I will be the last person and the President will also be the last person to subscribe to a situation in which we would pile up debts. – Ngozi-Okonjo-Iweala
A couple of days ago, the Finance Minister and ‘Coordinating Minister for the Economy’, Dr Ngozi Okonjo-Iweala gave an interview to Vanguard Newspapers where she spoke about a number of issues concerning the Nigerian economy.
She also gave some insight into how she’s managing the Nigerian economy specifically on the issue of debt. Now, they say ‘words are the currency of fools’ because you cannot spend words especially those uttered by a government official. But even more importantly, words spoken have the annoying effect of meaning something completely different in practice.
So perhaps a useful exercise will be to convert the words of the Minister into numbers so we can get a better idea of what she’s talking about yes?
Let’s start off with what I think is the main quote from the interview below
I will be the last person and the President will also be the last person to subscribe to a situation in which we would pile up debts. We watch those indicators like a hawk. Mr President is very clear on this issue. As you well know, we have some ratios that we monitor with regard to GDP.
The norm internationally is that it should not exceed 60% of GDP. In Nigeria, we have adopted 30% out of that because we want to be really careful. Right now our debt to GDP ratio is about 20%, well below the 30% ratio we have set for ourselves.
Now the above sounds very nice and good doesn’t it? In fact if not that we want to be really picky, we should just leave this statement as it is and pray for the Minister’s success as we like to do in Nigeria.
If you Google ‘Nigeria GDP’, you get a figure of $193.67bn. For the purpose of simplicity let’s round this figure up to $200bn (what’s $7bn between friends?).
At the beginning of that interview the Minister mentioned that Nigeria’s economy is expected to grow by 7% per annum for the next couple of years. For the uninitiated, GDP is simply the total of everything, tangible and intangible, that is produced in Nigeria in a year. So this assumes that all told, everyone producing something in Nigeria will increase their output by 7% per year.
Let us assume that we grow at 7% for the next 3 years (including 2012), we will have the following GDP figures
2012 – $214bn
2013 – $229bn
2014 – $245bn
Now even though the govt has set a target of 30% of GDP for borrowing, the figure is currently around the 20% mark. Let us assume that borrowing is a constant 21% of GDP over these 3 years. The debt figures will thus look like the following
2012 – $45bn
2013 – $48bn
2014 – $51bn
That is to say, purely on account of the economy growing by itself, the govt. will be able to borrow an extra $6bn to spend over these 3 years. Now given that the ‘target’ is 30%, your guess is as good as mine as to where the actual numbers will end up. So if the govt. were to hit this 30% target in 2014, the debt will be $23bn higher than above i.e. $74bn. Perish the thought.
Note that the govt. is not going to ignore this ‘opportunity’ to borrow presented by the growing economy. Indeed in that same interview, you will notice the Minister alluding to the fact that the recent $8bn borrowing for pipeline projects is part of ‘meeting this target’.
On to the next, if you believe that an economy can grow, then you must also believe that it can contract. These cycles are part of life especially for economies prone to shocks like ours.
So what happens if after reaching $51bn of debt in 2014, the Nigerian economy suffers a shock in 2015 leading to say a 3% drop in GDP? We will then have a GDP of $238bn. Now imagine that after this happens, the Nigerian govt. doesn’t borrow a single penny more so the debt remains at $51bn. Without doing anything at all, the ratio that the Minister is ‘watching like a hawk’, will climb to 22%.
This leads us to ask why exactly is Nigeria borrowing based on GDP in the ‘good’ times? Several countries, Denmark being a good example, have it written in their constitutions to balance their budgets while their economy is growing. They might not hit this target but at least their politicians are not sitting around dreaming up new vanity projects to spend money on when the economy is growing.
We also know that our hawkish Minister turns into a dove when it comes to cutting spending given that she could only muster a 1% cut in spending every year over the next 3 years. Say we spend 10% of the debt on servicing every year, we will move from $4.5bn to $5.1bn over 3 years in the scenario. This becomes an even bigger burden not just when the economy contracts but if the growth rate slows down.
And so the moral of this story is that ‘watching the debt like a hawk’ does not mean anything at all. Even if you close your eyes, the debt will continue to increase at this rate. But watching cannot possibly reduce it. If you only believe in words, you might be fixated on 21% and not notice that over 3 years the same 21% has increased by $6bn as in our example above.
A lot of countries have adopted this strategy and ended up disasters. More so, when the govt. inevitably hits its ‘target’ of 30%, there is nothing to stop it from increasing it to 50%, after all this is still below the ‘world class’ level of 60%.
We don’t need the Minister to ‘watch’ our debt grow for us. We can see that from where we are sitting. What we need is a commitment to restraint by way of an explicit commitment to a balanced budget while the economy is growing. If and when the economy stutters, then we can borrow in order to meet our commitments.
Now that would be impressive wont it? Or do you know any other way of reducing your debts other than living within your means?
Link to Feyi Fawehinmi’s blog: http://aguntasolo.posterous.com/what-she-said-ngozi-okonjo-iweala-by-the-numb