Forget oil. Forget taxation. Debt pays Nigeria's bills

 By Tunde Obadina

An enduring myth concerning public finances in Nigeria is that government operations are paid for by the nation's citizens, chiefly the wealthy. Flowing from this is the belief that some social and economic groups sustain the federation.  For instance, many people assume that the government needs oil income to pay its bills and that without the lucrative liquid gold, the public sector would be in deep trouble.

The reality is quite different. Government revenue only partially covers public expenditure. The contribution of taxpayers to the national coffers is minor and dispensable. Data recently published by the finance ministry show that 61% of the federal government's expenditure in 2020 was financed by borrowing from the capital markets and money created by the Central Bank of Nigeria (CBN). Abuja spent N10.1trn, more than double its N3.9trn revenue.

The idea that petroleum lubricates the state machinery is increasingly a fallacy. Oil-related revenue made up only 42.3% of the federal government's income and accounted for a mere 16.5% of spending. Nonetheless, oil's role did loom large compared to the contribution of the rest of the economy. Non-oil revenue accounted for a paltry 12.7% of federal spending in 2020.

The reality is that the Nigerian state's survival, both federal and sub-national, is increasingly dependent on creditors and central bank financing rather than taxpayers or oil revenue. Consider that the share of debt service payments of the federal government's income last year was a staggering 83%. Revenue remaining after interest payments covered only a quarter of the bureaucracy's personnel costs or a little more than a third of capital expenditure. Put another way, after satisfying creditors, which is necessary to keep on borrowing, what revenue remained was insufficient to implement just the defence budget.

Abuja is not alone in relying on debt. State and local administrations also generate little of what they spend. The combined expenditures of all three tiers of government were twice their aggregate income in 2020. When politicians promise or citizens demand more public goods, such as schools, hospitals and roads, and security, they seek to grow the national debt. The same goes for labour unions demanding public sector pay rises.

Proponents of Modern Monetary Theory (MMT) argue that fiat currency-issuing governments need not worry about running large deficits. Fiat money is a currency issued by a government that is not backed by any commodity and has no intrinsic value other than being supported by the state. Debt is not a problem for currency issuers as they can create as much money as needed to repay their obligations. There is no risk of default.

Indeed, MMT advocates believe such governments need not borrow as they can print all the money they want, that is, as long as it doesn't fuel inflation. In recent months, western governments have created colossal sums of money to support their Covid-19 devastated economies that make Abuja's debt financing seem trifling. Technically, as the naira currency issuer, Abuja could obtain enough money from the local capital market and the CBN to not tax any citizen.

Before asking the CBN to rev up its money-making machine, consider two differences between Nigeria and financially sovereign nations in Europe and the United States. Firstly, these highly indebted rich-nation governments borrow only in their currencies, whereas about 40% of Nigeria's debt is foreign. Unlike its naira loans, Abuja cannot settle foreign debts by the central bank digitally adjusting its balance sheet. Secondly, growth in money creation in the west has not triggered inflation. Consumer demand has not risen much, and their economies are sufficiently robust to absorb new spending.

In contrast, deficit spending in Nigeria has helped fuel inflation and weakened the naira. Its low productivity economy cannot supply goods and services to soak up new spending. Furthermore, government policies that restrict imports of goods and drive up local production costs limit supplies, driving up prices.  

Inflation, especially foodstuffs, harms low-income households. It traps them in poverty. By eroding their meagre incomes and other assets' purchasing power, inflation prevents poor people accumulating capital to improve their economic opportunities. They are unable to grow into prosperity, only struggle to survive on an inflation propelled treadmill.

While the poor suffer, the political elites feast on debt. Politicians and highly placed bureaucrats enjoy first-world lifestyles financed by public debt and central bank money printing. Meanwhile, middle and upper-income households consume cheap energy and other facilities subsidised by the government with borrowed money.

MMT assertion that currency-issuing governments do not need tax revenue to spend applies to the Nigerian state, even though it is not fully financially sovereign. With little prospect of substantial increases in tax collection in Nigeria's recession-crippled economy, Abuja will likely resort more and more to debt and money creation to pay its bills.

Deficits are not necessarily bad. The problem in Nigeria and many other indebted underdeveloped countries is that the borrowed and created money are used to fund a bureaucracy that hampers real economic growth. The evitable outcome is worsening inflation and impoverishment of the low-income earners.