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Nigeria must reduce penchant for borrowing –Economist – Punch Newspapers

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Dr Chiwuike Uba
Yearly, the Federal Government’s budget presentation is greeted by criticisms and doubts about its fruitful implementation; is there something fundamentally wrong with its budgeting process?
Certainly, there is. Without any doubt, Nigeria has made appreciable improvement based on where the nation was in the past. Transparency and accountability have improved. Nonetheless,  public consultation throughout the budget process.
The existing consultation framework is more of the Decide, Announce, and Defend (DAD) and/or Decide, Educate, Announce, and Defend (DEAD) approaches.Also our budget is seldom based on realistic forecasts of revenues and expenditures. These, to a large extent, are attributable to the underperformance of revenues and expenditures. We compare spending to budgetary performance but most of the time, budget spending deviates from the budget’s goal and objectives. Also, despite the challenges of budgetary realism, anchored on ambitious projections, the legislature still distorts the budget, sometimes not taking into account the negative effect of such amendments on the implementation.
Currently, governments at all levels have not demonstrated a commitment to collecting citizens’ input during budget planning, particularly at the ministerial and sectoral levels. Our fiscal laws and policies are not specific about the need for and process for public consultation in the budget process. Second, as a nation, our budget is seldom based on realistic forecasts of revenues and expenditures.

These, to a large extent, are attributable to the underperformance of revenues and expenditures. As a nation, we compare spending to budgetary performance but most of the time, budget spending deviates from the budget’s goal and objectives. Also, despite the challenges of budgetary realism, anchored on ambitious projections, the legislature still distorts the budget, sometimes not taking into account the negative effect of such amendments on the budget implementation.
What is the biggest challenge in the budgeting process?
It’s capital expenditure. Over the past few years, the implementation of recurrent expenditure has consistently been close to or over 100 per cent, but the economic and social sectors that can grow and sustain the economy tend to under-spend. Also, the utilisation capacity of Ministries, Departments and Agencies appears to be very weak too, perhaps largely because of the lack of planning capacity and the fact that the funds are not released to the MDAs on time. Some MDAs receive funds but do not have the capacity to spend them. For instance, according to the 2021 half year budget implementation report issued by the Budget Office of the Federation, the government has released on average 30 per cent of the annual capital appropriations to the MDAs. Nevertheless, only 46 per cent of the funds released have been utilised by the MDAs.

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You also argued that the 2022 budget proposal may be difficult to implement; what are your reservations?
Since 2015, Federal Government’s actual revenues have remained below budgeted revenues. Revenue is essential to the implementation of the budget and the only way we can fully execute the budget is by borrowing. Unfortunately, it is virtually impossible to fund the entire budget through debt.
Will the increasing price of oil help?
Agreed that the price of oil is growing; our production capacity is still very small. It would be extremely challenging for Nigeria to increase daily oil production to 1.88 million barrels per day by 2022. In August, which is five months to the end of the 2021 fiscal year, Federal Government’s actual revenues were N3.93tn, which is 27 per cent less than the budgeted revenues for the period. If the downward trend in oil production continues as expected, the projected annual revenue will not be met. Daily oil production decreased from a mean of 1.57 million bpd in August 2021 to 1.45 million bpd in September 2021. The decline in daily production has continued despite the increase in world demand for oil. For instance, while world oil demand increased from 92.81m bpd in 2021Q1 to 95.61m bpd in 2021Q2, and 98.46m bpd in 2021Q3 and 99.70m bpd in 2021Q4, our daily oil production has been on auto decline since January 2021.
Investment in the Nigerian oil industry has decreased due to international demand for lower carbon emissions and the use of fossil fuels. Under the conditions listed by the International Energy Agency, investments in fossil fuel supply could come to an end after 2021. Electric vehicles are being phased in to replace internal combustion vehicles. This is part of the environmental, social and governance criteria for investment in the oil industry. In addition, other relevant provisions of the United Nations Framework Convention on Climate Change and the Paris Agreement support the above ESG criteria. Insecurity, divestment in the oil sector, policy inconsistencies and weak business environment are some of the additional factors that would affect the ability of the government to raise the needed revenue to fund the budget.
Beyond oil, you said the N10.13tn projected revenue in 2022 appears unrealistic. What informed your doubts?
In addition to the reasons I gave earlier, the World Bank recently reported that an estimated 20 million additional Nigerians will fall into poverty by 2022. The increase in poverty or the number of poor people would have an impact on government revenues in 2022. Also, 2022 precedes an election year and this could also exacerbate insecurity in Nigeria. No country can optimise its income potential in an unsafe environment. The economy of the South-East is already bleeding as a result of the compulsory sit-at-home order by agitating groups. Income tax is imposed on profits. How does the government intend to generate revenue from businesses and individuals struggling to get a square meal? Businesses are closing, not only in the South-East, but in all other regions, because of the heightened insecurity. Compared to the 2019 Business Confidence Index of -18,200, Nigeria’s Business Confidence Index fell again to -22,400 by December 2020.

You said it’s not acceptable for the government to continue borrowing to finance consumption, but government has said it is borrowing to fund infrastructure like roads, railway projects, etc. Why do you believe otherwise?
I’m not arguing whether the government is borrowing for capital projects or not. Of course, some of the loans are used in the implementation of capital projects. Nonetheless, we must ask and know the proportion of the debt that is used to fund or implement capital projects. Based on the 2021 half-year budget implementation report released by the Budget Office, the Federal Government accumulated an additional public debt of around N4.9tn (N897bn foreign debt, N1.61tn domestic debt and N2.4tn ways and means advances). Of the N4.9tn debts, only 27 per cent (N1.34tn) was released to fund capital expenditures (including additional capital expenditures). This implies that all the revenue of the government and about 73 per cent of the accumulated public debt in the first half of 2021 was used for debt servicing and to fund recurrent expenditures.
External debt increased by 8.5 per cent from N10.95tn in December 2020 to N11.85tn in June 2021, while domestic debt (excluding ways and means advance) increased by 10 per cent, from N16.02tn in December 2020 to N17.63tn in June 2021. A quick review of the proposed 2022 budget shows that part of the proposed loans would be used to fund recurrent expenditures. Out of the total projected budget deficit of N6.26trn, which would be funded through loans, N5.35tn (representing 85 per cent of the deficit) would be funded by loans, while the remaining 15 per cent of the deficit, which is recurrent expenditure, would be funded by loans. The implication is that as of the first day, Nigeria is in a position to borrow for consumption. Meanwhile, based on the execution of the previous budgets, the execution of the capital budget is typically less than 70 per cent. This implies that a higher proportion of loans would be used to finance recurrent expenditure (consumption) in 2022.

Why do we have many uncompleted and ongoing projects scattered across the country, even though we have project-tied loans?
Prior to 2015, Nigeria’s public debt increased and in most cases such loans are taken under the guise of financing capital projects. Since 2015, Nigeria’s debt has increased from less than N10trn in June to N29.48tn in June 2021. If the projects for which these loans were taken were subjected to a cost-benefit analysis and a value-for-money audit, Nigerians would surely be shocked by the findings. Yes, we need to increase our revenues, but we need to do more to reduce the cost of governance and waste exacerbated by corruption.
What do you think is the way out of the borrowing, given the low revenue we are faced with and our huge debt that must be serviced?
The truth is that it will be very difficult to stop borrowing abruptly in light of the situation we are in. However, we must reduce our appetite for borrowing to refocus, redirect and rethink our need for borrowing. Nigeria needs a shift in mindset, value and a rebuilding of declining trust between the government and the governed. In the old Imo State, Sam Mbakwe constructed Imo Airport with public funds, contributed by the people. This was possible because citizens believed the money contributed would be used wisely for the purposes for which it was contributed. Unfortunately, this approach may not work at this time due to public distrust in government. Nevertheless, the government can adopt other public-private partnership arrangements to implement various capital projects for public use.

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Government businesses must be managed within an entrepreneurial system to deliver results and achieve the necessary public impact. Meanwhile, for the existing and/or yet to be implemented capital projects, it is important to re-evaluate them on the basis of cost versus benefits. There should be a balance between economic and political considerations when implementing projects. Take, for instance, the $1.96bn railway line to Maradi in the Republic of Niger is of little or no economic significance to Nigeria. Constructing a shootout on the Lagos–Calabar coastal rail line from Benin City to Enugu, linking up Agbor, Asaba, Onitsha, Awka and Enugu, would be a better option.
On the issue of insecurity, defence got the highest vote in the 2022 budget estimate; do you have doubts that increased funding could help to defeat the insecurity?
Since 1999, when Nigeria returned to democratic governance, fiscal and security figures have shown that the more money we spend on security the higher the rate of insecurity. From 1999 till date, Nigeria’s budget for security has exceeded N10trn. There seems like a direct positive correlation between security expenditure and insecurity. It is important to commend Nigeria’s security agencies for their efforts and sacrifices to tackle security challenges in Nigeria. Nevertheless, there is a need to examine security budgets more closely. The actual use of funds made available for security also requires a further review. The economic cost of insecurity increased from 0.01 per cent of GDP and N26.8 per head in 2019 to about 2.5 per cent of GDP and N8,811.9 per head in 2020. Nigeria is also ranked as the third most terrorised country in the world, after Syria and Afghanistan, according to the 2020 Global Terrorism Index. According to a United Nations Development Programme study covering 2007 to 2019, Nigeria lost an estimated $141.9bn in production due to security-related violence. The above situation shows that rising security spending is not the answer to Nigeria’s growing insecurity.
What then is the solution?
It calls for rethinking the strategy. The use of force cannot address all forms of insecurity in Nigeria. Unfortunately, the government pays little, if any, real attention to the issue of real insecurity. Our basic health, education, social and other facilities are almost entirely abandoned. To address growing insecurity, Nigeria must deploy a carrot and stick approach. The use of absolute force has not brought the desired solution. I read some months ago that Nigeria is planning to borrow $1.76bn for security spending. Have we taken into account the collateral benefits that could come from deploying this amount to revive our manufacturing industries? What about job creation, quality education, a good health care system, and such things? What about engagement with the agitating groups to find a durable solution to their grievances. The United States of America and Russia invaded Afghanistan in their bid to crush the Taliban. What is the result of spending billions in Afghanistan? We must learn the right lessons and avoid the wrong lessons.
The irony is that real production is necessary to resolve the issue of insecurity. Create an industry with the ability to employ about 3,000 people in every local government and see how criminality will collapse in Nigeria. At the moment, many Nigerians are poorly educated and the collapse of the educational system has led to high unemployment and insecurity. Therefore, urgent action should be taken to ensure access and quality of education in Nigeria. Furthermore, mandatory attendance in basic education should be applied, as grievances concerning the exclusion of access to power, opportunity and representation are resolved through dialogue, not brutish force.
In the estimate, capital expenditure accounts for only 33 per cent. Why has it been difficult for the government to cut the cost of governance so more money can go into capital expenditure?

I would attribute the rising cost of governance primarily to lack of political will to make bold decisions. Second, the polarisation of governance based on religion and ethnicity, corruption and weak public administration systems and structures are huge impediments to any reform aimed at reducing the cost of governance. The question is, who are the ghost workers and how did they get into the public service? This is the same reason we have frivolous, fictitious budget items every year. The structure of our governance system also lends itself to the high cost of governance. Apart from the wage bill and associated costs, the cost of operating these offices is unimaginable.
I should add that the National Assembly should always be guided by Debt to Revenue ratio and not debt to GDP ratio. It is the revenue that is needed to repay the loan, not the GDP.
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