Can Debt Be Good? By Magnus Onyibe

At the last count, the debt owed by Nigerian state governments to Deposit Money Banks (DMBs) was in excess of N600 billion. The dire state of most state governments’ finances was evidenced by their inability to pay workers’ salaries in some cases for more than six months in arrears.  Unable to wriggle out of the financial cul de sac, the federal government under President Muhammadu Buhari had to yield to the insolvent state governors’ plea for a financial bailout through an innovative and unprecedented debt rescheduling mechanism facilitated by the Debt Management Office (DMO) which saw bank short term loans being converted to long term bonds. Also as the lender of last resort, the Central Bank of Nigeria (CBN) has weighed in with the injection of N338 billion as loan to state governments to exclusively pay workers backlog of salaries in fulfilment of President Buhari’s promise to ease the pain of unpaid salaries to civil and public servants.

This is ironic because as the existing state governments’ debts to DMBs are being restructured into long term credit, the state governments are booking new debts with the CBN which invariably means that the state governments will be laden with debts.
Strikingly, if you add the over N600 billion legacy debts that state governments owe the money market to the fresh N338 billion being injected by the CBN, the total credit to the 27 financially distressed states will be in the neighbourhood of N1 trillion and that is quite significant.

With the federal government budget for 2015 being a little over N4 trillion, the estimated N1 trillion total credit to state govts would amount to roughly one quarter of Nigeria’s proposed annual expenditure.

Interestingly, the N1 trillion exposure pales in size when compared to the leveraged position of the same state governments to the bond market of which Lagos alone is exposed up to the tune of a whopping N500 billion and states like Edo owe a little over N11 billion and Kogi less than N1 billion.

As immediate past Lagos State Governor Babatunde Fashola has tried to explain to those who are criticising the seeming huge debt stock that he pilled up despite the fact that Lagos internally generated revenue (lGR) is in the N20 billion per month region, Lagos for instance, has adequate assets to justify the debts incurred.

Put succinctly, the debt bonds are somewhat proportional to the capacity of the state- Lagos with a monthly N20 billion IGR and N500 billion bond stock as well as Edo State with less than N2 billion monthly IGR and N11 billion bond stock.

Although the bailout has a legion of critics, such as those who posit that the measure is putting the manufacturing or real sector in peril as credit to the sector may be stifled, the need for the insolvent states’ economies to be reflated to generate growth cannot be discountenanced. Moreso if the debts are procured to fund infrastructures such as schools, hospitals, housing, electricity and potable water which are critically needed.

Imagine the number of people that would be lifted out of poverty in Edo State when Governor Adams Oshiomhole deploys the $15 million the state recently borrowed from the World Bank for investment in road construction, erosion control, building of hospitals, schools and markets amongst many other infrastructures and amenities.

As if racing against time, in less than 100 days after taking office, following the rescheduling of inherited state debts, Governor Ifeanyi Okowa of Delta State has also minted about 1,350 jobs for youths through an agriculture and enterprise-based skill acquisition scheme that hallmarks his campaign mantra-SMART initiative. The ability to achieve such a feat with meagre resources in a lean period like this, demonstrates that Nigerian leaders can think out of the box to deliver democracy dividends when, ‘their back is against the wall’.

Recently, Africa’s richest man, Aliko Dangote, in a meeting with the visiting United Nations Secretary General, Ban Ki-Moon, lamented that Nigeria is the only country that impressive growth in Gross Domestic Product (GDP) did not translate to growth in prosperity for Nigerians. I don’t know if that assertion is quite correct as GDP growth not tallying with prosperity of the masses has in the past decade become a critical concern of development strategists in global development finance institutions. In fact, high GDP not reflecting prosperity is an existential reality in some Latin American nations and even now in India where the economy is believed to have had an impressive growth of 7.4 per cent without impacting on the wellbeing of a critical mass of Indians.

While l have no idea of what might have caused the situation in India, in the case of Nigeria, the reason growth did not translate into prosperity for the masses, in my view, is simple. A few rich people cornered the wealth through privileges like grants and wavers hence the economy grew by 5 per cent yet the wealth did not trickle down or percolate to the hoi-poloi. This assertion is underscored by the fact that if Nigerian GDP growth had emanated from robust productivity owing to manufacturing and other real sector centred economic activities, the GDP growth would have had positive impact on society. Instead of organic growth, dodgy import duty wavers running into hundreds of billions of naira granted to rice merchants by the ministry of finance, dubious special grants in equally humongous sums of money extended to industrialists with phantom factories by the CBN and intervention funds running into several billions in the aviation, textile and agriculture sectors are responsible for the GDP growth.

When you add the estimated N3 trillion annual petroleum subsidy and leakages from crude oil for refined products swaps carved out for oil barons in the mix, then the reason there is growth in the GDP while there is no prosperity for Nigerians becomes more explicit. Given the scenario above which reflects the Nigerian situation, there is bound to be an impression that debt is not such a good thing.  But can debt be good? Surely, debt can be good particularly if it is used as earlier stated to buy infrastructure. Unfortunately, debt has been bad in Nigeria owing to the manner it is incurred and expended.

Stemming from profligacy of some of our leaders, Nigeria has had the unenviable record of incurring debt and not applying it productively such as development of infrastructure hence in 2009 when former President Olusegun Obasanjo took over the reins of government, he embarked on what was that time referred to as economic diplomacy seeking debt write-off that resulted in the World Bank and the International Monetary Fund (IMF) debt forgiveness of about $12 billion of Nigeria’s total debt stock which was valued at about $30 billion.

Despite the cleaning up, the nation’s balance sheet through the World Bank and Paris Club substantial debt write-off negotiated by Obasanjo regime at inception of the present administration about 100 days ago ,the team appointed to take stock of assets and liabilities from the Goodluck Jonathan administration reported that Nigeria’s total debt stock was in the region of N6 to N9 trillion but Jonathan’s team quickly responded by pointing out that the deficit was accumulated over the years by successive governments so it’s wrong to ascribe the deficit to the immediate past government.

The bickering between the Buhari and Jonathan regimes ( which needs to be toned down to avoid collateral damage) emanated from the fear that debt is bad but consider countries like the USA which is currently running her economy on a deficit of about $13 trillion.  According to the USA’s Republican Party presidential hopeful, Rand Paul, “The last time the USA was debt free was 1835’.  This means that for the past 180 years, the USA government has owed the private sector and the good news is that the economy has done well and Americans have prospered in that period.  Similar to the USA, the British government also has been in debt for more than three centuries, including the period of the industrial revolution that transformed the world from agrarian to industry-based economy.

Although the USA is the richest country in the world, as soon as a child is born there, he or she automatically becomes a debtor based on USA financial system which is credit driven. As some would argue mischievously, when USA’s $13 trillion debt is spread amongst her estimated 250 million citizens, each person would owe more than an average Nigerian when her purported debt of about N9 trillion is shared amongst her 170 million citizens. Obviously, the average Nigerian’s notion that debt is bad is shaped by the sad experience of the debt trap that erstwhile Nigerian leaders plunged the country into, due to massive corruption in both the public and private sectors of the economy.

It needs to be pointed out that the contrast between a third world or emerging economy like Nigeria which lacks capacity to sustain repayment of her debts and the USA with a robust economy and ability to service her debt is that while the U.A is a $17 trillion economy, Nigeria’s economy only recently grew to half a trillion dollars. The size of USA’s economy is assessed and valued by the sheer number of gigantic infrastructures like air and sea ports, bridges, roads, corporate and residential properties as well as other sundry intangible assets which justify the ascribed size of the economy as the largest in the world. Contrarily, Nigeria’s potentially large economy which is hampered by severe infrastructure deficit reflected in her current valuation at $513 billion. The size of Nigeria’s economy which could have been bigger only doubled from less than $300 billion to its current size after a 2013 re-basement exercise which elevated it to the prime position of the largest in Africa.

Unlike the robust infrastructures in the USA which has been facilitating increased productivity that economists believe enables every dollar to generate at least additional 40 cents, Nigerian economy is hobbled by endemic corruption as debts incurred to build bridges, dams, electricity grids and fertiliser plants that could have improved productivity were diverted into private pockets. The Siemens, Halliburton and a host of other internationally proven financial malfeasance established against some Nigerian leaders for corruption in contract administration come to mind.

As history is fond of repeating itself, a combination of forces beyond the control of Nigeria has conspired once again to bring the economy to a bind.  Following the current cash crunch as a consequence of the global crash in crude oil price, the tendency for Nigerian authorities to resort to austerity measures as former President Shehu Shagari did in the early 1980s under similar circumstance of international crude oil price slump, is very likely.  In the course of preparing late President Umar Musa Yar’Adua’s policy documents which later culminated into his Seven Point Agenda before his formal declaration to run for the office of the president of Nigeria in 2007, l had the privilege of chatting with him to determine his economic philosophy.  He told me that in Katsina State where he governed for eight years, he made sure that the funds for a project were in the treasury before embarking on it. I quickly remarked that little wonder, there were no significant infrastructural landmarks in Katsina State because it would be difficult if not impossible to save up enough funds that would be adequate to construct huge hospitals or magnificent airports before embarking on the exercise.  When l suddenly realised that l was addressing a serving governor and potential president of Nigeria, l quickly rebuked my self, but the late Yar’Adua who is an epitome of humility assured me that he was not offended by my comment.  The point here is that economists are trained to think big and have fantastic ideas while accountants are tutored to be frugal and bring economists’ fantastic ideas down to reality.  And for optimum performance, our leaders should have a knack or tendencies for being both economists and accountants, pari-pasu.

Of course the late President Yar’Adua who initiated the highly successful and game changing amnesty programme in the Niger Delta was neither an economist nor was he an accountant, but presidents, governors or local government chairmen must have grandiose ideas for impactful projects for the economies in the sphere of their influence to grow; for jobs to be created for their citizens and to enable the populace prosper.  That is the surest way, I think, that growth in GDP can translate into prosperity for the masses and invariably stop Dangote from further lamentation as he did to UN scribe, Ban Ki-Moon.  As Paul Krugman, the renown Nobel laureate in economics and New York Times columnist has posited, the current debt stock of the USA which some economists deem as too high may actually not be deep enough to drive and sustain the global economy hence the current slump in most European and Asian economies which, as major trading partners, are linked to the US economy.  A booming USA economy should serve as a tail wind to drive the rest of the global economy especially as Chinese economy is now suffering a headwind that has slowed down the second largest economy significantly.

If we should extrapolate the erudite American professor’s view and apply it to Nigerian situation, we probably need more debt to boost national productivity and as such the CBN and DMO efforts at buoying up the economies of the state’s could be steps in the right direction as those policies would stimulate the necessary growth that would drive employment and prosperity in Nigeria.

THISDAY