The Money Illusion

By Tunde Obadina

African politicians and policymakers have probably been watching with a sense of schadenfreude the unfolding drama of the public debt dilemma facing governments in the West. Not too long ago western commentators were poking fun at African nations crippled by high debt burdens, while multilateral agencies were advising African leaders on the wisdom of financial prudence.

Yet today government debt levels of most western nations are higher than those of many African countries when they were derided for their indebtedness. America’s public debt to GDP ratio is now around 106%, compared with Nigeria’s 60% before Abuja negotiated a debt buyback/cancellation deal with western creditors. As some economists have pointed out, US government debt is actually several times more than the official figure when the state’s commitments to future spending on welfare schemes are factored in. Today, Nigerian government debt to GDP is less 20%, below the level of debt of all developed nations, except Estonia. Perhaps a better way to view the debt burden of governments is to use the ratio of debt-to-government revenue. The IMF considered impoverished African countries with debt-to-government revenue ratio exceeding 280% as Heavily Indebted Poor Countries (HIPC) in need of debt relief. Today, the US federal debt is more than US$15 trillion and federal government revenue for this year is projected at US$2.6 trillion. I leave you to do the maths.

Before we get too carried away with the comparison between African and western debt levels, it is worth bearing in mind a major difference in debt management in the two areas. Unlike Nigeria before its debt restructuring, the US regularly services its debts. As long as it continues to meet its obligations, its debt burden is not an immediate threat to its economy. Debt becomes a problem when the borrower is unable or unwilling to service its loans, or when creditors fear it is going to default and as a result stop providing more credit.

Debt is not intrinsically a bad thing. It has been crucial source of financing for the establishment and operation of industries and infrastructure that have generated material prosperity in modern economies. Without debt it would have been difficult if not impossible to build railway systems, electricity power stations and manufacturing factories that require large amounts of capital. When loans are invested in projects that generate sufficient revenue to service the debt, indebtedness is not an unmanageable or unsavoury burden. All parties to the transaction – the borrower, the lender and the consumer – benefit.

Where debt is a problem and arguably immoral is when money is borrowed to pay for consumption, without prospect of revenue to service and repay the loan. Debt is particularly bad when the borrower acts in the expectation that somebody else will be lumbered with the repayment obligation. Here, not everyone benefits from the transaction. A striking feature of government debts today – both in the west and elsewhere – is that they largely comprise of this unwholesome type of debt. Basically, governments have and are incurring debts which are claims on future generations. Debt is being used as a means of enabling some of today’s generation to live off the earnings of future generations. This is what happens when government borrows to provide welfare benefits to people today or to finance military campaigns or to fund other non-revenue generating projects.

Although Nigeria’s debt to GDP ratio fell to 11.8% in 2006 as a result of the Paris Club deal, it has since risen to 18.3%, according to IMF data. The debt, mostly domestic borrowing, is liable to continue climbing as governments continue the habit of spending more than they earn. Most of the existing debt related to consumption expenditures, including payment of fuel subsidies and funding of unproductive state agencies. Even where government has spent on potentially revenue generating projects, such as power generation and distribution, the expenditure has been used for consumption. The billions of dollars spent by successive Nigerian government on the power sector over the past decade produced little extra electricity, only lumbered the present and future generations with debt.

The inequality resulting from government debt does not only affect the relationship between different generations but also that between different classes of people in the here and now. Besides borrowing from creditors, government also simply create money to fund their activities and even to repay their debts. One of the consequences of printing money is inflation – too much money chasing too few goods and services – which affects different groups in different ways.

Inflation may not be a problem for people who can offset the rise in prices by increasing their earnings. But individuals unable to do boost their incomes, inflation means a decline in living standards. One section of society so affected is the poor with limited or no earning capacity. So in printing money that fuels inflation government in effect robs the poor to enrich the better off. This has been the story in Nigeria and other parts of Africa where inflation rates have been high for decades.

The challenge facing people in both developed and developing nations is how to stop governments from running budget deficits, accumulating debt and printing money.It is essentially a political problem with economic consequences. Governments make claims on future generations and print money whenever they feel like it because they have power to do so. Today’s children and the unborn are powerless to prevent plundering adults from incurring debts whose repayment obligations await them in the future. While the poor, whose meagre earnings are eroded by inflation, may not be even aware that they are being robbed by elites who spend phantom money in the cities.