Category: Foreign reserves

Is Nigeria ‘officially broke’? Why prominent economist’s warning needs a larger view

“Our government is broke. And it’s official.” This was the alarming opening of Dr Obadiah Mailafia’s regular “Scenarios” column in Nigeria’s Vanguard newspaper for 22 June 2020. 

Titled “When government goes for broke”, the column was republished in other dailies and made a fascinating read as the former Central Bank of Nigeria deputy governor added his voice to a growing debate on debt in Africa’s largest economy.  

Mailafia is an economist who ran for president in 2019, coming fourth. He gave debt and revenue figures for the first three months of 2020 as evidence for his claim.

We fact-checked these numbers, as well as two key claims in the article. 

Claim

‘Our government is broke.’

Verdict

misleading

Mailafia said the country’s finance minister had “revealed” that in the first quarter of 2020 –  January to March – 99% of the Nigerian government’s revenue went to repaying debt.

(Note: In May 2020 Nigeria’s cabinet approved a reduced budget tabled by finance minister Zainab Ahmed.)

But is this enough to say the government is broke? Mailafia told Africa Check he meant that the Nigerian government was “getting close to being broke”. 

“That is why I said ‘goes for broke’ in the headline. One cannot say a country is completely broke. The government can sell land, print money or borrow, which is what our government is doing now.” 

Mailafia said his claim was based on figures from Nigeria’s budget office, which helps plan the country’s finances. (Note: The revised figures can be found here.)

The cheque is in the mail

A straight comparison of debt to income is not enough to declare a country bankrupt, experts told Africa Check.

“You cannot make such a conclusion using revenue and debt servicing figures for one quarter,” said Olusegun Ajibola, professor of monetary economics at Caleb University in Lagos. 

“Government revenue accrues over time and so revenue recorded for the first quarter of 2020 may be from the last quarter” of 2019, he said.  

His gist was that a government’s revenue in a particular quarter is not always from transactions in that quarter – it could be payment of a bill issued months before. For example, oil sold this month might be paid for months later.

Ajibola said this was the same for debt repayment. “The debt paid in the first quarter may have fallen due in the previous quarter. You must also consider the debt components being serviced, whether principal or interest.

“Before one can consider a government to be broke, you must consider data from two, three or more quarters.”

Foreign reserves and remittances also count

To get a bigger picture, assets such as foreign reserves should also be considered, Ajibola said. The reserves include foreign currency and treasury bonds. As of 4 August, they were valued at US$35.8 billion.

Foreign remittances also count, the economist said. The most recent data, for January and February, shows that Nigerians living abroad sent $3.1 billion home. In 2019 it was $19.2 billion. These amounts add up to trillions of naira.  (Note: The exchange rate in June, when Mailafia made his claim, was N360 to the dollar).

Matthew Odedokun, economics professor at Kwara State University, Ilorin in north-central Nigeria, agreed that foreign reserves were important in assessing a country’s ability to repay debt.  

The debt burden in relation to the gross domestic product and export earnings should also be considered, Odedokun said. (Note: GDP is the size of a country’s economy and market value of all goods and services produced in a country in a given period, usually a year.)

We therefore rate Mailafia’s claim as misleading.

Nigeria’s economy ‘in a difficult situation’

That being said, there is little doubt that the country’s economy is in a tough phase at the moment, Shehu Aliyu, professor of financial economics at northern Nigeria’s Bayero University, Kano, told Africa Check.

Traffic gridlock in Lagos, Nigeria. (Photo: AFP PIUS UTOMI EKPEI)

“Nigeria has been affected mainly because of the impact of Covid-19 on the global oil market. But that is picking up gradually, so the current difficult economic situation will not last long.”

Oil and gas account for 10% of Nigeria’s GDP, but half of government revenue and 90% of export earnings. In 2019, the government took in only half of the revenue it predicted it would earn from oil and gas. 

The government has also described its finances as being “critically constrained”.

Beyond Covid-19’s impact on oil, Nigeria’s economic woes have been caused by other internal factors, said Sarah Anyanwu, an economics professor at the University of Abuja.

Unhealthy dependence on oil and gas

“The impact of Covid-19 is global so the Nigerian government can’t be blamed for that,” Anyanwu said. “But factors like corruption, insecurity and reliance on oil for foreign exchange need to be addressed.”

Anyanwu added that the threat of violence in some parts of the country was reducing farmers’ productivity. Agriculture is an important part of the economy. In a rare interview in July, president Muhammadu Buhari described insecurity in the country’s north as “very, very disturbing”.

Caleb University’s Ajibola agreed that Nigeria needed to diversify its economy to reduce its dependence on oil.

Claim

During the first quarter, revenues stood at N950 billion.

Verdict

incorrect

We traced this figure to the budget office’s projections for 2020 to 2022, published in April 2020.

Nigeria’s constitution says revenue must be shared among its three levels of government:  federal, state and local. 

The government earned N2.2 trillion in the first quarter of 2020. This was N1.38 trillion in oil revenue and N825.37 billion from non-oil taxes, such as income, value added tax and custom revenues. 

This was before deductions, mainly a 13% deduction from oil revenue for states that produce crude.

After deductions, N1.385 trillion from the main pool of the federation account was shared among the three levels of government. This was according to the sharing formula of 52.68% for the federal government, 26.72% for states and 20.60% for local governments. The federal government got N729.89 billion, states N370.08 billion and local governments N285.32 billion.

Additionally, N296.78 billion from the VAT pool account was shared using a different formula: 15% for the federal government, 50% for states and 35% for local governments.

This means in the first quarter of 2020 the centre got N774.41 billion, states N518.47 billion and local governments N389.19 billion. When independent revenue such as funds generated by its agencies and enterprises are added, the federal government’s revenue in the quarter came to N950.56 billion.

This is the figure Mailafia referred to. But Nigeria’s entire revenue that quarter was in fact N2.2 trillion. If he had said federal revenues stood at N950 billion, he would have been on surer footing. We therefore rate the claim as incorrect.

Claim

Debt servicing obligations stood at N943.12 billion.

Verdict

correct

Mailafia described this amount as “staggering”. The figure he used in the article checks out with budget office data. 

This shows that at the end of March 2020, the federal government had spent N2.37 trillion. Of this, N943.12 billion – the figure quoted by Mailafia – went to repaying debt.

Other costs included N820.1 billion for salaries and pensions, and N139.70 billion for capital projects such as building roads, railways and houses.

As of May 2020, federal government spending had risen to N3.98 trillion – N1.58 trillion of it for debt repayments.

Claim

99% of revenue is being committed to debt servicing alone.

Verdict

correct

Mailafia was also close with the share of central government revenue used for repaying federal debt in the first quarter of 2020. 

The N943.12 billion spent on servicing debt was 99.2% of the N950.56 billion retained by the federal government. 

Mailafia told Africa Check his point was that “it is a bad situation when your debt servicing obligation is almost equal to your revenue”.

Nigeria’s government has said it will borrow to finance about half of its revised 2020 budget of N10.52 trillion. Of the total approved budget, N1.96 trillion will go to capital projects in 2020 while recurrent expenditure will account for the balance of N7.59 trillion.

The Nigerian government has recently said that while its debt to revenue ratio is high, the country’s debt to GDP ratio is within the limit of 25% as stipulated by its national debt management framework of 2018 to 2022. 

Additional reading:

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