TO BORROW OR NOT TO BORROW, LET THE DATA SPEAK

The Federal Government of Nigeria announced on October 2016 that it was going to borrow $29.9 billion (spread over three years) to finance the rebuilding of the nation’s decaying infrastructure and build new ones. The proposal has generated a lot of support and disaffection from various quarters. While some have called for its use to stimulate an ailing economy, others are contending that it amounts to mortgaging the future of the unborn, that whatever we need to finance development and stimulate growth can be sourced for without necessarily borrowing.

My task with this little piece is to present the data on Nigeria’s borrowing side-by-side the data on our ability to pay (economic growth) and give a summary of what I think based on evidence from data. Even though I agree with Prof. Akpan Ekpo that revenue and not GDP pays for debts, the later simply shows our capacity to pay hence this comparison.

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A careful look at Fig 1 above shows that taken in absolute terms, the growth in GDP from 1995 to 2015 is far more than the growth in the total debt stock (TDS). It is curious to note that the gap between the absolute levels of total debt stock and gross domestic product has been more widened with the dawn of the democratic dispensation. This we might conclude is a plus for the managers of the economy and debt accumulation. For example, in 2015, while total debt was about N11 trillion, the GDP was above N94 trillion, almost nine times more than the debt incurred for that year.

Can we thus conclude that since the debt stock in absolute terms is much less than the absolute level of GDP, we should fly to creditors and rake up the debts? The answer might depend on a further examination of evidence. Let us look more closely at what is happening with the data in Fig 2 below.

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The figure above is a deviation from the one presented before. Fig 2 shows the rate of growth in total debt and GDP. For more than twelve years from 1981 (apart from 1998), the rate of debt accumulation grew faster than GDP but fell from 1993 and continued falling until a year before the dawn of democracy when there was a sharp rise in the total debt stock.

The total debt stock fell almost as much as it rose as former president Obasanjo took office in the new democratic dispensation in 1999. The growth rate in total debt stock in this period remained lower than the growth rate in GDP. In fact, for most parts of his administration, the growth rate of debt was consistently reducing except for its sharp rise as his dispensation was winding down.

For the short stint late president Yar’adua had in power, the growth rate of GDP and total debt stock exchanged places, rising and falling at various times.

On the other hand, in the dispensation of former president Jonathan, there were attempts to reduce the growth rate of total debt stock that rose as late president Yar’Adua’s spell at the presidency ended. This effort saw the growth rate in GDP converge with the growth rate in total debt stock. However, like the two presidents before him, the growth rate in total debt stock started rising once again as his administration waned in 2015 unfortunately, the growth rate in GDP at that point (see arrow ↘) started witnessing a downturn, a downturn that continued till the third quarter of 2016 hence plunging the country into a recession.

In absolute terms, the proposed amount to be borrowed by the president is still not as much as the GDP of 2015 nor will it be up to that of 2016. Given that the total debt stock for 2015 was about N11 trillion, and the proposed amount to be borrowed externally is about N10.5 trillion, assuming now that internal borrowing is double the amount of external borrowing, total debt stock will stand at about N21 trillion, implying the annual growth in total debt stock by N7 trillion per year for the next three years (from the day the parliament approves that borrowing plans). Using the 2015 total debt stock figure, it means that in 2016, total debt would have amounted to N18 trillion, it will be N25 trillion in 2017, N32 trillion in 2018 and N39 trillion in 2019; bringing the average growth rate of total debt stock to about 39% per annum in an economy that has been witnessing a fall in its capacity to produce goods and services and also in its capacity to earn revenue!

My conclusion

Even though I agree that there is an urgent need to resuscitate our dying infrastructure and build new ones, and that our capacity to do so with our earnings has drastically been reduced, yet, as Nigerians, we all agree that how much we allocate to projects doesn’t matter as much as how well it is used; over the years, we have been borrowing to finance similar projects with no noticeable outcome, more so, our yearly budgets are supposed to take care of some of these capital needs but have over the years fallen short of expectations. Therefore, I would urge our policy makers to tread softly and explore alternatives to financing our capital needs.

Yes we can borrow, but we must do so with tact and care.

 

© Akpa Emeka Okoro

All Rights Reserved

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