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2016 Budget And The Imperatives Of Public Borrowing

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[caption id="attachment_4377" align="alignnone" width="600"]DG DMO Dr. Abraham Nwankwo[/caption]

Ifeanyi Omokwe
The 2016 budget like previous budgets can be described as ‘promising’ for the betterment of the Nigerian people. Indeed, it is a step towards making our nation great. Conscious steps ranging from the budget on capital expenditure, welfare services to be offered to the teeming youth, and the slash in cost of servicing the executive arm of government, shows nothing but promises for a brighter future. Whereas we must celebrate the content of the budget, coupled with the integrity of President Muhammadu Buhari, there is much that can be achieved in the positive light.

Politically, we must recognize that the president has gone great lengths in accomplishing part of his campaign mantra of “change” to Nigerians. However, we must not be overexcited about the initiative until we have subjected it to intellectual scrutiny as to the effects of the budget on the Nigerian economy and to posterity. It is important to note that the failure to do this will automatically make Nigerians similar to the proverbial beggars that ride on horses and cruise in Ferraris. This similarity exists ultimately because our collective intelligence has been toyed with time and over again by the political warlords, due to our inability to conduct a proper causal analysis of our intended actions as a nation. The following paragraphs should explain better.

If we were to study politics 101, the first thing we would be taught is the superstructure and substructure theology, where it is believed that the economy (substructure) controls or influences the political, cultural and social spheres (superstructure) of the society. However, the central truth remains that the politicians control the economy irrespective of what comes after. The Nigerian experience under President Buhari is that it is ultimately unchecked politics that destroys the economy. This is evident in the war against corruption and the promises it holds for the proper management of public funds.

In simple English, all this banter just goes to say that the President has made a politically correct step. And the implications transcend to projected economic prosperity.

Naysayers and prophets of doom will be hasty accusers of the source of revenue; especially the issue of public borrowing vis-à-vis the nation’s debt profile.

The implications of public borrowing are enormous for us as a country. Economic expert Nimal Sandaratne puts it thus: Government borrowing is not necessarily detrimental to an economy. In fact it could be advantageous if the funds borrowed are used for the long term development of the country and gives a return higher than the interest paid on the borrowing. Borrowing is a means of increasing total savings to enable increased investment. Short term foreign borrowing can assist in resolving constraints in foreign resources to tide over temporary balance of payments difficulties such as under the Stand-by Agreement with the IMF or Chinese government owned banks. Large development projects that confer benefits in the long run need borrowed funds. Therefore government borrowing is not inherently bad. In fact it could be an important means of spurring an economy to a higher trajectory of economic growth than its current resources permit.

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Let us attempt to find a correlation between the concept of political correctness and economic prosperity. This is very crucial to our understanding of the subject matter because we cannot overlook the environment with which the promises were made and are being kept. At the time the promises were made, the price of oil was at a whooping sum of $120 per barrel. The implication therefore is that the policy would have incurred minimal borrowing under such fiscal regime. However, the reality of the Nigerian oil predicament today is that oil sells for about $32 per barrel and is expected to drop to $20 based on IMF speculations. For a country that is making bold steps in diversifying the economy, this spells great boom especially as the funds is budgeted for capital expenditure.

Besides, Nigeria’s economy has been described as one of the most attractive investment destinations in the emerging markets despite the headwind blowing across most oil producing nations since 2014, this can be well attributed to the emergence of the Debt Management Office (DMO) and its effectiveness in successfully restructuring Nigeria’s loan.

It would be recalled that the DMO resuscitated the Domestic Bond Market in 2003 when it first issued FGN Bonds.  This landmark achievement was intended to restructure the Government’s domestic borrowing which was predominantly short term and to develop the  domestic  bond market which had been moribund for about 20 years.

The emergence of Dr. Abraham Nwankwo at the helm of DMO on July 1 2007 almost coincided with the final exit of Nigeria from both the Paris and London club debts in 2006. Before then, our external debts had remained unsustainable as a result of the crushing debt burden arising from the external debt overhang. Following the exit from both Paris and London club debts, our external debt fell from an all-time high of about $35 billion in 2004 with an external debt-to-GDP ratio of over 40 percent to about 3.5 billion in 2006 and an external debt-to-GDP ratio of 2.3 percent respectively.

Under his guidance, DMO has relentlessly pursued the realization of its statutory mandate and has recorded verifiable achievements, making it the pride of the nation across Africa and the world.
In addition to the maintenance of an accurate and up to date data which are published periodically, DMO has ensured regular and timely servicing of government’s debt. As a result of the adoption of sound practices in public debt management, DMO has continued to conduct an annual Debt Sustainability Analysis (DSA) and has successfully prepared a Medium Term Debt Management Strategy (MTDS), 2012-2015 which is being implemented.

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Currently, our debt-to-GDP ratio at about 12 per cent, against our peers’ more than 60 per cent, we are so creditworthy that we can comfortably borrow as high as $270bn during the next four years without being debt trapped so long as, going forward, all our debts are for project-driven, particularly infrastructure-based loans that by reducing our current infrastructure deficit, reduce the present high cost of doing business and high interest rate causing high arbitrage.

Nigeria has all the technical expertise in the country to address all our current economic challenges, including the ongoing efforts to block leakages in revenue and wastages in expenditure.
A comparative analysis of Nigeria and some foreign countries Debt-to-GDP ratio will further elaborate on the issue. Let us pose these questions, why are the rich nations also the most indebted nations in the world? In other words, Comparing Nigeria’s debt-to-GDP ratio which currently stands at 12 per cent to other powerful economies in the world, like Japan which currently stands at 224 per cent; Italy’s at 128.50 per cent; the United States of America at 107 per cent; France’s at 95 per cent; and the United Kingdom at 89.80 per cent? What about Nigeria’s peer countries like South Africa with debt-to-GDP at about 44 per cent; India’s 66.10 per cent; Brazil’s 60.8 per cent; Kenya’s 50 per cent; Ghana’s 67.50 per cent, and so it goes?

Finally, it has been showed above that the integrity of the president and the competence of the DMO in the management of funds will have a positive effect as relates to the issue of public borrowing, effective management of public funds as well as managing Nigeria’s debt profile. Indeed, we are on the part of political correctness and economic sanity for the prosperity of Nigeria.

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