PETERSIDE ECONOMIC REVIEW

Chamberlain S. Peterside, Ph.DThursday, December 9, 2010
[email protected]
New York, NY, USA

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BORROW-AND-SPEND BINGE
…IS PUBLIC FINANCE CRISIS LOOMING IN NIGERIA?

He that Goes A-Borrowing…

here’s a wise saying that “he that goes a-borrowing goes a-sorrowing”. That might be the woeful tale for Nigeria soon if its financial activities are not handled with utmost caution. The drumbeats of criticism and sharp focus on fiscal policy in political discourse have been sounding louder just as growing debt situation and reckless spending pattern have become hot issues at the national and state levels. The euphoria of debt-relief, monetization and rightsizing experienced less than 5 years ago is being overtaken by fiscal-despondency.


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Both insiders and political opponents alike (for good reason) have all been screaming about the mounting debts with nothing enough to show for it. One of the most vociferous proponents of fiscal discipline in Nigeria is World Bank Managing Director and former Finance Minister Mrs. Ngozi Okonjo-Iweala. Essentially, she helped anchor the financial success stories recorded by Nigeria in recent past. The criticisms are not the least because money-talk is always a potent political weapon during election season, but also owing to the need to draw attention on the real and eminent peril of mounting debt-stock.

According to latest official data, Nigeria’s aggregate public debt stands at $33 billion just as foreign debt has risen to about $3,6 billion and counting. Meanwhile several state governments have indicated interest to issue bonds at the Nigerian Stock Exchange (including Ogun State where this matter has torn the executive and legislature apart). If recent experiences of Western countries like Greece, Spain, Iceland and now Ireland that have been on the brink of insolvency are anything to go by, there is every reason to be leery in Nigeria. The charts below illustrate that very well.

…Is Public Finance Crisis Looming?
The dimensions of any public finance debacle in Nigeria could be multifaceted and severe than anything seen in Western Europe for obvious reasons. First, there will be no European Union or friendly wealthy nations to rely upon for bail-out; secondly, the already tense political climate in the country could be exacerbated by any austerity measures; thirdly Nigeria lacks the infrastructural-base and social safety-nets to cushion impoverished citizens from the impact of dramatic decline in government revenue.

Recent New York Times reports chronicled rising spate of indebtedness and potential risk of default by state governments in the United States. Some states are already drastically shedding staff and cutting expenditure on public services like education, healthcare and security. With no clear exit-strategy in sight, thereby heralding a prediction of dire financial blow that could rival the sub-prime mortgage troubles experienced last year.

By international comparison, Nigeria currently maintains one of the lowest external debt-to-GDP ratios in the world estimated at about 6 percent and public debt-to-GDP ratio of 16,8 percent. This has given international investors some measure of confidence in Nigeria over the last 5 years, but that is not enough reason for renewed complacency, neither can that substantiate a borrowing binge to plug soaring budget deficit. The ability of the federal government to emit more currency (which can stoke inflation) or issue bonds (which crowds out corporate entities from the debt market) to service growing debt-load can have very serious after-shocks according to expert opinion and therefore is not a viable alternative to strengthening public finance management and prudent resource allocation in the long-run.

…Profligacy Is Risky Business
The crux of the matter is that flawed fiscal policy mechanism and inefficient budget implementation are two main culprits for the current precarious financial status of Nigeria. In his testimony to the Senate two months ago, the finance minister Mr. Segun Aganga hinted that the 2010 budget-implementation is proceeding well, especially on the recurrent expenditure side where 100 percent of funds have been disbursed, whereas capital expenditure is less than 40 percent on track - with over 1,7 trillion as capital budget for 2010 – what is the outcome? - Mr. Aganga rightly asked.

In my view, the complex process for initiating, vetting, awarding and monitoring capital projects in any modern bureaucracy has become such a daunting task for Nigeria’s civil service structure that either the personnel are so out of tune with emergent developmental challenges in Nigeria or totally unsuited to carry out such critical functions within reasonable timeframe, hence the urgent need for radical reform in the public service.

The laxity in implementing capital budgets becomes very worrisome weighed against the backdrop that recurrent expenditure for personnel costs and operating expenses are fully deployed but caters for very miniscule portion of the nation’s population that are gainfully employed as civil servants or elected officials. The revelation by the CBN governor Mr. Lamido Sanusi that the national assembly alone gulps a whopping 25 percent of federal overhead expenses caused uproar few week ago, yet available statistic from the budget office clearly validates that.

That bloated cost structure is quite detrimental to long-term financial stability of Nigeria. Whilst effort must be made to tame government recurrent expenditures, the perennial inefficiency in implementing capital budget remains the underlying reason for continued sluggish economic progress, notwithstanding recent data that indicates that growth rate will hit 7,5 percent in 2010 – the quality of growth is the question. As is clearly evident and buttressed by empirical evidence, Nigeria continues to experience a job-less growth, as many capital projects go unexecuted year after year. So pilling up more debts cannot in any way help the situation except to line the pockets of few politicians and senior civil servants.

…Missed Opportunities
By exiting the Paris Club debt-trap in 2005 thereby saving substantial resources from debt-service payment and aggressively pursuing monetization policy, Nigeria gained ample opportunity to redirect its strength on productive spending, tackling perennial poverty and concentrate on social stabilization programs. But that wasn’t to be. Five years down the line Nigerians are yet to the experience long-awaited dividends of that debt-deal.

Effective administration of outstanding debt-stock and issuance of new treasury bills and bonds through the Debt Management Office (DMO) at the national level has been quite impressive. Thus far that process has helped in galvanizing a domestic debt market. But controlling the expenditure part of the equation and proceeds of bond issuance is a different story. By failing to upgrade the caliber of public finance administration, Nigeria continues to pay a costly price in form of frivolous expenditures and unrestrained cost-escalation. By some statistics federal budget has nearly doubled in the last three years.

Few months ago, the current deplorable fiscal picture of Nigeria resulted in a downward review of long-term financial outlook by Fitch rating agency from “Stable” to “Negative”. The rationale for such downward review was the uncertainties related to upcoming general elections, coupled with depletion of excess crude account (ECA), which declined from $20 billion in 2007 to less than half a billion in 2010. $1,0 billion was set aside to as Sovereign Wealth Fund. In addition, external reserves have fallen marginally (or not surged as should be expected in a climate of persistent high oil price of $75-$85 per barrel vis-ŕ-vis benchmark budget price of $60 per barrel). The reserves currently stand at $34 billion as at mid October.

…Sorry States
The story is no different and maybe even worse for the state governments. According to official data practically all the states except Lagos rely on federal allocation for the bulk of their revenue and sustenance, yet most of them indulge in unfettered spending spree while craving to raise more money from the capital market. The urge to implement capital projects that will supposedly impact on livelihood of the electorate has become a new fad amongst state governments however most of these projects are either not well thought-out or poorly executed.

But beyond the capital projects, quality of fiscal management, public procurement and accounting systems in most states remain very archaic or prone to abuse and massive pilferage. It is practically impossible to efficiently and prudently manage public resources with such outdated and sub-standard accounting method and tools with limited oversight.

The inability of all the states but Lagos to explore avenues for tapping internally generated revenue (IGR), as alternative means of financing development projects remains a setback to financial sustainability. Only few states aside from Lagos (Ogun, Cross River, Delta and Rivers State) derive at least 25 percent of aggregate revenue from internal source based on our analysis of 2010 budgets. On the flipside, an overwhelming portion of budget allocation is expended on recurrent expenditure, leaving very little for capital projects. Leading the pack in ratio of recurrent expenditure to total budget is Bayelsa, Imo and Abia States, while Aqua Ibom, Rivers and Kaduna State leads in total volume of capital expenditure in 2010 (see chart below).

Some other states maintain quite a reasonably low overhead or at least are able to cover their recurrent expenditures from internally generated sources like Cross River and Rivers State (where recurrent expenditure accounts for less than 25 percent of total budget and is more than covered by internally generated income). In striving to build a robust financial base for the future, some states like Rivers has gone further by creating a reserve fund where it saves 1 billion Naira monthly, having accumulated 27 billion Naira as at October 2010.

Lagos state has progressed quite well also to the point of earning far more revenue (over 70 percent) from domestic sources than it derives from federal allocation. It is therefore discernable that unless states are capable of demonstrating prudent and judicious resource-management of free money accruing from federal allocation, how will they be able to efficiently deploy other-peoples-money raised from the capital market through bond issuance?

* For Nigeria in 2010 budget – 66.4% and 33,6% is recurrent and capital expenditures respectively.
**IGR – Internally Generated Income
Source: Researched and compiled from 2010 budget proposals of respective states and federal government.

…Towards New Accounting Standards
Despite the clear and stringent requirements stipulated by the financial regulatory agencies for bond issuing, public accounting systems (PAS) in practically all the states of Nigeria (except Lagos State) remains quite sub-standard and begs for serious upgrading to meet the demands of the twenty-first century. This indeed should be an additional hurdle that states ought to meet in their quest to issue bonds in the capital market. In that regard one might consider the recently introduced regulation on implementing international financial accounting standard, as laudable effort by the apex monetary institution and regulatory agencies, because that could help align accounting practices in Nigeria with global best practices.

Overall financial status of both the Nigerian nation and most federating states, as we know it today is quite dicey. Whereas effort is ongoing to surmount developmental problems (namely electricity shortage, infrastructural backlog, handle post-amnesty issues, attain food security and create jobs), deficit spending pattern is cause for major concern. Notwithstanding rising oil prices that is occurring in the face of fragile peace in the Niger Delta the nation and its federating states might be treading on a quicksand by neglecting to improve financial management practices. Some crucial issues to consider might include the following:

  1. It is simply a no-brainer that Nigeria needs to reverse course quickly by restructuring and streamlining operating cost of its bloated and incapacitated public sector, which can help reign in budget deficit. How much longer Nigeria can afford to doll out the egregious petroleum subsidy without risking total insolvency remains a big question.

  2. Set the Sovereign Wealth Fund (SWF) rolling and gradually beef up the external reserves – the timing couldn’t be better with ongoing global economic recovery and high oil prices that are way ahead of benchmark budget price of $60.

  3. Follow through on helping the state governments set up and operate robust and functional Debt Management Offices (DMO) with the responsibility for originating, monitoring and administering their debt-stock.

  4. Aggressively revamp and modernize public accounting system (PAS) infrastructure within the states. This is inevitable and extremely urgent. It can be done through deploying technology-based, efficient and secure budgetary, audit and financial management software, which will drastically enhance disclosure, transparency and accountability.

  5. Enacting and adhering to fiscal responsibility act in all the states and obtaining unbiased credit ratings is an imperative that will compel states to open up to third-party financial scrutiny and oversight of independent agencies and civic society groups.

  6. Deepen transparent and competitive public procurement processes through enacting uniform legislations and empowering autonomous institutions to administer and implement regulations that can help contain cost and curtail contract overpricing.

Chamberlain is a New York based financial professional and member of Rivers State Economic Advisory Council.

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