By Kunle Aderinokun, Chika Amanze-Nwachuku, Obinna Chima, Nume Ekeghe in Washington D.C. and Onyebuchi Ezigbo in Abuja
Despite mounting concerns and the warning by the International Monetary Fund (IMF) of the heightened risks associated with greater reliance on foreign borrowing, the Minister of Finance, Mrs. Kemi Adeosun has said that the federal government would not be reckless with foreign borrowings as it maintains an expansionary fiscal policy.
She also assured Nigerians that it would not bequeath a portfolio of unserviceable debts to future generations of Nigerians.
Adeosun made this known in Washington D.C. at a joint media briefing with the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, at the end of the 2017 Annual Meetings of the IMF and the World Bank Group.
The IMF had warned Nigeria and other low income countries that greater reliance on foreign borrowing may at some point expose their economies to vulnerability arising from debt service burden, foreign exchange risk, and a sudden jump in long-term interest rates, if the funds are not put to good use.
The warning came a day after President Muhammadu Buhari had sought the approval of the National Assembly for additional foreign borrowing of $3 billion to re-finance domestic maturing debts and the issuance of a $2.5 billion Eurobond/Diaspora Bond to fund the 2017 capital budget.
However, Adeosun explained that the federal government has adopted an expansionary fiscal policy with an enlarged budget in order to deliver a fundamental structural change to the economy, thereby reducing the country’s exposure to crude oil.
“Why are we borrowing? Mobilising revenue aggressively was not advisable, nor indeed possible, in a recessed economy. But as Nigeria now reverts to growth, our revenue strategy will be accelerated.
“This is being complimented by a medium-term debt strategy that is focusing more on external borrowings to avoid crowding out the private sector.
“This would also reduce the cost of debt servicing and shift the balance of our debt portfolio from short-term to longer-term instruments. This government will be very prudent around debt. We won’t borrow irresponsibly,” said Adeosun.
Adeosun explained that the increase in external debt was a result of the significant decline in the country’s earnings, which according to her plummeted by about 85 per cent.
She said the government also felt that laying off thousands of workers in the civil service was not the way to stimulate growth.
She added: “Also, when we came into office, about 27 states could not pay the salaries of their workers. If we had allowed that situation to persist, we would have been in depression by now.
“So we took the view as a government that the best thing to do was to stimulate growth and spend our way out of trouble, get the state governments to pay salaries, make sure the federal government pays and invests in capital infrastructure.
“Once growth is restored, you will begin to systematically reduce your dependence on borrowing.”
On the efforts by government to increase the tax base, Adeosun was emphatic that the solution to borrowing by the federal government would be for Nigerians to pay their taxes.
“If you pay the taxes properly, there is no need to borrow. Of course, there is the responsibility on the part of government to be more responsible and efficient. We are really focusing on this. We are trying to find ways to cut costs. But fundamentally we must invest.
“We don’t have the power (electricity) we need, we don’t have the roads yet and there is a lot of money required to fund these projects. If we are able to move our tax to GDP ratio from just six per cent, where it is now, to 10 per cent, it would significantly reduce the amount we need to borrow.
“And that would have a wider effect on the economy, reduce borrowing and bring down the interest rate. It will also create head room for the private sector to borrow, because they are currently being crowded out,” Adeosun said.
Also, responding to the concerns over rising public debt among the state governments, the minister explained that any state government that wants to borrow must get approval from her ministry, and a debt sustainability analysis would be undertaken.
According to her, if such loan requests by state governments are more than 40 per cent of their revenue, they are turned down.
“So people are talking of how many loans we are approving, they don’t talk about how many loans we are turning down. Many do not go through and we are constantly monitoring state governments to ensure that the debts that they take on are sustainable.
“The problem with some of the states that have debt problems are legacy issues that were there before they came in. But since we came in, we have been very strict, trying to make sure states do not borrow more than they can service.
“Nigeria’s debt to GDP ratio is one of the lowest. We are at 19 per cent, but most advanced countries have over 100 per cent. I am not saying we need to move to 100 per cent, but I am saying we need to tolerate a little more debt in the short-term to deliver the rail projects, the roads and power so as to generate economic activities, jobs, which would be used to pay back the debt.
“But I assure you that this government is very prudent around debt. We don’t borrow recklessly and we have no intention of bequeathing unserviceable debts on Nigerians,” she added.
Furthermore, the minister said the luxury tax policy planned by the federal government was being finalised, adding that it would cut across the ECOWAS region.
She said the tax plan would have to go through a legal process, including the Customs Union in the sub-region, for it to be finalised.
“It is no news that Nigeria’s tax contributes just six per cent to GDP. Another country with such low tax base is Saudi Arabia. They just introduced Value Added Tax (VAT) for the first time.
“The problem we have in the country is not just that the system needs to be overhauled, it is also that people are not complying and this is because there are no consequences.
“We have just started with Voluntary Asset and Income Declaration Scheme (VAIDS) as a measure to tackle that and the response is impressive.
“In fact, people have started declaring and I have had a number of approaches from high net worth people asking me to speak on their behalf to state governors to allow them time to comply because their personal taxes are payable to state governments.
“I have encouraged every governor that everyone who comes to declare should be given enough time to pay up. This is because the amount of tax that they would have to pay is large.
“We are doing this because we don’t want a situation whereby this leads to stifling economic activities. If someone comes quickly and willingly wants to pay, we have to show reasonableness by acceding to his request.
“Whether taxing the rich will increase public revenue or not, it is all about public revenue to which they are obligated for public services. In any tax system, the burden must be borne by anyone whose income is allowed to bear it, so those with higher incomes should by definition, bear a greater part of the burden.
“The problem currently is that those at the lower rungs are the ones paying. If the man at traffic control, with little income, pays at source, why would we not pursue the billionaire or the trillionaire to pay out of his income?
“We need to change the mindset in the country with regards to taxes, and so far we are encouraged by the responses of companies to this tax amnesty.
“During these meetings, I have been able to speak to a number of ministers like those from Indonesia and Argentina that have completed theirs in order to exchange ideas and get their progress report.
“From their response, we are on track and they predicted that at the end there will be a rush to beat the deadline for the amnesty,” she said.
In his remarks, Emefiele said owing to the positive economic growth recorded by Nigeria, foreign banks had pledged to raise their credit lines to Nigerian banks in order to boost lending and stimulate business activities in the country.
He also revealed that foreign banks were now more confident with the direction of the Nigerian economy.
Emefiele said it was gratifying for him to see most of the correspondent banks during IMF/World Bank meetings making positive comments about the Nigerian economy, especially about efforts made in stabilising the foreign exchange market.
“We held meetings with a couple of correspondent banks and it was interesting and nice to see them making some positive comments. They are showing more confidence in the economy and making commitments that they would make credit lines available to Nigerian banks, even in larger sizes.
“For me, what is gratifying is that in the midst of the global recovery, Nigeria itself has shown signs of recovery, especially the turnaround in the GDP, from contraction to about 0.55 per cent. That for me shows that we are on the right path,” Emefiele said.
He also revealed that some foreign direct investors were interested in investing in the country’s infrastructure and agriculture sectors.
Responding to a question on his projection for the naira, Emefiele pointed out that as accretion of Nigeria’s external reserves continues and the economic fundamentals get stronger, the nation’s currency would definitely strengthen.
He said the central bank would continue to monitor the banks to ensure that there are no threats that would alter the strategic health of the industry “to the point where we begin to think about some threats that will destabilise the system and therefore create problems for the economy”.
He urged Nigerians living abroad to continue to remit foreign currencies to the country, just as he spoke on plans to develop a policy that would link the country’s credit bureaus to foreign borrowing.
“We are working on how to actually link our credit bureau arrangement with foreign borrowing, so that once there is a linkage between Nigeria and the foreign credit system, and it becomes easy for Nigerians abroad to borrow from Nigeria and also get some form of attachment to the credit that they have abroad, either in the United States or the United Kingdom.
“With that, it should be easy for them to access credit, then begin to build their businesses so that they can retire to Nigeria rather than retire abroad,” Emefiele said.
On the banking system, he noted that there has been a lot of attention on the banking sector again, but assured the press that there would be no bank failure.
“From our view, we are saying no bank should fail in our environment, whether you are big or whether you are small, and what we would continue to do is to see to it that we put in place strong prudential guidelines that will continue to guide them.
“Be it capital or liquidity, all these we would put in place to continue to strengthen, to ensure the banks remain strategically healthy to be able to perform the roles and responsibilities they are supposed to play in an economy so as to achieve growth and development,” he said.
APC Upbraids PDP over Borrowing
Just as Adeosun defended the federal government’s external borrowing plan, the All Progressives Congress (APC) also clarified that the Muhammadu Buhari-administration plans to use the $5.5 billion foreign loan to finance development projects that will impact positively on the economy.
The party explained that the foreign loans will be invested in infrastructure projects such as the Mambilla hydropower project, construction of a second runway at the Nnamdi Azikiwe International Airport, Abuja, provide counterpart funding for rail projects, and for the Bodo-Bonny road, with a bridge across the Opobo channel.
The ruling party, which was reacting to the criticism of the Peoples Democratic Party (PDP) on the plan by the administration to borrow $5.5 billion, asked the PDP to wake up to the new realities that the days of borrowing to pay salaries and fund bogus projects were long gone.
In a statement issued by the APC National Publicity Secretary, Mallam Bolaji Abdullahi, APC accused the PDP of deliberately spewing falsehood as means of seeking a return to power in 2019.
The ruling party said that in developing economies, governments typically resort to borrowing to finance economic development projects because taxation and other revenue streams may not necessarily provide sufficient funds for economic development.
“The recent borrowing plans proposed by the Muhammadu Buhari administration is no different, as the president has clearly stated in his request to the National Assembly that the loans will be used to finance the 2017 budget deficit and invest in critical and verifiable infrastructure project which will ultimately grow the economy,” APC said.
The PDP had in its statement questioned the rationale behind the government’s move to increase the country’s foreign debt at a time its economy was still fragile.
The opposition party said the loan request before the National Assembly would amount to consciously mortgaging the future of unborn generations.
However, APC yesterday dismissed PDP’s criticism, especially the claim that it “meritoriously” governed the country for 16 years and “handed over a buoyant economy to the APC in 2015”.
It accused PDP of failing to utilise the country’s high earnings from crude oil during its tenure to invest in infrastructure and build up savings for the rainy day.
APC said before it assumed office in May 2015, the PDP-led government had borrowed N473 billion out of the N882 billion budgetary provision for borrowing to ostensibly fund recurrent expenditure, including salaries and overheads.
“Really, what could be further from the truth? The APC considers the claim as a new height of PDP’s insensitivity to the populace and has further exposed the PDP as a party unrepentant for the rot it left the country after its 16-year rule.
“Even when crude oil sold above $100, the immediate-past PDP-led administration struggled to build savings. In addition, the Excess Crude Account was misspent. Poor capital expenditure meant badly needed infrastructure development was put on hold.
“This forced construction companies with government contracts to cut back and sack thousands of workers.
“Nigerians will sadly recall how in the lead up to President Buhari’s assumption of office, former finance minister and coordinating minister of the economy, Dr. Ngozi Okonjo-Iweala in May 2015, revealed that Nigeria was borrowing to pay government salaries.
“On April 2016, Okonjo-Iweala who also served as finance minister under President Olusegun Obasanjo between 2003 and 2006 and again under President Goodluck Jonathan between 2011 and 2015 also blamed the country’s present economic situation on the zero political will of immediate past government to save for the rainy day.
“Today, the successive national budgets of the APC administration have prioritised and increased budgetary allocations for capital projects as one of the strategic ways to stimulate economic growth in the country.
“The economy has started responding to the policy initiatives of the government as evidenced in the improvement and stability of the naira exchange rate, increase in the country’s foreign reserves, and the recent announcement by the National Bureau of Statistics (NBS) that the country has officially come out of the recession,” APC said.
The party urged members of the National Assembly to rise above sundry sentiments and approve the president’s external borrowing request, saying it was pro-people and in the overall best interest of the country.