Governance issues in debt management

bd eze onyekpere
bd eze onyekpere

Nigeria’s incredible and huge debt profile raises serious issues of governance and the rule of law. This assertion is made within the context of the activities of the outgoing President, Major General Muhammadu Buhari (retd) administration that inherited a debt profile of N12.118tn and will be leaving office with debts in excess of N70tn, an addition of not less than N58tn under a space of eight years.This discourse reviews the process and legal regulations for debt management and recommends steps for the incoming administration to ensure that the country’s debt profile becomes sustainable through keeping to the letters and spirit of the law.

The principal provision in S.41 of the Fiscal Responsibility Act is that government at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonably long amortisation period subject to the approval of the appropriate legislative body. Furthermore, the government shall ensure that the level of public debt as a proportion of national income is held at a sustainable level as prescribed by the National Assembly from time to time on the advice of the minister. This provision contemplates a number of fundamental and irreducible principles for incurring debts and debt management.This provision is reinforced by S.48 of the same Act which states that the Federal Government shall ensure that its fiscal and financial affairs are conducted in a transparent manner and accordingly ensure full and timely disclosure and wide publication of all transactions and decisions involving public revenues and expenditures and their implications for its finances. Furthermore, by S.44(1) of the FRA, any government in the federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.

The first of these fundamental principles is that borrowing and debt management are on the Exclusive Legislative List implying that the relevant federal law guides debt management and any state law inconsistent with federal provisions is null and void to the extent of its inconsistency. States are at liberty to make provisions on debt management but such laws, policies and administrative provisions must be in harmony with federal provisions.

The second is that borrowing for recurrent expenditure is clearly not approved. It is a taboo and it is legally forbidden. Thus, borrowing for the payment of salaries and overheads is not within the contemplation of the FRA and other federal laws.  Only capital expenditure and human development are the approved subjects for which debts can be incurred. Capital expenditure is defined to mean spending on an asset that lasts for more than one financial year and expenses associated with the acquisition of such assets. The FRA does not define human development but it is generally understood to be about the process of enlarging people’s freedoms, capacities, opportunities and improving their livelihoods and well-being. Overall, the subject for borrowing must be regenerative in terms of increasing the human capacity, revenue sources, increased productivity and value addition that will build the capacity for debt service and eventual repayment of the debt in future. Considering that we have been using in excess of 90 per cent of retained revenue to service debts in the last two years, the Federal Government and many states of the federation have been operating in defiance of the law.

The third principle is that every request for borrowing and every project to be delivered with the proceeds of borrowing must have a cost benefit analysis. The implication is that the benefits must be seen to clearly outweigh its costs. Cost-benefit-analysis is defined to mean an analysis that compares the cost of undertaking a service, project or programme with the benefits that citizens are likely to derive from it. The costs and benefits may not be financial only, they should include social, environmental and other costs and benefits. From extant practice, governments in Nigeria simply make a decision to borrow because they need finances which are not available to them. There is no published cost benefit analysis underpinning any project executed with borrowed funds. Otherwise, how can one justify the proposal to borrow $800m to be shared out at N5000 each to 10 million families over a six months period, and thereafter the money will be exhausted. If this is approved by the National Assembly, Nigeria would have incurred a humungous debt, but the benefits are not clear. This raises the question; would simply sharing out $800m to the poor be the best and responsive way to alleviate poverty? The answer is obviously in the negative as the money can be invested in regenerating projects that will alleviate poverty, create jobs and strengthen the ability to repay the loan.

The fourth principle is that such borrowing shall be on concessional terms with low interest rate and with a reasonably long amortisation period. Concessional term means the terms of the loan must be at an interest rate not exceeding three per cent. This three per cent rule can only be met through borrowing from international development financial institutions and will be violated by borrowing from commercial financial institutions. However, subnational governments have been borrowing from commercial banks and other sources that defy the three per cent rule. The long amortisation period seeks to avoid a mismatch between the investment of the debt proceeds and the demand of repayment. It gives the debtor increased flexibility rather than being tied to an inflexible and difficult to meet repayment plan.

This fourth principle informs the provisions of the Central Bank of Nigeria Act to the effect that Ways and Means advance from the CBN to the Federal Government, is a temporary advance that should not exceed five per cent of the actual revenue of the previous year and must be repaid within a short time, but not beyond the end of the financial year in which it was incurred. Converting the provisions for a small and temporary advance into a major source of deficit financing and essentially a source of debt and borrowing is in clear violation of the law and a dangerous fiscal practice that the Buhari administration has introduced into our fiscal jurisprudence.

The fifth principle is that debt negotiation and management are to be done with absolute transparency. The debts are not the personal debts of the principal actors, from the president, minister of finance, debt management office officials to the members of the federal legislature. The performance of their respective debt management duties demands utmost good faith, not only to the present generation of taxpayers but to future generations who will be under obligation to repay debt in the next 20 to 40 years of the long amortisation period when the current set of actors who negotiated and (mis) managed the proceeds of the debt would have left public service and many of them would be deceased.