Monday, May 29

The Fiscal Responsibility Act (2007) and Nigeria’s Debt Management

At The Maroonsquare Discourse on National Development held on the 28th and 29th of March, 2019 held at the Science Auditorium, Federal College of Education (Tech), Akoka, Yaba, Lagos sponsored by the Rosa Luxemburg Foundation. Onyeisi Chiemeke discusses the Fiscal Responsibility Act and the issue of Nigeria’s rising debt profile. Below is an excerpt of the paper delivered.

It is a fundamental fact of the history of modern economies that certain stimuli are requisite to incentivize any economy. In this regard, every fiscal system requires such stimuli as subsidies or loans to walk on the path of growth. Good examples of such stimuli are subsidies and loans. While subsidies may not be as patent in form as loans, because of its nature of being a government intervention scheme that does not have the string that is associated with loans. Subsidies as we know are cost differentials taken off the table by government fiscal policy in order to maintain equilibrium in the price mechanism with respect to goods and services. On the other hand, loans are credit facilities with added cost of money (interest) by a borrower from a lender. Loans are acquired by both private organisations and public institutions, either bi-laterally or multi-laterally. In some sense too, where loans are obtained by private organisations from foreign financial institutions, national governments may be required to give guaranty that is why sometimes it is necessary to look at foreign reserves of every country with the Central Bank. The health or otherwise of a country’s foreign reserve impacts positively or negatively both on the country’s currency and her ability to trade in the international market. As we write, it is taken that the Nigerian government has had a steady stability in her foreign reserve for the past 3 years which as we speak according to the Central Bank of Nigeria (CBN) stands at $43,317,340,520.2. (This figure is subject to weekly variation

The history of Nigeria debt crisis, O. O. Romanus in an article published in the European Journal of Business and Management Vol. 6, No. 33, 2014 traced the origin of Nigeria’s debt crisis. He wrote that:

          “The phenomenon of external debt by Nigeria dates back to the colonial period when foreign loan was taken to complement the little Internally Generated Revenue (IGR) for developmental purposes (Adepoju, Salau & Obayelu, 2007). Between 1958 and 1977, debts contracted were the concessional debts from bilateral and multilateral sources with longer repayment periods and lower interest rates constituting about 78.5 per cent of the total debt stock (Adepoju et al, 2007; Omoruyi, 2010). African Forum and Network on Debt and Development (AFRODAD) (2007) noted that Nigeria’s external debts increased over time because of a proportional shortage of foreign exchange to meet her developmental needs. The fall in oil prices in the late 1970s had a devastating effect on government expenses; it therefore became necessary for government to borrow for balance of payment support and project financing. This increased the nation’s debt profile to US$2.2 billion in 1980 (Ajisafe, Nassar & Fatokun, 2006; Ndekwe, 2008). However, in 1991 it had risen to $33.4 billion, and rather than decrease, it was on the increase, particularly with the insurmountable regime of debt servicing and the insatiable desire of political leaders to obtain loans for the execution of dubious projects (Essien & Onwuoduokit, 2009). Other factors that led to this sharp increase include; the entrance of state governments into external loan obligation, decline in the share of loans from bilateral and multilateral creditors, the consequent increase in borrowing from private sources at stiffer rates and the inability to manage external debts prudently due to corruption and mismanagement of oil revenue (Winberger & Rocks 2008; Abrego & Ross, 2001).”

Further to the paragraph cited above, O. O. Romanus traced the causatives of the debt crisis to:

          “As revenue from oil production increased, Nigeria’s attractiveness to predatory external creditors led to major borrowing by successive governments with resultant huge external burden on the country. All manners of loans were collected from both private and multilateral creditors by the federal and state governments. The resultant debt burden meant that substantial amount of oil revenue were expended on servicing the accumulated external debts annually. The history of Nigeria’s huge debts can hardly be separated from its decades of misrule and the continued recklessness of its rulers (Soludo, 2003; Ikeje, 2009). Nigeria’s inability to settle her import bills resulted in the accumulation of trade arrears amounting to US$9.8 billion between 1983 and 1988, while the accrued interest of US$1.0 billion was recapitalised. In 1990, Nigeria’s external debt rose again to US$33.1 billion (CBN, 2006). Furthermore, servicing and rescheduling of debt became problematic for Nigeria from 1985 when its external debt rose to up to US$19 billion. Before then, Nigeria had experienced boom in oil revenue which was followed immediately by an unexpected decline (Iyoha & Iyare, 2008; Frankal & Dude, 1989). For instance Nigeria earned $25 billion from oil export in 1980, this declined to $12 billion in 1982 and further to $6 billion in 1986. Government spending had remained high within this period and much of the projects were financed through external borrowing. As at the end of 2004, Nigeria’s debt stock had reached almost $36 billion out of which $31 billion was owed to the Paris Club of Creditors while the rest was owed to multilateral, commercial and other non-Paris Club of creditors (CBN, 2008; DMD, 2008; Hameed et al 2008). Nigeria’s debt service payment debts started on a soft, tolerable level in 1958 until it became a hard bargain years later. Matters came to a head in 2003 when one of Nigeria’s creditors, the Paris Club, demanded $3 billion annually for debt service payment, AFRODAD (2007). In 2004, the Nigerian total debt amounted to $33.4 billion and it was at this stage that the country resorted to seek for debt relief to tackle the debt crises and the resultant economic crises when other options failed to yield the desired result.”

This view by O. O. Romanus was further adumbrated upon by Lex Reiffel in the article; Resolving Nigeria’s Paris Club Debt Problem, Policy Brief No. 144, 2005

          “In 1970, the external debt of the Nigerian government was negligible. Only three years later, the first OPEC-led oil shock sent Nigeria on an economic roller coaster; government revenue and spending soared. Nigeria’s oil export earnings peaked at $25 billion in 1980 but were down to $6 billion by 1986. Spending meanwhile remained high, largely financed by external borrowing at market interest rates. Regrettably, the government wasted much of its oil earnings on unproductive consumption. By 1985, significant debt service arrears began to accumulate, setting the stage for Nigeria’s first debt restructuring operations. Nigeria’s debt accumulation occurred within a volatile political context, during a time when Nigeria experienced the assassination of its prime minister, the outbreak of civil war, a brief period of democratically elected government, and military coups.”

We remember that the outcome of the Paris Club debt offer and cancellation was the following:

  • Nigeria will reach agreement with the IMF in September on its economic objectives and policies for the coming year and immediately thereafter will negotiate a Memorandum of Understanding with the Paris Club to formalize the restructuring.
  • Nigeria will clear its current arrears— amounting to $6 billion—by a cash payment…
  • Nigeria will buy back the remaining debt after “Naples” reduction of 67 percent by making a cash payment of another roughly $6 billion, approximately six months after the first payment.
  • Thus, to eliminate $31 billion of Paris Club debt, the creditors will write off about $18 billion, and Nigeria will pay about $12 billion. Two significant details apparently remain unsettled: the precise amount to be paid in September and the timing of the second payment. Both are potentially problematic.

Despite the rosiness of a steady foreign reserve growth, Nigerians are looking at the macro and micro economics dynamics of Nigeria’s increasing debt situation, particularly from the history of the fact that between 2003 and 2007, there was a high sense of ululation that with the resolution of her debt situation with multi-lateral agencies like the Paris Club where Nigeria got a breather of debt cancellation after paying a percentage of the total foreign debt. But the joy of the aftermath of the Paris Club project seems to have disappeared as Nigeria’s debt has been on a steep rise, leading to the fear that the future of unborn generations of Nigerians is being mortgaged because as the Holy Bible said somewhere in the book of Proverb; ‘the borrower is a slave to the lender’. The other side to the assertion of the Bible would be that every economy is run on credit, and the vagaries of the economic principles of opportunity cost, choice and scarcity impose a demand on government to run 3 modes of budget planning – surplus budget, deficit budget and balance budget. 

Foreign debt has led to constant state of panic for countries in the Global South, particularly in Africa. The thought has been that foreign debt is a new form of colonialism. To borrow from late Bukinabe leader Thomas Sankara, ‘foreign debt has become the new slavery’. The table below from the Debt Management Office’s (DMO) 2017 Annual Report and Statements of Accounts gives an insight into the constant source for worry by Nigerians on Nigeria’s debt profile.

CLICK BELOW to download the full paper

Onyeisi Chiemeke, is a legal practitioner. He is the author of the book; June 12 Election – Campaign for Democracy and the Implosion of the Nigerian Left. .  

Copyright © Onyeisi Chiemeke, TheMaroonsquare, 2019

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