Can Nigeria Spend Its Way Out of Recession ?

Introduction

The latest figures from the Nigerian National Bureau of Statistics (NBS) show that Nigeria has continued its recessionary trend, with third quarter GDP contracting further by -2.24%, a worsening of the -2.06% and -0.36% negative growths in the second and first quarters respectively. The need to quickly devise a robust plan for economic resurgence is therefore imperative.

Nigeria’s Economic Management Team (EMT) has indicated that there is a need to raise funds that will help the country come out of the recession, initially through concessionary sale of assets and now through borrowing. This proposal by the government has met with stiff resistance from the legislators and some Nigerians for several reasons. First, the relevant technical details on the terms, including loan sources, repayment and target sectors, were not attached to the proposal. Second, the magnitude of the loan makes it the largest in Nigeria’s borrowing history. The government’s 2016-2018 External Borrowing (Rolling) Plan includes borrowing $29.96 billion (about N9.6 trillion) from the World Bank, African Development Bank, Japan International Cooperation Agency (JICA), Islamic Development Bank (IDB) and China Exim Bank.
 
The External Borrowing Plan

Naturally, Nigerians are worried that if this whopping sum of money is borrowed, it may take the nation back to the league of Heavily Indebted Poor Countries (HIPC). Nigeria’s debt profile has already risen to N16.29 trillion as at June 2016, according to the Debt Management Office. Moreover, the 2016 budget shows that while a whooping N1.48 trillion will be spent on debt service, key sectors were allocated fractions of that amount e.g. education (N369.6 billion) and health (N221.7 billion). Also, while it took twenty six (26) years (from 1978 to 2004) for Nigeria to accumulate a debt of over $35 billion before securing debt relief in 2005, the present administration’s loan proposal, if approved, would take us back to that same level of debt in just three years (2016-2018).

The government has tried to justify the need for this external loan, with the main reason being the country’s huge infrastructure deficit, as well as the inability of its fast depleting resources and annual budgetary provisions to finance this deficit. Its argument is that improved infrastructure would reduce the cost of power, transportation and other major services, which would reduce inflation. This would then encourage lower lending rates, which would further encourage investment in the real sector. In addition, the government argues that most of the proposed loans are concessionary in nature, with an average interest rate of 1.5%, in contrast to the Paris Club of creditors whose loans had interest rates as high as 18%.

The proposed loan is meant to cover a three-year period as articulated in the 2017-2019 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), and is meant to target areas like infrastructure, agriculture, education, health, water supply, poverty reduction, employment generation, governance and financial management reforms. A huge part of the loan ($11.27billion) will be channelled towards the government’s programmes and projects, while $10.69billion will go into special national infrastructure projects, $2.2billion into education and health projects, $1.2billion into agricultural projects and $3.5billion into Federal Government budget support, among other uses.

The Way Forward

The proposed plan for the loan seems noble since it cannot be disputed that Nigeria requires substantial funding to finance its huge infrastructure gap. The potential gains from developing the nation’s infrastructure are undeniable. However, Nigeria needs to thread carefully in taking more loans as this may result in another debt trap. Part of the problems currently bedevilling the country is unrestrained borrowing by past administrations. For example, the huge portion of the budget that goes into debt servicing is partly responsible for the high poverty rate in the country, given that it takes up what should have been allocated to key sectors of the economy like health, education, water supply and employment generation.

That said, one of the quickest ways to get out of the recession would be to take a low-interest loan with a long tenure. Every nation needs leverage to fast track its development, as can be seen from the fact that the biggest and richest economies are the most heavily indebted. For example, as at 2015, the UK had a debt of £1.56trillion or over 80% of its GDP, while the US (the largest economy in the world) had a debt of over $19 trillion, which is more than a quarter of its nominal GDP. Well thought out borrowing can therefore serve to stimulate the economy and take Nigeria out of this recession if the proceeds are well utilized.

Although Nigeria’s debt profile is relatively low at about 12% of GDP, it stills weighs heavily on the public purse since the country spends on average 35 kobo out of every naira collected by the Federal government on debt service. If left uncontrolled, the implications of additional debt burden to Nigeria may be unfavourable.

There may be need to scrutinize and probably renegotiate the terms and conditions of the loan proposal. For example, the loan from China may involve the use of Chinese labour to build the needed infrastructure. This will not in any way ameliorate Nigeria’s unemployment problem. Also, not all the funds need to be borrowed as some of it can be generated by broadening the tax base and plugging leakages. There should be greater transparency and accountability with respect to recovered loot and all other inflows into government coffers in the past 17 months. This will increase public confidence in the ability of government to judiciously utilize the proposed loan.

In addition, the government needs to provide a more detailed and comprehensive utilisation plan for the proposed loan. This should include details of the loans’ tranches; its projects and programmes timelines, milestones and targets; how it plans to monitor the contractors; short to long term benefits; repayment plans; and performance measurement, among others. Also, government needs to implement reforms that will support the proposed projects in the borrowing plan to ensure that they yield real benefits. For example, there is need to implement reforms that seek to reduce government costs, combat corruption and promote diversification of the economy.
 
Conclusion

Nigeria is currently undergoing an economic crisis that requires immediate solution. The way forward will be to carry out selective approval of government’s proposed loan, conditional on the provision of a detailed utilization plan. Once the projects are underway, government must then begin to focus on innovative ways of increasing the country’s internally generated revenue.

Culled from Preston Consult, a Public Policy Brief.
For more info contact
info@prestonconsultsltd.com |
t.nwachukwu@prestonconsultsltd.com
 

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