectory of long-term fiscal stability and self-sustaining growth,” he said.
Drop in oil prices
Dr. Nwankwo said with the drop in oil prices, government has no choice than to diversify the economy away from oil. “There is still a broad resources base for diversifying and industrialising the economy. With appropriately structured financing, Nigeria should be able to programme a trajectory of long-term fiscal stability and self-sustaining growth,” he said.
He said the debt body has been helping the country to manage its debt effectively. For instance, it commenced the implementation of the strategic objective of assisting the states of the federation to develop debt management institutions and capabilities since the last quarter of 2007, as part of its five-year strategic plan.
The goal was to forestall a relapse into debt un-sustainability, as was experienced by the country before its successful exit from the Paris and London Club debts over-hang. The strategy was to redress the very weak debt management institutions, structures and practices at the state levels towards a more effective coordination of public debt management.
The DMO has also established Domestic Debt Data of States of the 36 states, with framework in place for regular updates. The debt office has also helped in the passage by some states within the federation, the Fiscal Responsibility/Public Debt Management Laws to govern debt management and engender fiscal discipline.