‘States’ financial mess is ticking time bomb’
The Federal Government’s recent N222bn bailout to states and loan restructuring may have worsened Nigeria’s chances of economic recovery in the nearest future, experts say.
Hit by the harsh fallout of low global oil prices, the Nigerian economy has been on a free fall, a situation worsened by government’s hard-line foreign exchange policy.
At the height of economic turmoil last year, states approached the newly inaugurated Muhammadu Buhari administration for bailouts, mainly to pay salary arrears.
But despite criticism that the states were not financially prudent and may not follow through with the intent of the bailout, the Federal Government approved the requested sum for 19 states across the country.
Also, three weeks ago, the Federal Government restructured loan repayment plans for debtor states, exempting them from remitting deductions for the month of March, in what is viewed as another sort of bailout for the states, which have been stretched to their limits in meeting financial obligations.
With the recent restructuring of loans and calls for more bailout, however, experts have said the trend portends ominous signs for the economy, arguing that the decision of the Federal Government to bend backwards casts the country in bad light in local and international lending community.
Moody’s, the creditworthiness rating service, had announced the downgrading of Nigeria’s long-term issuer ratings from Ba3 to B1 last Friday. B1, B2 and B3 ratings are judged to “have speculative elements and a significant credit risk”, while Ba1, Ba2 and Ba3 are seen as “speculative and a high credit risk.”
The downgrade, the service said, is based on Nigeria’s increased external vulnerability “brought about by the prospect of lower-for-longer oil prices.”
Two dons at the Lagos Business School, Prof. Leo Ukpong and Dr. Adi Bongo, believe the country would suffer worse fate and risks ‘more downgrades’ with its decisions on the bailout.
The suspension of state loan repayment by the Federal Government (lender), according to Prof. Ukpong, signals financial distress on the part of the states (borrowers).
He argued that financial distress implies inability of the borrower to make interest and principal payments on outstanding loan; hence if the economic and financial situation faced by the (borrowing) states does not improve fast, the Federal Government could be forced to ‘write-off the debts.’
“Unfortunately, the current economic condition seems to suggest that the recovery will take a long time (unless the crude oil prices significantly rise above the current rate),” he said.
He explained that writing off defaulting states’ debt would increase Federal Government’s debt portfolio, which in turn, would make the government a risky borrower in the (international and domestic) money and capital markets.
Noting that the trend would directly imply an increase in the interest charged by lenders, when they grant new loans to the Federal Government, he said it is likely that the government’s credit rating will be downgraded.
“On the states’ part, defaulting on their loans will also result in the high interest rates on new loans and a downgrade of the credit ratings. In essence, the nation as a whole will find it difficult and expensive to borrow new funds for capital projects and/or other needs,” he stressed.
He added that consequent credit crunch would also exert pressure on Naira, leading to a likely devaluation of the currency, drop in investment, consumption and Gross Domestic Product (GDP).
He said Nigeria could only get out of the morass with proper economic planning and strategies, as it is very likely to recover from these “negative effects” in the medium and long run (five to 10 years), adding, “But within the short run, our only saviour is an up-turn in crude oil price combined with strict fiscal discipline.”
Agreeing with him, Bongo, who noted that Federal Government’s gesture sends mixed signals, said: “I suppose Federal Government is keen on alleviating the current economic hardship in the country. This gesture is certainly a reprieve to states that have come under severe budgetary constraints since the federal allocation dwindled.”
He continued: “What isn’t certain is whether this amounts to a default on the part of the Federal Government vis-a-vis the creditors, whether domestic or international. Unless there had been some negotiations on restructuring or rescheduling of these debts prior to this pronouncement, I guess it might send the wrong signals to the lending community and thus, worsen the country’s already shattering credibility.”
Noting that with government’s plans to raise about N2.2trn in new debt to fund the 2016 budget, he said the policy direction doesn’t seem to offer potential creditors any confidence in the country’s sovereign guarantee, as it will certainly diminish government’s ability to raise new monies in both the domestic and international market.
Yesterday, the Federal Government said it has mapped out plans to provide critical support to youths and create opportunities to revitalise the creative and innovative technologies sector of the economy.
Specifically, government will develop super technology hubs in Lagos and Abuja and six others in the geo-political zones, to help build solutions for government and social services, especially in health care, education and agriculture.
Vice President Yemi Osinbajo disclosed this in a keynote address at the Green With Creativity Conference convened by Unboxed 2.0 in Victoria Island, Lagos.
Osinbajo said though Nigeria’s creative industry has developed almost without government, the innovative technologies sector offers even more growth potentials with its ability to get work done faster and easier, as well as, impact other sectors of the economy.
He said: “Government intends to establish two super hubs for technology innovation in Lagos and Abuja. This is in addition to six others in the geo-political zones. We already have some partnerships with technology companies that are willing to resource these hubs and put in place some capacity building tools. Each hub would be designed to develop relevant, innovative technologies to a wide range of business, social and government problems.”
On plan to engage unemployed graduates, he said: “We would be training 500,000 graduates that would be teachers and extension service workers. But the interesting thing about this is that we are going to ensure that they are trained in relevant technologies. Each of them would have a device that would have sufficient software for technology training. We are working, at the moment, with five to six technology companies that are helping to develop that device.”
Meanwhile, in pursuance of his fight against corruption, President Buhari will travel to London Tuesday for the international Anti Corruption Summit, which will commence Thursday.
A statement, yesterday, by his spokesman, Femi Adesina, said Buhari would play a “prominent part” in the summit, which will be hosted by British Prime Minister, David Cameron, with many other Heads of State and Government in attendance.
According to the statement, “President Buhari will, ahead of the summit’s opening, deliver a keynote address titled: “Why We Must Tackle Corruption Together”, at a pre-summit conference of development partners, the Commonwealth Enterprise and Investment Council, Transparency International and other civil society groups on Wednesday. The President will also reaffirm his administration’s unwavering commitment to the fight against corruption and the Federal Government’s readiness to partner with international agencies and other countries to identify, apprehend and punish corrupt public officials.”
Buhari’s delegation will include, the Minister of Justice and Attorney General of the Federation, Alhaji Abubakar Malami, and the acting Chairman of the Economic and Financial Crimes Commission (EFCC), Mr. Ibrahim Magu.