Nigeria runs risk of economic, financial instability if… — Ex-minister, Shamsuddeen

Former Minister of National Planning, Dr. Shamsuddeen Usman has warned that Nigeria runs the risk of economic and financial instability, a decline in the standard of living and even a possible economic meltdown if the country doesn’t get its finances put in order.

Dr Usman made this known in Kano during the 63rd annual conference with the theme: “Fiscal Sustainability and Policy Response for Economic Recovery in Nigeria” organized by the Nigerian Economic Society, NES.

The former Minister gave the warning in the face of the high and rising level of government debt in relation to national income, which he said, poses serious economic risks.

According to him, “As you are aware, Nigeria’s budgetary history is indicative of this trend. Nigeria’s budgetary expenditure is heavily reliant on oil revenues. Oil revenues account for more than 90% the of Nigerian government’s budgetary revenues. Consequently, volatility in oil prices translates directly into swings in government revenues. The drop in oil prices has frequently resulted in increasing borrowing to finance the budget.

“The long-term drop in revenue generation remains an issue in the current fiscal year. According to preliminary figures, the FGN’s retained revenue as of June 2022 amounted to just N3.81 trillion, accounting for 70.1 per cent of the target figure of N5.43 trillion.

“According to projections, the budget deficit will increase from N5.60 trillion in 2021 to N6.39 trillion in 2022, or from 3.46 per cent of estimated GDP to slightly above the 3.0 per cent threshold for expenditure ceiling in the Fiscal Responsibility Act (FRA). The exceptional increase in the deficit has mostly reflected the automatic, cyclical response of revenues and spending to a weak economy, as well as the fiscal actions, are taken to ease the recession and aid the recovery.

“In the light of the National Assembly possibly approving a wide range of

debt requests sent to it by the Executive, the national debt could soon reach N44.5 trillion. As of December 31, 2021, Nigeria’s ratio of total Public Debt as a percentage of GDP stood at 22.80%, which is still within the 55.0% debt sustainability threshold for Nigeria, as well as Nigeria’s self-imposed Limit of 40.0% set in the Medium-Term Debt Management Strategy, 2020-2023. However, the high and rising level of government debt in relation to national income poses serious economic risks. Over time, rising Federal debt crowds out private capital formation, slowing productivity and growth.

“A major key issue of concern is Nigeria’s debt service as a percentage of

revenue, which rose to 118%, according to the Medium-Term Expenditure Framework and Fiscal Strategy report released recently. Notably, the debt service gulped a sum of N1.94 trillion, between January and April 2022, against a retained revenue of N1.63 trillion. This shows that the financial risks are highly elevated.

“Additionally, Nigeria’s public debt stock as of March 31, 2022, rose to N41, 604,057.45 million ($100.07 billion). External debt represents 39.94 per cent (N16, 617,190.74 billion), while domestic debt represents 60.06 per cent (N24, 986,866.71 billion). In terms of  US dollars, the total debt stock of Nigeria increased from US$ 87.24 billion, as of end-March 2021, to US$100.07 billion at the corresponding period in 2022. Actual domestic and external debt service from January to March 2022, amounted to N668, 685.71 million and US$548,789.18 million, respectively. To the extent that rising debt is financed by borrowing from abroad, an increasing portion of our future income will be dedicated to interest payments on foreign-held Federal debt. High levels of debt also limit policymakers’ ability to respond effectively to future economic shocks and other adverse events.

“Furthermore, as of the end of July 2022, the Federal Government owed N20.61 trillion in debt, after borrowing N3.15 trillion from the CBN in just seven months. This level of borrowing from the CBN is 10 times higher than the statutory limit of 5% for Ways and Means advances by the CBN. The CBN’s ability to control domestic prices and exchange rates may be harmed if it continues to lend to the Federal Government in excess of the statutory Ways and Means limit.

“The CBN’s deficit financing causes distortions or surges in the monetary base, which has had a negative impact on domestic prices and the exchange rate, resulting in macroeconomic instability, due to the injection of excess liquidity.

“When it comes to the Federal budget, perhaps the single most crucial fact for the public to grasp is that business as usual is simply not an option. Creditors will not lend to a government whose debt is growing at an unsustainable rate, relative to national income. Thus, the Federal Government will need to make budgetary adjustments large enough to stabilize the budget, eventually. A methodical and deliberate procedure that takes into account relevant factors and allows for sufficient lead time for individuals and businesses to adapt to new tax and spending policies could be used to make these modifications. It is also possible that a fiscal crisis will occur, prompting the government to make the necessary adjustments more quickly and at a much higher cost to the economy, as a result of rising interest rates, falling confidence and asset values, and a decelerating economy. The choices are stark and generally unpalatable.

“Long-term fiscal sustainability should be the primary focus of Federal budget policy. To put it simply, fiscal sustainability occurs when the debt-to-income ratio of the Federal Government remains stable or decreases over time. To accomplish this, the primary budget should be balanced, or at least very close to it, by cutting costs and raising income

until spending is roughly equivalent to income before interest payments.

“Long-term planning is essential for a sustainable budget. Therefore, a credible, practical, and enforceable long-term plan is essential for achieving fiscal sustainability, as it will be necessary to reduce deficits over a longer period of time. Policymakers can protect the still-fragile recovery from a sudden fiscal contraction by taking a longer-term view, in forming concrete plans for fiscal consolidation, which is especially important in the current environment. Moreover,  taking steps now to implement a credible plan for reducing future deficits would not only improve economic performance in the long run but could also yield short-term benefits in the form of lower, long-term interest rates and increased consumer and business confidence.

“The problem is, Nigeria, as we are all aware, has never lacked often well-articulated plans, but the difficulty has always been the lack of diligent implementation.

“There will be a lot of tough choices and tradeoffs to make when it comes to crafting and enacting long-term fiscal policies. However, it is essential for the well-being of our country that we rise to this challenge quickly. If we don’t get our finances in order, we run the risk of economic and financial instability, a decline in the standard of living and even a possible economic meltdown, as has happened in a number of countries such as Argentina, Greece and Lebanon,” Dr Usman stated.

Earlier, in her welcome remarks, the President of the Nigerian Economic Society, NES, Prof. Ummu Jalingo called on the government to set fiscal rules and adhere strictly to them for the country to attain sustained macroeconomic stability engender growth, and tackle unemployment among others.

Prof. Jalingo also called for blockage of leakages in all revenue sources (oil, natural gas, precious commodities) and culprits brought to book to face the full wrath of the law.

“The theme of the conference “Fiscal Sustainability and Policy Response for Economic Recovery in Nigeria” was chosen to look at challenges around fiscal sustainability in Nigeria. We are trying to look at physical challenges and other issues around the challenges. Issues of expenditure of the Government, debt, revenue and other issues.

“We are trying to work around the theme to ensure that there are good responses from the participants to guide policymakers in this country,” Prof. Jalingo however stated.