When more loans look deceptively attractive

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The World Bank and the federal government were locked in a strange argument last week over Nigeria’s crushing public debt burden. Gloria Joseph-Raji, a senior economist with the World Bank was at the centre of the storm. Mrs. Kemi Adeosun, Nigeria’s minister of finance who speaks English with Theresa May’s accent, ruffled the hornet’s nest when she told newsmen that Nigeria would have to borrow more to fi x decaying infrastructure. Joseph-Raji countered that Nigeria’s debt was no longer sustainable. She backed her claim with an array of statistics.

The World Bank has since reversed its position. It now agrees that Nigeria has to borrow more to fix infrastructure.

The truth, however, is that Nigeria’s debt is ballooning out of control. Debt crisis is a global phenomenon plaguing both rich and poor nations alike, but Nigeria’s debt has some peculiarities. With the national debt at a scant 19 per cent of GDP, Nigeria’s debt looks deceptively comfortable. The national debt of the United States of America (USA), the world’s largest economy stands at 104 per cent of its GDP. Japan’s case is worse than that of the U.S.

The world’s third largest economy fl ounders under the weight of $10.04 trillion as national debt. That amounts to 200 per cent of Japan’s GDP. The bad news about Nigeria’s national debt is in its debt-to-revenue ratio. America’s budget defi cit amounts to 43 per cent of its revenue. Nigeria’s budget deficit is 60 per cent of government income.

That was the main plank of JosephRaji’s argument. With government revenue accounting for a scant 40 per cent of the nation’s annual budget, the country’s debt at a total of $64 billion is becoming an unbearable burden despite the comfortable debt-to-GDP ratio of 19 per cent. With domestic debt at N19 trillion, debt servicing for 2017 hovers around N600 billion.

Th e situation is so precarious that the Debt Management Office (DMO) is now trying to balance the act by raising more foreign loans and less domestic debts. The DMO is therefore chalking up foreign loans to service domestic debts.

The reason is obvious. Foreign debts attract lower interest rates than domestic debts. Federal Government Treasury Bills carry a backbreaking 18 per cent yield. On the contrary, even as Nigeria is regarded as high risk borrower in the international money market, it could still raise foreign loans at anything from eight per cent interest rate.

However, as low as the interest on foreign loans may be, they still constitute the same risk of unsustainable servicing burden as domestic debts with double digit interest rates. The risk with foreign debts is escalated by the likelihood of external shocks in the oil market. If oil prices plummet the way they did in 2015, the consequent loss of revenue would almost certainly trigger a replay of the phenomenon in February 2017 when the exchange rate of the naira dropped to N520 to the dollar.

A sudden escalation of the crisis in the Niger Delta could mitigate production and as well instigate a calamitous drop in oil revenue that would crash the exchange rate of the naira. Under such a worst case scenario, the cost of servicing the foreign debt with a weak naira could be as high as the interest on domestic debts. The solution to Nigeria’s debt crisis lies in higher tax revenue. Nigeria has one of the lowest tax-to-GDP ratios in the world.

The figure stands at a paltry six per cent. The Republic of Ghana, an economy at the same level of development as Nigeria, garners a healthy 20 per cent of GDP as tax revenue. Germany’s tax-to-GDP ratio is an intimidating 43 per cent.

Nigeria can earn more from tax revenue by widening and deepening its tax net. Nigeria has millions of millionaires who evade tax. They must be captured in the tax net.

The Federal government now targets 2019 as the deadline for ending Nigeria’s shameful dependence on imported refined petroleum products. Locally refined petrol can hit retail outlets at a pump price as low as N80 per litre. If the federal government slaps petroleum tax of N10 per litre on locally refined petrol, that could only push the pump price to N90 which is very comfortable both for motorists and tax collectors.

Th at alone could fetch N146 billion annually at consumption rate of 40 million litres per day. A similar tax on diesel could chip in anything from N40 billion per annum. Government can also raise more revenue by introducing the British equivalent of road tax on every vehicle plying the roads. Road tax in Britain amounts to 228 pounds (N91, 200 at an official rate of N400 to the pound) for the lowest valued vehicle on the road. Trucks and luxury cars pay higher fees.

The federal government could slap a road tax of N3,000 per annum for the lowest valued vehicle on the road. With an estimated 11.2 million vehicles on Nigerian roads, road tax could fetch as much as N33.6 billion annually, while considerable sums could as well be gleaned from the re-introduction of toll gates. Th e debt crisis cannot be settled with a resort to more external debts. Tax revenue does it better.

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