2006 BUDGET: DEBT MANAGEMENT AND VAT 09012006

Our national debt profile and management received unparalleled attention in year 2005.  The subject of our indebtedness was shifted to the front burner of public debate when the President gleefully announced the write off of about $18bn from the $30bn owed our major foreign creditors, the Paris Club.

The announcement was initially greeted with much jubilation nationwide.  However, the initial euphoria soon gave way to criticisms and expressions of reservation on the wholesomeness of the debt deal when it became clear that our ‘compassionate’ creditors also wanted a pound of flesh.  The conditional immediate upfront payment of $12.4bn seemed like a forceful removal of a feeding bottle from a starving child especially when it became apparent that we had already made payments in excess of $17bn on the borrowed sum of just $10bn and yet we still owed $30bn.  Indeed, well-meaning clerics and vastly popular anti poverty campaigners around the globe have dubbed the debt deal as immoral and have urged their home governments to refuse the forced payments from a country currently regarded as one of the poorest countries in the world according to United Nation’s ratings.  There is no gainsaying that judicious application of  $12.4bn would transform our ailing infrastructures and improve the lives of our people!  Instead, this debt relief will only provide about $600m annually for poverty eradication, as according to Mr. President “… due to the Paris Club debt deal, external debt service for 2006 is down by over 59% to N70bn compared to N170bn (about $1.4bn) in 2005, …” but the President affirms that with the debt deal, “we have saved our youths the burden of a debt that would have continued to balloon unbearably.”  However, there are Nigerians who disagree and maintain that only 100% debt cancellation should be worth celebrating; after all, they wonder why Nigeria should be treated any different from countries like Ghana and others who had their foreign debts totally cancelled; more so when evidence suggests that most of our so-called loans never left European bank vaults in the first place!  There are also those who believe that we got such a raw deal because we went begging on our knees for debt forgiveness instead of demanding total cancellation as of right, especially with the favourable wind of international public opinion behind us!  Indeed, it seems odd that the 2005 budget could not be fully implemented because of a shortfall of N292bn (about $2.2bn) in projected revenue at a time that higher crude oil prices netted the sum of over $14bn from which $12.4bn would be paid to the Paris Club for possibly doubtful debts!  Incidentally, the President also celebrated the release of $470m looted funds from Switzerland in the 2006 budget speech..  Some critics maintain that our failure to demand for the payment of interests on these recovered loot is a symptom of our naïve negotiating skills and a lack of confidence in ourselves!

Public attention is currently riveted to issues relating to our foreign debt but the burden and impact of the current national domestic debt burden is equally worrying; these domestic debts which total about N1,500 billion ($11.5 billion) consist mainly of contractor’s debts (about N300bn), pensions and salaries and Treasury bills and bonds which account for over 70% of total domestic debt.  Thus, our domestic debt of N1,500bn almost equals the total 2006 federal government budget of N1,570 billion!

It is also intriguing that N300bn owed local contractors for jobs already completed amount to the value of capitalization for up to 12 mega banks under the current banking reform.  These local contractors who took bank loans at rates of interest in excess of 20% to finance government contracts may have been declared bankrupt by now, as government has hitherto ignored the payment of accumulated interests.  The saving grace may well be that most of these contracts were probably inflated in the first place, and the veracity of some of the contractors’ bills was also suspect!  Nonetheless, “the 2006 budget includes N25bn to pay  those contractors’ whose bills fall below N100;, but for contractors who are owed above N100m, we plan to issue them bonds (of 2-5 years duration) to settle our indebtedness” (excerpt from 2006 budget speech).

It is a welcome development that the 2006 budget will begin to recognize the legitimate rights of local contractors to interest surcharge for delayed payments, but some observers wonder why the government is willing to pay $12.4bn to the Paris Club while it continues to pussyfoot on the N300bn (about $2.2bn) owed local contractors; what is good for the goose, they say, is also good for the gander!  Besides, if interest elements and exchange rate depreciation are compounded with  amounts owed to local contractors, the outstanding amount may well have exceeded N1,000 billion at current values.  In the area of pensions, the 2006 budget has provided for the “National Pensions Commission to complete and document the extent of arrears owed”.  What is, however, clear is that “domestic debt service … is increasing somewhat by 18% from N186bn in 2005 to N220bn in 2006”.  The increase is mainly attributable to redemption of the increasing value of Treasury bills and bonds, which have been issued to “mop up excess liquidity and curb inflation”.  Critical observers maintain that it is an anomaly for almost 70% of domestic debts to comprise Treasury bills and bonds with coupon rates in excess of 15% in the light of this administration’s efforts to achieve single digit commercial lending rates.  Furthermore, one wonders at the wisdom of borrowing at such high costs when in fact the nation has  idle reserves in excess of $20bn (the balance after deduction of $12.4bn payment to Paris Club) in non interest yielding offshore accounts.  The behaviours of our monetary authorities become more disturbing as most of the funds raised through Treasury bills and bonds are sterilized and add no direct benefit to the economy, while the protocol of liquidity mop up has become a perennial obstacle to the operation of a satisfactory or conducive monetary policy.

In the concluding part of this piece, we will turn our attention briefly to the subject of VAT (Value Added Tax) as it relates to the 2006 budget.  The President indicated that out of the N3,700bn which will accrue to  the federation account, N450bn (12.2%) will derive from VAT receipts and “the larger receipts from VAT are based on an increase in the rate without prejudice to the outcome of VAT legislation from 5% to 10% …” the operators in the real sector have decried the proposed 100% flat rate of increase in VAT as inimical o their survival, as they fear the cost of critical raw materials will rise inordinately and make their goods uncompetitive vis-à-vis imports.  Their fears are also founded on the introduction of the ECOWAS Common External Tariff Regime, which would bring down the cost of imported finished products with the rather import-friendly duty of 15%.

In this event, some analysts have recommended that a multi-step VAT structure be adopted so that VAT for industrial raw materials will remain at the current 5%, while the VAT for luxury and conspicuous expenditure be increased to 20 – 30%; for example, VAT on the tariff for all hotels above two-star rating could attract 25% VAT, while luxury cars with engine capacity above 1500cc could attract 20% VAT in addition to the normal duty.  It is likely that the net sum of N450 billion projected from VAT receipts can still be achieved with a selective VAT regime that would protect local industries and support employment rather than the simplistic flat rate of 100% increase that has been proposed in the 2006 budget and the adverse inflationary tendency that the unimaginative flat rate VAT would portend.