A couple of pre-discussion clarifications. There is a proper context to Polonius’ oft-quoted admonition (Shakespeare’s “Hamlet”) to his son Laertes: “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry”. Incidentally, this context is especially useful as part of any discussion of Nigeria’s new and rising debt profile. Simply put, it is that (as with the concept of a “budget deficit”) there is nothing wrong with the notion of “debt”. What ought to matter are the uses to which borrowed funds are deployed. Borrowing short-term, and at relatively high rates may be an appropriate response to a temporary balance of payment shortage. It is evidently not going to work with structural deficits. It is doubtful if at all borrowing of any kind would help a structural problem. Better, instead to address the changes to the system that remove these kinds of deficits. Similarly, borrowing that increases domestic capacity, including through higher rates of net capital formation, would necessarily pay its cost. This is why the German constitution, for instance, accepts deficits only as far as they are incurred to finance investment.
The current problem, though, with the national debt, is not just that it is rising, it is that we are borrowing to finance current consumption. Regrettably, the structure of the domestic economy and the incentives which government consistently puts in place are such that the consumption pattern that our rising debt drives is not one that feeds through to increases in private investment in the capacity to meet this growing demand. Rather it drives domestic activity in our trading partners, through our high import bill. For this reason, we may yet fulfill the second condition of Benjamin Franklin’s caution on borrowing. We may very soon go “a sorrowing”. It helps, though, that the responsible officers of the state are alive to this possibility.
Sad, yet, is that even in the responses of those responsible for managing the economy, we sway to the songs of a very familiar siren. What difference is there, between today’s refrain and the old argument, which after the 1972 oil crisis (when oil-exporting nations such as ours were flush with petrodollars) argued that we were “under-borrowed” and encouraged us to pile on the debt? Remember that at her most recent public meeting, the minister of finance, and coordinating minister of the economy reported that “It is indeed true that our debt ratio is alright and sustainable at this moment. That is why the rating agencies upgraded Nigeria when they were downgrading everyone else. Our debt-GDP ratio, if you just take federal debt, it is about 17% — both domestic and foreign. If you add what we have from the states, we could get up to 21% as opposed to a standard of 25 to 30% which we have set for the country”.
Surely, we have been down this route once. Down to the argument, also recently canvassed by Dr. (Mrs.) Okonjo-Iweala that “The interest rate at which the Federal Government and states are raising debt at the moment is too high. We are raising debt at 15% because we need the money to finance our expenditure and finance capital. But if you can raise debt at zero or one per cent somewhere else, which one will you go for?” For, several years back, when we were persuaded by the logic of being “under-borrowed” and, on this basis, binged on external debt, a different dynamic from the current global financial and economic crisis was operating to depress lending rates in the West. As soon as President Nixon uncoupled the dollar from the gold standard in 1971, the more radical oil exporters in OPEC (Gadhafi’s Libya to the fore) pushed for higher oil prices to compensate for the “cheaper” dollar. The inflow of dollars into OPEC members’ coffers overwhelmed these economies, forcing exchange rates up, and destroying their competitiveness. Because these economies could not absorb this excess revenue, much of it ended up in the vaults of banks in the West to depress rates there. Thus, when we tried to compensate for being “under-borrowed”, we were technically being lent some of our surplus.
As it is today, the rates were just as low then. And they were floating rates, not fixed. So that as soon as our borrowing binges mopped up the liquidity that was depressing rates, we saw the cost of servicing our debts slowly rise, until the new discourse turned on the “debt overhang” and the implications of “debt peonage”. Today, on the back of the global financial and economic crisis, monetary authorities in Europe and the US have tried to kick-start business and consumer spending by some of the cheapest money policies the world has ever known. Policy rates are as close to zero as is possible in those countries, and my sense is that very soon Nigeria will be tapping into these stream of cheap funds to replace the more expensive domestic variety.
What will happen when those economies begin to recover and rates start to rise? It would matter then what we have done with the borrowed funds. Within this context, it makes sense to enquire into existing possibilities. In the absence of structural reforms that reduces the impact on government spending of the fiscal leakages (egregious examples of which we are daily regaled with) and the public sector’s huge wage bill, is there any chance that we may spend any money usefully?