THE novel intent behind the Federal Government’s plan to establish a sinking fund may not be too different from the kind it had for advocating debt relief nearly a decade ago; establishing an Excess Crude Account and the subsequent Sovereign Wealth Fund. What is, however, different is the growing discontent of many Nigerians with the ease with which these novel ideas lose relevance in addressing the issues for which they were advocated in the first place. The truth is that Nigerians are no longer excited about these initiatives or mechanisms regardless of their nomenclature. This may not be unconnected with fact that they now understand better the very dominant and almost irredeemable influence of other factors like corruption and poor political will in determining the success or failure of such initiatives.
A sinking fund is usually established by a government agency (or a business as the case may be) for the purpose of reducing debt by repaying or retiring outstanding loans and securities held against it. The advantage of the sinking fund is that it helps the government remain liquid while it meets its repayment obligations. Much as a sinking fund connotes some potential advantages for a country to conveniently attend to its debt obligations, it is neither an automatic mechanism for escaping all debt related issues nor does it have, by any means, what it takes to deal with some of the root causes of our need for public borrowing.
In other words, there is practically nothing inherent in the concept of a sinking fund that protects it from being mismanaged or its tenets disregarded just the way the Fiscal Responsibility Act and the Excess Crude Account were relegated, among other mechanisms. No matter how genuine the intentions behind the establishment of the sinking fund is, it is important to note that the issue that gave rise to the fund in the first place are still with us.
Despite the opportunities that a national debt sinking fund presents, we can’t deny the fact that the need for a sinking fund arose not as a last resort but as a result of the Federal Government’s failure to thoroughly abide by the tenets of other such fiscal management laws or mechanisms. Experience over the past years clearly show that government often comes up with such palliative ideas like the sinking fund when it is cramped for cash or desires to get some endorsement or “favour” just to meet its fiscal obligations. All of these initiatives often fizzle out as soon as those opportunities are appropriated.
First, before the debt relief of 2005 deal the country had embarked on an ambitious reform programme. It introduced the oil-price based fiscal rule to stabilize government expenditure and improve macroeconomic management. A far reaching public service reform monetized benefits and eliminated thousands of ghost workers among other effects. Corruption was combated by, among other measures, implementing a new procurement system, by establishing the Economic and Financial Crime Commission (EFCC). The National Economic Empowerment and Development Strategy (NEEDS) was elaborated, which described the reforms that were already being implemented.
To systematically manage the nation’s debt, the Debt Management Office was established. Part of its responsibilities were that of keeping an accurate and up to date database of the nation’s debt, advise the federal government re-structuring and re-financing of its debts among other responsibilities. These, and other requirements, were necessary for the Paris Club to finally effect the debt cancellation. All these gamut of reforms were Nigeria’s efforts at “putting her house in order” in order to win the deal.
Eventually, in 2005, Nigeria concluded a debt relief agreement with the Paris Club on a US$ 30 billion debt with these creditors. The country agreed to pay US$ 12 billion, while an amount of US$ 18 billion was cancelled.
Subsequently, the Nigeria Extractive Industry Transparency Initiative (NEITI) Law, the Fiscal Responsibility Law and the Public Procurement Law, which were referred to as sunshine, were all promulgated laws within the same year, 2007. These and other related laws had stipulated far reaching measures cutting across the entire gamut of our fiscal system to establish a sustainable and development driven fiscal regime. The laws prescribed guidelines and conditions, both broadly and specifically as touching operations on the revenue and expenditure sides of the nation’s financial management.
There is no doubting the efficacy of these laws in improving the quality of public resource management system of nations. Evidence has shown that nations that have adopted such laws have often experienced better outcomes in their resource management. Countries with such success stories include South Africa and Brazil among other nations.
However, if these plethoras of laws that have existed for at least five (5) years in the country are yet to instill a regime of prudent resources management in the country, there is practically very little that can be expected of the sinking fund. The reason for this is clear. Whether a fund is set aside specially to handle debt settlement or debt are settled through the regular appropriated budgetary funds, the fact remains that these debts must be settled somehow. The resources for settling them will not come from elsewhere; they are still part of our commonwealth. The sinking fund mechanism is only as relevant as our fiscal managers are committed to be guided by it. And the very obvious fact remains—sinking fund or no sinking fund— there is practically no short cut to financial stability without fiscal prudence.
Though the sinking fund represents one step at addressing the growing debt issue, the root causes of the country’s bourgeoning debt (especially the domestic debt) are still very much here with us. And they will persist regardless of the sinking fund. First, the need for a sinking fund less than ten (10) years after the setting up of the Debt Management Office and just five years after the enactment of the Fiscal Responsibility Law is a clear pointer to the extent of handicap of institutional mechanisms in taming the rage of fiscal mismanagement in Nigeria.
Though the law establishing the Debt Management Office empowers it in Section 23(1) (VI) to determine “the creation and management of sinking funds to provide for the redemption of securities at maturity”, the question is; has the office judiciously and comprehensively explored all available options in line with its functions and powers as the manager of the country’s debt? For instance, the law in section 23 (c ) mandates the office to “review and advise on the maintenance of statutory limits for all categories of loans or debt instruments at levels compatible with economic activities required for sustainable growth and development in collaboration with the Central Bank of Nigeria and the Accountant-General of the Federation”. The law even went as far as vesting in the office the power to supervise the operation of the Development Fund under the Finance (Control and Management) Act, as amended. These, among other powers and functions, give the office a very significant grip of the country’s fiscal operations. These responsibilities are also to be carried out in collaboration with other agencies of the government that jointly determine the monetary and fiscal state of the country.
Secondly, the refusal of the President to comply with the provisions of in section 42(1) of the Fiscal Responsibility Law on the limits of consolidated debt of Federal, State and Local Governments has not helped matters at all. The law specifically stipulates as follows: “The President shall within 90 days from the commencement of this Act (the Fiscal Responsibility Act, 2007) and with advice from Minister of Finance subject to approval of National Assembly, set overall limits for the amounts of consolidated debt of the Federal, State Governments pursuant to the provisions of items 7 and 50 of Part I of the Second Schedule to the Constitution and the limits and conditions approved by the National Assembly, shall be consistent with the rules set in this Act and with the fiscal policy objectives in the Medium Term-Fiscal Framework”. If these limits were set and complied with we most likely wouldn’t be where we are today. Our debt profile has been simply left to be determined by the mere expenditure urgency of the Federal Government year in year out.
The same story goes for the Excess Crude Account. From a robust $20 billion in 2006 to a slim $3.6 billion and $4.6 billion as at April and May 2012, the story of lack of fiscal prudence reverberates. Additionally, the “urgency” on reducing the cost of governance has gradually hissed out. The reports of the Expenditure Review Committee chaired by Prof. Anya O. Anya and the Presidential Committee for the Restructuring and Rationalization of Federal Government Parastatals, Commissions and Agencies led by Steve Orasanya have simply gone “for the record” as one of those reports. While the federal government wants Nigerians to celebrate the marginal drops in recurrent expenditure annually, it keeps avoiding the more fundamental and root causes of the problem we have at hand. Whichever way we want to see it, the fact remains that our public sector has not become viable and productive enough to warrant the magnitude of public resources that is spent on it at present.
There is no doubt that the federal government’s lack of fiscal prudence has put the country’s fiscal architecture in such a situation that Nigerians are now going to have to make huge sacrifices in order to achieve just a little. In a forum organised recently by the Ministry of Finance to present the 2013 Budget to the public the Finance Minister stated, “We have always told you that we have been managing to bring down the yearly domestic borrowing from N852 billion in 2011 to N744 billion in 2012 and we are projecting N727 billion in 2013”. For just these marginal drops in domestic borrowing and a less than 3 percent increase in capital expenditure, a lot of capital projects will remain uncompleted because the federal government needs to meet its debt obligations and at the same time spread its little available resources on the very large number of ongoing federal projects (about 6,294 projects). While the government is trying to reverse some of the clutter that has accrued over the years, Nigerians wait to reap the dividends of the nation’s resources that have been mismanaged over the years as a result of poor fiscal management.
Our current fiscal position calls for a second look at our fiscal institutions. This is because the very central point of public finance is about people spending other people’s money. Unfortunately, the uncertainty and complexity of the economic and political environment render the understanding of such relationships almost impossible .Since this very idea which should form the basis for credible fiscal institution is lacking, the tendency toward excessive spending, deficits and debt increases with the number politicians who are able to have unfettered access to public treasury. This scenario can be mitigated by strengthening the existing institutions that govern decisions around public finance. These institutions include those shaping the environment of the budgeting process; the second include those that ensure compliance with output oriented rules while the third include institutions which work to ensure compliance with procedural rules. Though some flaws would have been experienced in the workings of our institutions in the various categories stated above, the framework and opportunities for these institutions to function better than they are doing now exist. Nigerians must not stop demanding performance from these institutions even in view of the frequently adduced constraints for their underperformance.
The ongoing constitutional amendment is a critical opportunity for Nigeria to address one of the institutional frameworks that affect the environment of our budget process and public finance management. We must keep pushing for the best practices as far as practicable in our system in order to close the performance gap that we at present experience.
• Ikechukwu Okoli, a Public Sector Economist, wrote Enugu.
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