Each time I read of our governments (central and sub-national) contracting new debt, I cringe. Several years back, a friend and boss advised me not to pay for what I can have for free, or take on credit. So my worry isn’t from an “ideological” or “religious” aversion to debt. It is instead from a concern with the use to which these credit lines are put.

I imagine that the central criterion for public borrowing would include the ability of the loan to generate returns that cover payment of both the interest on the debt and in the end, the principal sum. Easy then, to insist that all public loans be for commercial purposes: a subway; new train tracks; new roads; etc. These facilities make it possible to structure “user pays” tariff arrangements that permit cost recovery.

But governments’ bailiwick reaches beyond these. There are activities in an economy, especially the provision of schools and healthcare facilities, the total benefits from which cannot be captured by any one provider. Whereas this is one reason why market failure is regularly cited in the provision of these public goods, the positive externalities they generate are the strongest arguments for public investment in these sectors.

Consequently, although government has a strong case for channeling monies into these sectors, on their own, they may not meet the criterion for fully covering the cost of any borrowing that government may have incurred in investing in them. The best educated students, for instance, would need close to ten years of schooling, before they begin contributing to their own net welfare. By extension, net growth in contributions to domestic output from a better educated and healthier citizenry should ultimately boost an economy’s ability to repay all such loans.

I worry then that the federal government only recently contracted a US$170 million (N27 billion) loan from the French Government to improve the provision of power in the Federal Capital Territory, FCT, Abuja. Arguably, the provision of power is one of those investments that government makes on which it can structure “user pays” tariffs that permit cost recovery.

However, the history of the ECN, NEPA, PHCN, and now the DISCOs suggests government is signally unable to manage this feat in the power sector. In part, you may blame a citizenry that has come to accept government provision as an entitlement. You may absolve the citizenry of this foible by also citing its familiarity with the venality of persons in power. So by refusing to pay a commercial rate for government provided services, all that we are doing is negotiating our share of the national loot.

All of which is besides the point in the matter of this new loan. The bigger question is how government provision of power in the federal capital territory sits with its current commitment to privatise assets in the power sector? In other words, why does the federal government think it can make better use of the new capacities it is investing this new loan in, than it made of the ones it only recently sold?

Invariably, concern over our large appetite for borrowing (the “how much debt is too much?” question) is rejoined, by government functionaries, with a plethora of statistics. We are reminded that our debt-to-GDP number (at 21%) is not only lower than that for other countries. It is also well within the generally accepted bounds for this metric (40% – 60%).

But what story does this ratio really tell? The numerator refers to all claims on government – bonds, treasury bills, etc (and irrespective of the claimant’s nationality/residence). The denominator describes the size of economic activity. The presumption in its use is that government’s revenue (taxes) are a function of the size of its economy. In other words, the bigger the economy, the more taxes are available to government. The more taxes government collects, the better it can meet debt obligations.

In Nigeria, what is the tax portion of government revenue? And crude oil exports? That goose no longer lays golden eggs. Only last week, the Bayelsa State government was mulling pay cuts in response to huge shortfalls in allocated revenue from the centre. Global oil prices have remained elevated, and Nigeria’s earnings are lower. Besides, as soon as the much-touted re-basing of the nation’s GDP is done (the economy is projected to become much bigger than it is now), this favoured ratio would suggest more space for borrowing.

However, it would only be a fool who then argues that this is because government’s capacity to service the additional debt (a larger tax take, for example) is that much bigger.

  1. Ability to pay.  Ideally, this is the point of the different ratios with which public debt is estimated (check them).  Our preferred ratio is misleading (is this the word?)  2. Is that ratio a target towards which we ought to aspire.