I Am Worried Our Debts Are Unsustainable -Opeyemi Agbaje – Nigeria Politics Online

Agbaje Opeyemi is the Chief Executive Officer of RTC Advisory Services Limited (formerly Resources and Trust Company Ltd). He is a leading financial and policy analyst, a strategy and business consultant and lawyer. He was former Head of Department of Strategy, Entrepreneurship and Business Environment at the Lagos Business School, Nigeria. In this exclusive interview with Nigeria Politics Online’s team of OPEYEMI SALAU and TAIWO OKANLAWON, he speaks on why attentions should be on how executive spend and execute projects, National Assembly, Exchange Rate, FOREX, Capital Expenditure and other issues. Excerpts:


Question: NASS finally approved N7.441trn for 2017 budget; do you see this budget improving the situation of the country’s economy?

Answer: Well, there is an increase in the budget from last year’s N6trn to N7.441trn but remember that the exchange rate has also gone to N305 to $1. So, in dollar terms the increase may not be significant. The good point in it again, noting the dollar impact, is the implication of the dollar devaluation. But the good thing is the increase in the capital expenditure, that’s the largest increase in budget. So, capital expenditure has gone up by 37% from N1.6trillion last year to N2.177trillion this year. That indicates an attempt to increase the portion of capital expenditure from the budget. Capital expenditure in 2017 is almost 30% of the budget. That’s a recognition that we need to spend more on roads, on infrastructure and all of that.

The big problem with this budget which is the continuation of the last two years budgets is the rising debt service obligation in the budget. So, in this year’s budget, the debt service obligation is over the total budget, about 25% of the budget. If you put it over revenue just like last year, it will probably be about 40% and it’s revenue we use to pay, service debt not the budget because budget is spending. So, I worry about that and I worry about the strategy of borrowing. For me, it indicates that borrowing may not be a sustainable strategy for us. I think we need a strategy that focuses on private capital which is available globally but for some reasons, we haven’t yet emphasised that. Yes, in 2015 and 2016, there were constraints that prevented private capital from coming; the exchange rate issue and absence of a clear economy policy. But now, we have improved a lot on those. The exchange rate for foreign investors is now close to market which is already affecting the capital market positively and we now have economic recovery and growth plan. Now, we should be more competitive going for foreign private capital injection into this economy and I think the government strategy should focus a lot more on that instead of borrowing in a manner that begins to look unsustainable, in my view. You can’t be spending 50% of your revenue on debt service and continue to increase borrowing which is largely the strategy we have seen in the last two years. So, in summary, yes there are commendable aspects of it, particularly, the attempt to focus on capital expenditure; mostly spend in the Ministry of Power, Works and Housing and the Ministry of Transportation. Those are two important areas but the big worry is that we continue to sub-optimize private capital and we are beginning to go into levels in which I think from the point of debt servicing, our debts may be becoming unsustainable.

Question: With N7.441trn approved, N2.174trn which represents 29 per cent of the total budget is meant for capital project. This is a significant improvement on paper. Will the funds be released this year and will the impact of the expenditure be felt in 2017 because close to half of the year is gone.

Answer: That’s the problem we have been facing. We faced the same problem last year. The budget last year was passed in May and this one too is being passed in May. It is a suboptimal approach. That time lost can never be recovered. But to the extent that the government has found a way of  saying it extends implementation of the budget to March and sometimes to April or May, so they will spend this capital expenditure up to may be May 2018. But it’s not the right way, it’s not optimal, it reduces the positive impact with our capital expenditure, and we have been in this our democracy thing since 1999. We should have perfected by now, a process by which the budget can get to the National Assembly by July or August and be passed by December or November, so that by January 1st we start implementation, that should be the ideal approach.

Question: What is your take on National Assembly raising its budget from N115bn to N125bn?

Answer: I would be less critical of the National Assembly than most commentators. The reason I said that is that we should remember that their budget which is high was N150 billion  in 2015, and reduced to N110billion in 2016,  and in 2016 when it was reduced, the budget got larger  from N4trn to N6tr. So,  they took it and now the context of N125b over N7.4tn, so I want to appreciate the  fact that they reduced it last year and they have not yet increased it to the former level which was N150bn. The other point I will like to make is that we spend a disproportionate amount of time on the National Assembly budget while ignoring the real spender of money which is the executive’s budget. This budget of N125bn over N7.4trn represents 1.6% of the budget and we continue arguing about 1.6% of the budget which is okay. I agree that the National Assembly’s budget has not looked transparent especially with the report we heard about the kind of money individual Senator takes. But let us pay attention also to the person that spends 95% of the budget. That is where the biggest corruption, with due respect, is likely to happen. That is where the biggest value of money is likely to be lost. I have said this before, all those years when we used to shout about the National Assembly budget, they were spending 3% of the budget and we were always talking about 3% of the budget and at the time their budget was N150bn over N4trn, it was 3%, now it is 1.6% and yet that is what we focus on. What of the person (the Executive) spending 95% of the budget? So for me, the logic is a bit worrying, it is like the Yoruba adage “eni a le mu la n le di mo.” It seems to me that is what we are doing. Why don’t we look at the man spending and wasting 95% of the budget. So, I am also critical of the kind of spending of the National Assembly but my common sense tells me that I should focus on the man that spends all of the money, rather than the man who spends 1.6% of the money.

Question: How do you see the rejection of budget for the office of the SGF?

Answer: From the indications we have seen, and for some of us who know a bit of goings on in Abuja, the Executives always has too much money, in my view, to spend. When you spend N500m the way that of the office of SGF spent the money meant for IDPs the last time, when you hear about the kind of monies that were given to NSA under the former regime, when you see the way money is spent in Abuja, then you know that they have more money than useful use for money. So, anything we can use to reduce and to make the general budgeting process, whether the executives, the Legislature or the Judiciary more transparent.

In fact, like I said, I also commend the Senate because for the first time ever since 1999, we now have a breakdown of the National Assembly budget. So, we are on the path to holding them accountable. Before, all we had was their total spending. We had no way of knowing the breakdown. Because of civil society, advocacy and the commitment from the Senate President, we now know the breakdown, now we can begin to hold them accountable. We are making some progress and I think it is wise to appreciate that progress. But of course, we will continue to call for continuing transparency but not just focus on the National Assembly. In my view, we should focus also most importantly on executive; the one that spends 93% of the budget. Let’s hold them accountable.

Question: After lots of campaigns on buying locally made goods and banning importations such as rice, we expected that dependency on the exportation of crude oil should reduce, but unfortunately, the budget revenue still shows oil exportation as the major source of revenue. What is your take on this?

Answer: Well, I share your frustration, I think we paid lips service to all of this diversification, so  far, I think the logistic shows that we have a mental addiction to this oil, I have heard this line which I find a bit strange, that they all utter now “oil got us into trouble and oil will build us back” and when they say it, they make it sounded profound, but for me it is a meaningless statement and it’s a sign that we have not understood the imperatives of diversification and we continue to cling to oil and it reflect in those figures. We haven’t done anything structural except just talk to reduce this dependency on oil.  The dependency and challenge of oil is in two places: diversifying our exports so that we don’t just export crude oil, so that private businesses export processed agricultural goods, not just raw agricultural commodities, manufactured goods, ICT exports, even in terms of the oil, we should be increasing the share of refined petroleum products and petrochemicals in our exports, not just crude oil. That means we must build refineries before we can export refined petroleum and we must satisfy local consumption. We must begin to export solid minerals and we have many other mines in Nigeria but again, to get people to invest in that mines, that means we must provide a stable investment environment. So, we must do the hard work of getting refined petroleum products and petrochemicals, mining investors in solid mineral sector, a competitive manufacturing sector which means we must have power and we must ease the logistic for manufacturing. We must continue to support ICT sector so that our young men and programmers who are increasing in number can also begin to export those goods. And we must focus on our informal creative sector; football, fashion, Nollywood and all of those things that can earn us significant export potentials. That is one, we must diversify our exports and we have not yet done it.

The second beat is in terms of government revenue where government gets its own revenue from. Now, that means that at some point soon or even now, we must solve the problem of taxation. How do we increase the tax net? Get more people to pay, get informal economy to pay taxes, which is tied with all source of initiatives including increasing the technology base of government, making government run more on technology platforms, National I.D card projects, personal identity, all of those things are tied into business and then I think that whether we like it or not, we have to confront the issue of Value Added Tax, (VAT) increase. I agree with those who said we shouldn’t do it in a time of recession. But sooner than later, as I have personally done a review of the tax rate across Africa and the average is between 10% and 17.5%. Nigeria stands alone at 5% and that’s strange because we are bigger than all these other economies. Therefore, when you look at the portion of this, taxation as a share of government budget is inappropriate and to the extent that we’ve found out that VAT is the easier tax to collect in this economy. The logic of modest increase in VAT rate from 5% to 6% is compelling but I agree that we shouldn’t do it until we are sure there is a strong economy recovery and have again reversed the increases in poverty and unemployment in the last two years.

So, generally, the point is we have to increase exports and therefore increase the share of revenue that comes from exporting other things which will also help to solve our export challenge because if we are exporting other things, we will have alternative sources of revenue both from government and from the private sectors and then we must diversify our government reliance on petrol or crude oil for its revenue. This means, ultimately, reviewing our taxes.

Question: The increase in expenditure came with a significant mark up in the benchmark crude oil price to $44.5 per barrel from the N42.5 per barrel proposed by the President; don’t you think they should have stuck to President’s N42.5 per barrel?

Answer: well, we’ve had that trend since 1999, every single year. As a matter of fact that trend is why we are in trouble. When we say we didn’t save, we should apportion the blame equally because fixing the budget benchmark is a means of saving because as happened under Obasanjo and even Jonathan, those times when Okonjo Iweala was Finance Minister, we always set a conservative budget benchmark to leave a gap between the price so that we can save the difference but the National Assembly always raised it and at least reduce the scope for saving by raising it and that’s part of why we have nothing left when the oil party was over. We have not accumulated any savings. In this year’s own, I’m not too worried, to be fair to the National Assembly, whether at $42.5 or $44.5, I think the decrease is modest. And two, both are realistic; both still leave a margin for saving. I think so far, we’ve seen an average of crude oil ranges between $50 and $55, so at $44.5, I guess it’s still fair. I think generally however, the principle we should follow is that we should retain the one that the Executive does because that was done based on trend and analysis. The National Assembly basically just look at newspapers in my view and say since the price is $50, let’s raise it to $55 so we can have more money to spend. I don’t think that is a logical and scientific approach to fixing the budget. The budget benchmark should be fixed based on some principles and we should always remember leaving a gap to enable us to save and therefore it is desirable that the National Assembly should understand that by fixing the conservative benchmark we are allowing the country save for the next time that oil prices collapse.

Question: N1.84trn (20%) is for debt servicing, some experts have called on FG to make the debt profile public, what is your take on this?

Answer: Well, the debt figures are public, for instance the debt service in this year budget we are spending almost  N1.7trn on debt service. Last year, it was N1.4trn and then even the total quantum of the debt, we just looked at the figures and said, some days ago, we knew what the debt figures were. The real issue is the debt strategy itself. The government, I think they have an unspoken bias against private sectors, against people from private investment and that’s not at the level of policy, because when you read at the economy recovery and growth plan, it says that it’s based on private capital. But when you look at actual behavior, at least in the first two years, maybe it will change. Now that we’ve rating, the ARGP, the debt figures are not secret; they well known. The debt management office frequently publishes those figures and we frequently work with those figures. But what they tell us is that when you look at debt over GDP which is what the ministry and the government emphasize, they said the debt is sustainable because our debt over GDP is low compared to global standard and that is untrue. But it is not debt over GDP that services loans, it is your revenue with which you service loans and the debt service ratio is very bad especially when you don’t use it over the budget. When you use it over revenue and even when you don’t use it over budgeted revenue -because budgeted revenue is always over-optimistic- when you use it over actual revenue and the figure we see suggest that over actual revenue shows that the debt service is between 50-60%, that cannot make sense. So, we need a critical reappraisal of our debt strategy and that is worrisome especially because the presidency just sent another request for may be $8bn-10bn borrowing through the National Assembly before the president traveled. So it’s worrying, yes, we know that some of these debts are long-term debts with low interest but yet they are foreign currency debts and their impacts on our budget- current budget, not even long term budget. These are serious and I think unsustainable.

Question: Last year, we witnessed a lot of controversies relating to the budget, from stealing of budget to rejection and all of those dramas, but this year’s budget has been able to pass through the National Assembly with less of those dramas, so what do you think is responsible for this progress?

Answer: Yes, we also have a small crisis this year that police came and took away the budget. But that is a minor one relative to last year’s own. Quite frankly, based on my own observation of development last year, I put the blame of last year more at the executive level, because I found out that Nigerians like to blame the National Assembly, but what we saw last year was a poorly prepared budget sent by the executive, and then at some point when it was realized that the budget was poorly prepared, somebody came, took the whole budget and then brought a new one, and then we said it was missing and all of that. I think the core problem last year was that we had a new team of the executive who were not familiar with the budget process and who were learning on the job. Then, we made some adjustment subsequently. We appointed Ben Akabueze as the director of budget, we got a grasp of the finances of the country at the budget and planning ministry and all that. So, I think we take it that last year was a learning curve for the people in the budget and planning ministry and this year perhaps is the collaboration between them and the National Assembly has improved also.

Question: Earlier on, you mentioned Foreign Exchange rate, how do you see the intervention of our FOREX affecting the budget performance as against 2016 budget?

Answer: Well, the first point which I mentioned earlier, is that we should always remember that especially the capital expenditure budget is usually spent in Dollars and therefore FX is relevant, even though we see the figures for capital expenditure is in Naira but we should also remember that all of those Naira in the end they will award  a road or rail contract to Julius Berger or China or somebody else and they will pay them in dollar and therefore the quantum of money depending on the exchange rate is an issue. Like I said, if you look at the dollar, our budget in dollar terms is actually falling. If you look at 2011 or 2010, the figure is bigger in dollar terms than 2016 or 2017 because then, the exchange rate was N117 to $1 and now it is N305, and N305 is not a completely realistic rate because even in the CBN, some people are getting at N360 or N370, so that is one factor.

The other factor is that, well the CBN policies have improved in the last few months and it’s already having an impact on the economy. Because manufacturers have better supply of FX and the GDP growth figures will be better, purchasing managers’ index will be better and employment will improve marginally, as long as you have goods, you can employ people you laid off, I mean once you have raw materials. The other thing is that SMEs are getting better supply of FX. So, you have this $20,000 window that CBN has opened for SMEs which will also affect performance, all of these translate to taxes and exercise duties and customs duties for government, so it also improves the budget performance. And we already see the capital market growing in this last few weeks, essentially because foreign portfolio investors have more confidence in Nigeria because now, they know they can get their dollars out around N370. That may be very significant, it means remittances can return, foreign portfolio on the capital market may return, even foreign investments in government bonds which help to finance government budgets will also improve because there is a large deficit of N2.357tr in this budget, so they need people to lend them that money and half of it every year or more than half of it comes from foreign portfolio investors who are buying Nigeria’s treasury bill and treasury bonds.

So all of that, I think to the credit of CBN and the government, the FX outlooks have improved in the last three months; helped by higher up prices admittedly, a successful euro bond, those were the two major factors but also maybe some policy flexibility coming out of the Central Bank. So, that I think has been one of the areas that we have improved policy.

Question: Sir, with more debts to be financed in this year’s budget, what is your advice to the government?

Answer: Well, let me take it holistically. My major concerns about this budget is the reliance on borrowing as the primary strategy for financing the debt and even as a primary strategy of financing the economy, I think we should shift that strategy to a reliance on private capital, domestic and foreign. That requires the policy to change, instead of borrowing N3tr to do a rail project; the Chinese investors would have done it with their own N3tr if we give them a concession. Why do we prefer to borrow? I don’t understand. It’s a misery. If we give them a concession, go and do this project, they will do it with their money, GEE wants to do our rail project now with their money as much as $5b, so why don’t we do more of that? Why do we use our own money to fix airport when we can concession the airport to private person, and then government can now use its money to do healthcare, security, education, policing, the thing that nobody else can do, to improve public water supply, to improve security and those kind of things, so why are we wasting government money to build airport, doing railway, borrowing to do it when private capital is begging to do it, why don’t we open up the markets so that we can build ten refineries? Why are we trying to repair useless refineries? My biggest concern and biggest gap in politics I found something of a misery is this reliance on borrowing and it is in the budget. If we can shift the strategy, we will reduce this deficit that we are incurring, we will reduce this borrowing that we are incurring which is increasing our foreign debt and increasing our reliance on foreign portfolio investors to finance the budget. One of the consequences on this reliance on this foreign portfolio investors to finance the budget is high interest rate, because for the foreign people, for them to lend you money to finance your budget, the cost of the TB must be higher than the inflation rate and inflation is over 17% now, which means government must establish TB rate at 18%, instead of us to reduce borrowing, the government should do its TB at 5% and let us lend at 13% or 14%o. But the reason we can’t do that is that we have to attract foreign portfolio investors to come and buy treasury bills. All of that goes back to the same problem, the focus on borrowing, government borrowing, government control, government investment in infrastructure, rather than allowing the private sector. Like I said, in the ERGP, we have actually rejected that in the government’s own ERGP, we will allow private sector to do it. We will adopt market mechanism, we will allow market to fix prices, we’ve already said all these but not yet showing in our behavior at least in most areas. My main concern is that we need to resolve that ideologies of strategic issues and then all other things will follow from that. The other thing is that, I think if we don’t do it in 2017, in 2018, we have to examine our Value Added Tax and we have to focus on deliberate policy to increase our non-oil exports, that again is in the ERGP but it now has to be translated to actions.

Question: An expert argued that the budget of Power, Works and Housing is more concentrated on the Power rather than the roads, what is your own opinion about this?

Answer: The breakdown between Power, Work and Housing, I’m sure we will soon get the figures but in previous years actually, most of the money in Power, Work and Housing has been on the roads. I’ve not seen the breakdown of this one, we just have the total figure of N553b. But I have the breakdown of the last two years; the largest chunk typically went to roads and then we have the second one, Power and then Housing was small. From what I have seen previously, the largest chunk typically goes to Works, because they have over a thousand contracts, they even cannot fund the entire projects. So, what the Minister has been doing is deciding on prioritization, say we will focus on Lagos-Ibadan Expressway. We will focus on getting the contract drawing for the Niger bridge, but yes I do agree with you, and even Power, we haven’t been spending so much money because Power has been privatized, it’s a private sector so, the money in power is being spent on the transmission network which is the only part that remains in government and then the NIPP which we have not yet fully sold off. I’m not sure the figures bear out such accusations that we are spending money on Power than on roads, except you have the figures for this year, but based on what I have seen in previous budget, that’s not the case.

Question: Lastly, on issue of debt, the EFFC last year gave us figures of enormous recovered loots, but this year’s budget does not cover up for our deficit, why is that so sir?

Answer: We had that debate last year, because government was issuing big figures that it has recovered, and then the logical question then became, so if we had recovered something trillion, at a point they said the money in the TSA was N3trn and they have recovered up to N1tr, why are we then saying there is a deficit of N2.3trn, why do we then need to borrow to finance the budget when we have N2.3trn.

The truth is that what we have recovered is a lot smaller than what the propaganda suggests. There is a big figure that the EFCC claims but 95% of what they claim are under interim forfeiture orders, which the way it works in the legal process is that EFCC seize your house or your money, they go to a judge and the judge gives them an interim for future orders, the judge then say but the person who owns it should now come to me proof whether he owns it or not, so until that case is tried, it is not yet a recovery that can go into the government’s budget, that is what the situation is. So, 90% or more of the monies we claimed to have recovered are all under interim for forfeiture orders and it’s only a small figure, I think when they brought out the figures last year, it was only about N70bn or so that are final forfeitures. That’s in the context of our budget deficit of N2.3trn N70bn was just recovered. So, that is the reality, so we should discriminate between the propaganda that EFCC issues and the reality of what it has in its pocket. But I don’t know what happened to the $43m, I think the judge said it should be forfeited since nobody came to claim it, if it has been forfeited then maybe this year’s figures will be bigger.

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