- Is Nigeria taking on too much debt?
‘Borrow, borrow make you shine’ is a Nigerian pidgin English expression used by children in playgrounds across the country. The expression is used to taunt other children with a reputation for borrowing clothing, accessories or even stationery to make them ‘shine’ i.e look better, seem more attractive to the opposite sex or achieve greater levels of acceptance.
It is easier to borrow money than to repay, easier to lend than collect
-David S. Landes
Last week, President Muhammadu Buhari wrote to the senate asking for approval for a $5.5bn loan. The opposition party, PDP and many ordinary citizens were appalled by this request as Nigeria already spends nearly 70% of it’s budget servicing debt. Join me on this journey as I try to contextualise Nigeria’s debt burden and examine whether borrow borrow can truly make Nigeria shine.
The current state of the economy
As a doctor, I find macroeconomics is a lot like medicine. The economy is the patient; a complex organism, who shares many similarities with other patients, but still is a unique human being. There are many things that could be wrong with a sick patient, which is why you perform and review test results to make a diagnosis.
Then treatment is prescribed based on a number of factors including patient age, allergies, clinical preferences, drugs available in that particular environment, local antibiotic resistance patterns & a potential host of other factors.
The Nigerian economy is not unlike a patient that has been in a near fatal car accident. The patient has multiple injuries and needs to be treated in a Level 1 trauma centre. He will require an air ambulance transfer, his airway needs stabilizing, he will need to go on life support, perhaps and few transfusions and then major surgery to recover.
Kemi Adeosun and Godwin Emefiele are the top surgeons in the Nigeria hospital, treating the patient; the critically unwell Nigerian economy. Last week, they prescribed a $5.5bn dollar infusion.
The fact of the matter….
Before I go on, I need to point out that this is just analysis. We need to borrow the money because we don’t have money to even begin to run government next year without it.
In medicine, we previously used the Liverpool Care Pathway, The Liverpool Care Pathway for the Dying Patient (LCP) was a patient care protocol (now discredited) covering palliative care options for patients in the final days or hours of life. It involved patients being casually assessed as terminal ,then heavily sedated & denied any food or water, so the diagnosis became self-fulfilling. Not borrowing would starve Nigeria’s economy so severely that we would essentially be putting the country on the Liverpool Care Pathway en route to malnutrition and certain death.
Lets look at tests that Dr’s Kemi and Godwin looked at when deciding this line of treatment.
1. They looked at the debt to GDP ratio
The debt to GDP ratio tries to compare the total size of the economy, to the amount owed. By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country’s ability to pay back its debt.
It is useful to remember that high public debt should not necessarily cause panic. Japan has a debt to GDP ratio of over 200% (Giving them a debt per capita of $80,000, yes each citizen of Japan technically owes $80,000!) , America has a debt to GDP ratio of about 100%, whilst humble Nigeria has not joined bad gang; our debt to GDP ratio is less than 20%. This should give us the freedom to borrow with reckless abandon and use the money to shine, right? Not exactly.
IMF research has shown, the trajectory of debt-to-GDP ratios can matter more than their overall level so we can’t look at the figures in isolation we must look at the trends. Very similar to medicine, if the patients white cell count is reducing then the infection is improving. If it is increasing then the infection is getting worse and you should change the antibiotic. An isolated value doesn’t give you as much information as the trends. So let us look at the trends.
Even when you look at the trends you can see that Nigeria has been a very good boy and has not joined the bad gang that Japan, United Kingdom and Morocco has. Our debt to GDP ratio has grown much more slowly that the countries that have no home training and have been borrowing recklessly.
In the global economic playground, using just our debt to GDP ratio’s, we have every right to borrow $5bn even $10bn, look what our mates are doing…….
Borrow, Borrow my good child Nigeria and SHINE!!!!!
2. Amount of fiscal space
Not as fast. What about fiscal space?
Fiscal space is the flexibility of a government in its spending choices, and, more generally, to the financial well-being of a government.
Peter Heller defined it, in 2005 as :
The room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy
Moody’s gives a more helpful definition:
The difference between an estimated upper limit of public debt (beyond which action would have to be taken to avoid default) and actual public debt, expressed as a percentage of GDP or equivalently as the difference between the debt-limit-to-GDP percentage and the actual-debt-to-GDP percentage
Dr Ola Brown in her seminal, Nobel prize winning essay gives the most helpful definition:
How much gbese can Nigeria take without it turning to looting, because there is no imaginable way we can pay back. So no one in their right senses will continue to borrow us money
Nigeria claims to have fantastic amounts of fiscal space according to the slide above. Even Moody’s rating agency, as you can see below, is telling the world that we are stable, therefore not about to default….
Countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease-IMF
Even the IMF tells us that when we you have fiscal space bigly, like we do, there is no point in raising taxes too much, so lets konitu enjoying and worry about the debt later
Looks like the only issue doctors of the economy, Dr Kemi Adeosun and Dr Godwin Emefiele have is which club (financing institution) to go to, to get the money and make it rain.
3. Debt to revenue ratio
This beautiful picture I have painted, of borrowing with reckless abandon and flourish begins to dissipate when we start looking at the debt to revenue ratios.
GDP really only shows how much you could be making, if you had an efficient way of taxing that GDP. GDP is more an indicator of potential, actual revenuecan be very different. Especially in countries like Nigeria.
Dreams are not the same as cash
Let me explain with a scenario. You are a banker. I walk into a bank with dreams of borrowing $10bn, although my company currently only makes a few million dollars.
Beside me is my class captain, the head boy of entrepreneurship, my uncle, my godfather, your mentors mentor, the one man bank, Alhaji Aliko Dangote, first of his name, ruler of the 36 kingdoms, juggernaut of African enterprise also known as Ali Cash.
Who do you give the money to? All things being equal?
I trust you will do the sensible thing and give the money to Alhaji, as he has actual revenue that proves that in a certain number of years, providing nothing disastrous…like a zombie apocalypse occurs, he will be able to pay back.
They don’t understand that in Jesus name, by God’s grace, in the next 5 years I will be richer than my Uncle. They have not seen all my efforts in fasting and prayer. They just look at how much I am making.
Unfortunately, therein lies the problem for Nigeria. The same problem as me. These bankers don’t see our ‘potentials’!!!!
The graph above compares debt to revenue; actual cash, not potential. The story changes. All the people that we abused as bad gang earlier are able to generate more revenue from their GDP than we are.
We are way below the world average in term of actual revenue to debt . Turns out that some of the baddest gang members e.g Japan when we look at revenue to debt look like angels to us when we consider actual cash not dreams.
Why do I call them dreams? I believe that mobilising tax revenues in a rich country with a small population, is very different from mobilising tax revenues from a poor country with a large population.
The GDP of Nigeria is about $400bn, when divided by our population, each person gets roughly $2000 per year per person. How do you tax people that are barely eating?
When you divide Denmark’s GDP by it’s population you get about $53,000 per person per year. Much easier to shake down a relatively rich person for tax that a person who is barely surviving.
Head of Abuja office of Social Action, a Non-Governmental Organisation active in debt relief advocacy, Mrs. Vivian Bellonwu-Okafor stated this week that : ‘Borrowing longer-term foreign loans to pay off maturing short-term domestic debt, instead of taking actual steps to gradually reduce and exit debt overhang, is a demonstration of poor economic management’.
The World Bank Chief Economist for African Region, Albert Zeufack, cited similar concerns about the debt to revenue ratio advocating for sustainability in Nigeria’s borrowing.
Truth is that there are countries in the world such as Sri Lanka, Pakistan and Lebanon that have higher debt to revenue ratios.
But we must ask ourselves like good Nigerian children, ‘is this the type of gang I want to join? Will my parents be proud?’
In conclusion, will borrow borrow make us shine? I don’t know about shine, but it will keep us alive so we can continue to ask the question.
Unlike, I implied previously we should definitely not be making rain as we did in the past, we need to target investments/government spending to stimulate businesses and make people richer so they can afford to pay tax, so we can in turn afford to pay back the money we have borrowed.
If everything else fails, we can legalize prostitution like Germany (which makes $18bn yearly from prostitution) and pay back immediately. Where there is life, there is hope…