When a country’s debt becomes a ‘crisis’
At the meeting of the “Bretton Woods” (IMF and the World Bank) Institutions’ group meeting in Washington DC last week, it was revealed that Nigeria’s fiscal deficit (the Federal Government’s funding gap) now stands at a staggering N24.39tn, or $USD 79.44bn. I say staggering because it was not too long ago, during the last year of President Olusegun Obasanjo, in 2007, that Nigeria was running a mere N0.5tn deficit, representing 2.9% of the Gross Domestic Product. Now, as of today, the Federal Government’s deficit at N24.39tn represents close to 20% of the country’s GDP. But, wait a minute, the Minister of Finance, Mrs Zainab Ahmed, hurriedly issued a statement saying: “Nigeria not in debt crisis” – yet, one would suppose. Yes, going by the immutable laws of financial economics, we still have little room for manoeuvre in fact. We can still push our deficit spending up to 25% of the GDP before the Bretton Woods institutions start panicking. Ever wondered why these foreign (mainly Western) bodies seem more concerned about our debts than we are?
Just think about this. If a bank lends a roadside vendor one thousand naira and is unable to pay it back at the agreed time, he will be in trouble, because he risks having the whole of his merchandise confiscated by the bank to cover the debt. Now, if the same bank lends the same customer N1m in exactly the same condition, and is unable to pay, who do you imagine would be in trouble? If you get that logic, then, you understand why the IMF, the World Bank and other international financial houses run cold sweat at the news of Nigeria’s high debt profile. You will also understand why the IMF is keen on Nigeria to withdraw petrol subsidy as it provides avenue for a perpetual drain on the Federal Government’s resources, thereby increasing our propensity to borrow even more. “Pile up debts for the generations yet unborn, if you like, but, do not go so far as to put at risk the money we have put into your crappy economy”, appears to be what they are really trying to tell us, is it not? Makes sense if you buy into the logic. So many other things around the debt issue, however, make much less sense.
The average annual salary for a newly qualified professional (lawyer, accountant, lecturer, etc.) in this country is around N1m a year. Compare that to the Nigerian senator’s monthly take-home pay of N15m, many of whose highest education attainment is a secondary school leaving certificate or even less. To fully appreciate the meaning of “Nigeria not in debt crisis”, imagine that our average professional in this country is having to spend N200,000 more than his annual take-home pay of N1m, (20% of his annual disposable income), just to make ends meet. He does this by borrowing, with no prospect of augmenting his take-home pay through any other means. He is then advised to borrow even more, to a higher level, say, N250,000, (25% of his annual disposable income). It would be tempting fate to imagine that this particular professional would refrain from stealing from the public purse if given a chance. And, in a situation like this, would YOU take an easy bribe if that came your way? Just wondering. The professional’s predicament is analogous to the situation we find ourselves in as a country in respect to the deficit. The Federal Government’s funding gap has become chronic. How much is too much? When is a budget “crisis” not a crisis?
Imagine further that the hapless professional still finds it harder to lead a regular life with his family and is advised to borrow N500,000 (representing 50% of his annual take-home pay) or, even higher borrowing of N1m, extending to 100% of his annual take-home pay. What happens to him and his household? He, at this point, would have fallen into a trap; the debt trap as it is called in the world of finance. Well, as bizarre as the picture we are painting here looks, many countries around the world are actually doing just that. China’s funding gap, for instance, is equivalent to 50% of its GDP; South Africa 57%; India 70%; the UK 87%; Brazil 88%, and the USA 106%. It gets worse; Italy’s funding gap runs currently at 131% of its GDP; Portugal 124%, and Greece 176%. Based on this, you might say Nigeria is in good company, right? Why can’t we just take more loans from whom-so-ever is willing to lend us? Economists and disciples of Keynesian economics call it “deficit finance”. The problem is more foreign borrowing means less ability to control our own economic destiny, as the terms for servicing the debt are fixed by the lenders. Making a switch to domestic borrowing would not make that any easier as it would lead to high interest rates. Interest rate for domestic manufacturers is already crippling enough. Print more money? Well, in theory yes, but in practice, it leads to a loss of value of the currency. There are many other measures such as compelling banks to increase their reserve for the benefit of the Central Bank of Nigeria, but none of those offers any easy fix.
How do countries like Portugal, Italy and Greece get away with running such high deficits without pronouncing a “crisis” in those countries? The simple answer is that they are part of the Euro-Zone of the European Union with substantial access to trade and investment. Moreover, the European Central Bank is committed to their survival. It has to. This is not to mention the political “project” of the European Union which envisages “an ever closer union” of the member states. What about China, South Africa, India, Brazil, the UK etc, running high deficits without pronouncing a “crisis”? These are essentially industrialised countries with products to build and sell to the outside world. As long as they have regular orders on their books, and the cash flow situation looks healthy, bingo! In other words, it is not the amount a country is owing that constitutes a crisis, it is the ability to service the debt that is key. Your funding gap can be as low as five per cent in an economic cycle and still finds you in a “crisis”, while another country can run a deficit of up to 100% of their GDP and still finds itself bankable. Consequently, for our finance minister to simply look at the relatively low funding gap and conclude as some economists do, that we can still borrow even more, is foolhardy to say the least. South Africa’s funding gap at 57% is cushioned by its reliance on its strong industrial and manufacturing base. It is the most advanced economy in Africa. The same goes for India, Brazil etc.
Nigeria’s main earning from export is oil (95%), the price of which it has no control over, 75% of the country’s national budget goes on revenue. Borrowing for investment is one thing, but borrowing for revenue is quite another. The projection for the future is one of more external borrowing through issuing of bonds, money from the World Bank, China and African Development Bank. It is not a free lunch. We have an insatiable appetite for borrowing which can only be quenched by producing and consuming what we need locally rather than incessant imports. Nigeria’s funding gap has reached a crisis point. It is only a matter of time before the IMF makes that official. The operative word, for now, is that it is “unsustainable”. Nonetheless, the crisis is staring us all in the face, except for our Minister of Finance! Sadly, so.
(PUNCH)
