What is the appropriate response to the following numbers?
According to newly minted figures from the Debt Management Office (DMO), over the 12 months to end-December 2011, Nigeria’s debt stock increased by 24.37% from N5.235 trillion as at end-December 2010, to N6.510 trillion. Of the end-December 2011 sum, the external component (i.e. claims on national assets by non-resident persons/institutions) at N887.95 billion represents 13.64%. The rest is spoken for by the stock of debts owed locally by government. For context, the country’s total debt stock accounts for about 17.50% of the 2011 GDP numbers.
In a world dominated by concern with Europe’s sovereign debt crisis, one name jumps out of these numbers. Greece. Is Nigeria in danger of a descent down the precipitous slope that has roiled financial markets across the world? Not immediately. Greece’s debt-to-GDP ratio, for one is 160%. In addition, once it gave up its control of monetary policy by joining the euro zone, it was technically borrowing in a “foreign currency”, unable thereafter to inflate away a burdensome debt stock. Besides, the federal government owes the bulk of our debt to local entities.
Moreover, in our own example, at 17.50%, the debt-to-GDP ratio is not just lower than the numbers we see in the euro zone’s periphery, it is well within the debt threshold considered as sustainable for economies such as this. (Except that abstracted from specific contexts, these targets do not make much sense). We ought though to be concerned by the annual growth rate of our debt stock over the last two years. Looking ahead, these numbers can only worsen. With the budget deficit widening, a lot will depend on how well oil prices perform. But even here, there’s a problem. Investigations by the National Assembly into goings-on in the oil sector do not provide enough reassurance that private interests will not continue to capture the gains from any increase in the oil price.
If, on the other hand, because of the confusion surrounding the legal environment in the oil industry, we do not see the increase in investment necessary to boost production capacity, then we will struggle to meet the 2.48 million barrels per day benchmark on which budget 2012 is based. Add to this mix, the fact that the CBN is not glad-handing anymore. It has kept ways and means handouts at a minimum; and would readily push the policy rate up at the slightest sign of inflation.
That said, there’s a strong case to be made for a healthy appetite for debt. First, we need to upgrade existing capacity while building new capacity across all the sectors of this economy. The public budget is so plainly inadequate for this purpose (in part because it is so leaky), and the private sector will not put money in because the cost of having to build the associated infrastructure will price the eventual services/products out of any market. So everyone acknowledges that we have a large borrowing requirement. Indeed, I have been at the end of arguments to the effect that no country ever developed without leverage. At a point, these positions begin to look like self-fulfilling prophecies or arguments in circumlocution. In other words, because strong growth elsewhere has been associated with growing public (and private) debts, Nigeria’s burgeoning national debt is not only to be welcomed but must indicate growth.
Alas, at considerable risk of sounding blasé, correlation is not causation. Debt makes sense only where/when the return from the activities it supports is at least equal to the cost of service. Any other way, chances are that value is being destroyed. Even, in those cases where/when, hypothetically, cost-to-return ratios are healthy, questions around the capacity of a system to absorb (i.e. usefully deploy) additional debt matters. In our case, there’s little doubt that huge system-wide deficits guarantee a positive return from any type of investment in this economy. Just as there’s no doubt that the selfsame inefficiencies in the system that have allowed these deficits to build up will constrain for a while the efficient deployment of investments beyond a certain minima in this economy.
At a different level, we also confront a sequencing dilemma. Despite the yawning investment needs across the economy, a couple of “start-to-finish” issues remain to be resolved. Industry will not yield higher returns for instance, until investment in the power sector shows positive returns.
But having said all this, the strongest argument against our perennial recourse to debt for financing government’s activities is the structure of government expenditure. We ought to be concerned that the public debt is growing on the back, not of investment in new capacity, but of the exertions of spendthrift governments.