May 24, 2018

Gov’t Bailout: Can Debt Be Good? – Magnus Onyibe 

Gov’t Bailout: Can Debt Be Good? – Magnus Onyibe 

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 Central Bank of Nigeria, CBN, which invariably means that the state governments will be laden with debts.

Strikingly, if you add the over N600b legacy debts that state governments owe the money market to the fresh N338b being injected by the CBN, the total credit to the 27 financially distressed states will be in the neighborhood of one trillion naira and that is quite significant.

With the federal government budget for 2015 being a little over four trillion naira, the estimated one trillion naira total credit to state governments will amount to roughly one quarter of Nigeria’s proposed annual expenditure.

Interestingly, the one trillion naira 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 half a trillion naira (N500bn) and states like Edo, owe a little over eleven billion naira and Kogi less than one billion.

As immediate past Lagos state governor , Babatunde Fashola has tried to explain to those who are criticizing the seeming huge debt stock that he piled up despite the fact that Lagos internally generated revenue, lGR is in the twenty billion naira 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 N20b IGR and N500b bond stock as well as Edo state with less than N2b monthly IGR and N11b 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 can not 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 will be lifted out of poverty in Edo state when governor Adams Oshiomhole deploys the fifteen million dollars 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 one hundred days after taking office, following the rescheduling of inherited state debts, Gov. Ifeanyi Okowa of Delta state has also minted about 1,350 jobs for youth 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 are against the wall’.

Recently, Africa’s richest man, Aliko Dangote in a meeting with the visiting United Nations, UN 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% 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 does not translate into prosperity for the masses, in my view, is simple. A few rich people cornered the wealth through privileges like grants and waivers hence the economy grew by 5% 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 centered economic activities, the GDP growth would have had positive impact on society. Instead of organic growth, dodgy import duty waivers running into hundreds of billions of naira granted to rice merchants by the Ministry of Finance, MoF, 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 three trillion naira 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 IMF debt forgiveness of about twelve billion dollars of Nigeria’s total debt stock which was valued at about thirty billion dollars.

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 one hundred 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 six to nine trillion naira 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 govt.

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 thirteen trillion dollars.

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 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 thirteen ($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 nine trillion naira 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 U.S.A with a robust economy and ability to service her debt is that while the U.S.A is a seventeen trillion dollar economy, Nigeria’s economy only recently grew to half a trillion dollars. The size of U.SA.’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 $513b. The size of Nigeria’s economy which could have been bigger only doubled from less than $300b 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 fertilizer 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 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 realized that l was addressing a serving governor and potential president of Nigeria, l quickly rebuked myself, 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 economist 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 program in the Niger Delta was neither an economist nor was he an accountant, but presidents, governors or local govt 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’s the surest way, I think, that growth in GDP can translate into prosperity for the masses and invariably stop Aliko Dangote from further lamentation as he did to UN scribe, Ban Ki-Moon.

As Paul Krugman, the renowned Nobel laureate in economics and New York Times columnist has posited ,the current debt stock of the USA which some economist 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 US economy should serve as a tail wind to drive the rest of the global economy especially as Chinese economy is now suffering a head wind that has slowed it down 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 states could be steps in the right direction as those policies would stimulate the necessary growth that would drive employment and prosperity in Nigeria.

That being the case, President Buhari should not shy away from stepping up efforts in investing in productive activities generating projects like establishment of solar power manufacturing plants and windmills in the desert areas of Sokoto and Katsina states; hydro dams in the riverine areas of Niger and Kogi states; as well as modular refineries in the oil and gas rich areas of Niger Delta to grow the economy and create jobs. It is better to subsidize production of such goods and services than petroleum which is gulping trillions of naira annually and creating jobs overseas instead of Nigeria .

Take Sheik Mohamed Al Maktoum of the United Arab Emirates, UAE for instance.The visionary leader  has a philosophy that if you build it, the people will fill it. Today, Dubai’s Buj Khalifa is the tallest building in the world, Jebel Ali sea port which is considered very huge by every standard is soon to be replaced by an even bigger one presently under construction and ditto for the very futuristic airport which is one of the most sophisticated in the world. Dubai aspires to be home to one of the largest malls in the world and her airline, Emirates parades one of largest fleet of Airbus in the industry globally, yet Dubai has a population of less than five million people and it was less than thirty years ago an economy based on local boat building.

Although the UAE (comprising of seven emirates) is rich in oil wealth abundant in Abu Dhabi, the capital, guess what? Most of the money for the aforementioned gigantic  infrastructures in Dubai are borrowed from the West. Yes, western countries like the UK and Scandinavian countries like Sweden and Norway, etc. In the aftermath of the 2008 global economic recession, Dubai was going broke and was about to default in debt repayment to European creditors until Abu Dhabi rescued her by advancing some funds to enable her bounce back as the economic recession eased.

What’s more, oil/gas rich Saudi Arabia with one of the largest oil reserves and a robust sovereign wealth fund, SWF recently borrowed five (5) billion dollars for investments in projects.

The fundamental difference between the UAE and Nigeria is that foreign direct investment funds flowing into that country is essentially from ‘mum and dad’ investors (pensioners) in Europe and all over the would who channel their retirement benefits into equities in Dubai ventures which is why the tenure of the funds invested are long as opposed to the so called ‘hot’ money from international funds from portfolio managers which are moved in and out of Nigeria at the speed of light as soon as volatility is noticed.

Perhaps, it is towards integrating Nigeria into the UK equity market, that London Mayor, Boris was in Nigeria recently to explore relationship with Nigerian Stock Exchange, NSE with respect to investing the pension funds of her aging population in Nigerian market.

The reason for the disparity in western investors interest between Dubai and Nigeria is not farfetched. Over the years, the stability of Dubai’s economy has been proven to the European investors who have become confident in the safety of their funds, but on the contrary, the Nigerian economy has been negatively portrayed as unstable and unviable. Moreover, Nigerians are perceived as hunger stricken fraudsters, and worse still, the society is classified as disease and conflict ridden.Which investor from advanced society would prospect for economic returns in polio ridden society like the Kano suburb which CNN’s Dr Sanjay Gupta recently showcased on his program Vital Signs? With such pathetic perception, western investors would only see opportunity for offering aid instead of trade, so no ‘mum and dad’ investors (who are critically needed because they engage in long term) would consider Nigeria a worthy investment destination.

Therein lies Nigeria’s dilemma.

How our country can be rebranded for a more positive perception in the global market place so that she can be considered a worth while investment destination in the manner that Dubai is viewed in Europe and the Americas is a task that must be accomplished.

The burnishing of Nigeria’s image may already be 50% up given the positive perception that the leaders of the free world (Barrack Obama,David Cameron,Angela Merkel and Francois Holland amongst others) have of Nigeria’s new president, Muhammadu Buhari who is viewed by fellow leaders as a man of integrity and fidelity whom they can do business with (based on the encomiums showered on him during their recent meetings).

The nitty gritty of rebranding Nigeria as an investment haven will be the subject of a subsequent article.

At the last count, the debt owed by Nigerian state govts to Deposit Money Banks, DMBs was in excess of  six hundred billion naira. 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.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 DMO which saw bank short term loans being converted to long term bonds. Also as the lender of last resort, the CBN has weighed in with the injection of N338b as loan to state governments to exclusively pay workers back log of salaries in fulfillment of president Buhari’s promise to ease the pain of unpaid salaries to civil and public servants.
Magnus Onyibe, a development strategist, futurologist, former commissioner in Delta state govt and an alumna of Fletcher School of Law and Diplomacy, sent this piece from Abuja.

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