*Backs Salami, advocates project-specific borrowing
•The growth in the level of debt is something of concern because the debts are liabilities. You also have to focus on the assets. What are the assets that are being acquired? How much of it is for consumption and how much of it is for Gross Capital Formation.
•The concerns are natural concerns and everybody will be concerned because the fact that you are borrowing does not mean the project will be complete, or it does not mean the project will have the desired impact.
By Babajide Komolafe
The public outcry against President Mohammadu Buhari’s request for $4.179 billion additional borrowing intensified yesterday with another member of the Presidential Economic Advisory Council (PEAC), Mr. Bismarck Rewane, supporting the position of the Council’s Chairman, Professor Doyin Salami, stressing that every Nigerian should be concerned about the nation’s huge profile, which increased further by N2.36 trillion or 7.13 percent to N35.47 trillion in the second quarter of the year (Q2’21).
Salami, in a presentation titled, “The State of the Economy,” expressed concern about the nation’s debt profile. He stated that the country’ N35.47 trillion public debt was unsustainable even though the country’s debt-to-Gross Domestic Product (GDP) ratio at 35 per cent seems comfortable.
Supporting Salami’s position, Bismarck Rewane, who is also the Chief Executive Officer, CEO, Financial Derivatives Company (FDC) in an exclusive interview with Saturday Vanguard, averred that every Nigerian should be concerned because the FG is taking a risk with the borrowing.
Furthermore, Rewane cautioned against reckless borrowing, stressing that continuous borrowing if not complemented with increase in government revenue, will push the country towards a ‘fiscal Cliff’.
Consequently, he recommended that the FG should adopt the model of project-specific borrowing, which can have a measurable and objective impact on the economy, as against the current practice of borrowing to fund anything. Read interview below
WHY WE ARE CONCERNED ABOUT NIGERIA’S DEBT PROFILE- Rewane, member, Presidential Economic Advisory Council.
What do you make of the public outcry against the President’s request to borrow another $4.19 billion?
I don’t think it is a new request. The process normally is that you first get approval in the budget for funding. And then you now need to get approval of the National Assembly to borrow.
So it is not budget deficit plus additional borrowing, it is how to fund the budget deficit. But a lot of people have misunderstood it to be an additional deficit.
But having said that, the growth in the level of debt is something of concern because the debts are liabilities. You also have to focus on the assets. What are the assets that are being acquired? How much of it is for consumption and how much of it is for Gross Capital Formation.
And the Gross Capital Formation, it has a time frame. Because if you borrow and increase productivity, then you can increase output to amortise the debt. The time between when you now invest, and the time between when you borrow and start paying interest, and when the project being funded, is completed, begins to impact the economy, that is called the Outside Lag. The Outside Lags are very long. The lag between when you do things and when the impact is felt in the economy.
So the Outside lag for the borrowing is quite long, it is quite significant. So you are not going to see the impact of it (project funded by the borrowing) for some time while the debt burden and the debt service will hit you almost immediately. That is the point. So it is now how you manage your position.
So what is the impact, what are the linkages ? For example, if there is something we borrow money for today that can clear the Apapa gridlock, and within two months the gridlock is gone, and it makes it possible for us to move freely in and out of the port immediately, you will see the impact on the economy immediately.
But if you are borrowing to start the foundation of a rail project that will not be completed until four years later, you will not see the impact for the next four years. However, you will be servicing the debt. So that is the concern. The time lag between when the borrowing is incurred and when the productivity gain kicks into the economy.
Are you implying that the benefits of the borrowings will be visible and enjoyed during the regime of the next administration?
This is why they say the taste of the pudding is in the eating. This administration also inherited some debts from the previous administrations, and it will pass-on some debts to the next administration but the point is that the productivity gains have to be seen.
But the good news is that, the projection for our productivity or Gross Domestic Product (GDP) growth in 2022 is 3% higher, than the 2.5% for this year, and in 2023 the projection is 2.9%. So it means some projects, not necessarily because of this borrowing, some of the projects for which borrowing was done in the last two to three years will begin to have their impact on output and employment in 2022 and 2023.
So will you describe the concerns about the nation’s debt misinterpreted or a misunderstanding or even unnecessary?
No. The concerns are natural concerns and everybody will be concerned because the fact that you are borrowing does not mean the project will be complete, or it does not mean the project will have the desired impact.
So everybody has to be concerned, and say, hey, we are taking a risk and we are incurring debt. The outcome, because it is a project, the likelihood is from beginning to end, simply because of the total package, because it is a turn key project.
For example, if you are building a rail, let’s say from Port Harcourt to Maduguri, it is expected that the total amount is known, the total amount that is borrowed, and the payments made, and then in three years, you will have a complete project.
And if you are rehabilitating a pipeline and you know that in two years, instead of having trailers carrying petrol, diesel and kerosine, in two years these commodities will go through the pipeline. So project finance and project management are key to the borrowing process.
So the question is that, as long as you can identify project specific borrowing as against total borrowing that can be used for anything, the risk (of borrowing) may be justified.
What is your position on the concerns raised by Professor Doyin Salami, the Chairman of the Presidential Economic Advisory Council, on the additional borrowings requested by the FG?
He said the debt profile may not be sustainable. In other words, if it (the debt) is not well managed, that is, unless you do something about your revenue, you may get to a point they call ‘a fiscal cliff’. That is what he said. It means that fiscal policy has to look at the debt level and see how sustainable it is in the long run. And what you do in such cases is that you increase the revenue if you can or you restructure the debt. So instead of a five year debt, you may make it a 10 year debt. So that the debt burden, its impact does not weigh excruciatingly on the system.
Should future borrowing be conditioned to specified percentage increase in government revenue or should the FG just continue to borrow and hope for increase in revenue?
No. You can’t be borrowing recklessly. Again, the borrowing has to be project specific. It has to be a project that can increase productivity so much that the productivity gain can far exceed the cost of borrowing. That is the litmus test for borrowing. So I think that kind of analysis has to be done.
And the total debt has a percentage of your GDP, (the limit has been increased to 40%), you need to monitor that too, so that we don’t go on a binge of reckless borrowing. That is the most important thing.