Debt Burden and Development in Enugu State
The Enugu State House of Assembly, as recorded in its Votes and Proceedings of the November 13, 2014, unanimously authorized the State Government to obtain loans of N11billion from UBA at an interest of 17% annually to refinance a subsisting facility from GTB and fund an on-going infrastructure development in the State.
Interestingly, the House reconvened from its break to approve the loan in a closed-door session. This is even as the media have raised the alarm over a possible Executive-Legislature showdown owing to the alleged refusal of the House to give a retroactive approval for another N7 Billion loan. Expectedly, the loan has continued to generate monumental controversies.
There is no gainsaying that every government has goals to achieve, especially towards improving the standard of living of its citizens, increasing economic growth potentials, and developing its wealth base. However, the resources needed to achieve this is scarce, hence the search for external resources.
Economically, Enugu is predominantly rural and agrarian, with a substantial proportion of its working population engaged in farming, although trading and services (mainly in the urban areas) account for about (19%) and (13%) of output respectively. The total Internally Generated Revenue (IGR) in Enugu State averaged about N1.7 billion between 2007 and 2011. Enugu’s 7.8 IGR is the lowest percentile, compared to the other South East states. The same goes for total revenue.
Revenue estimates in the State suggest that about 85% and 75% of the revenue was sourced through FAAC in 2012 and 2013, respectively. These values depict an increasing reliance of the state revenue on the Federation Account- talk about Feeding Bottle Federalism.
To worsen matters, annual budget law in Enugu in about the last seven years lack a clearly defined appropriation for all spending authorities to be voted, including all transactions of statutory extra-budgetary funds within the budget. There is a serious lack of information on financial plans and operations of statutory extra-budgetary fund in the State. The State has not been able to produce medium-term fiscal documents anchored on the political Four (4) Point Agenda showing government priority and the means to achieve them.
Enugu runs into deficits because it lacks the mechanism to forecast the macroeconomic environment and revenue within a fiscal year. There is no clear sectorial policy amongst the MDAs. This would have provided credence for fiscal management and budget process supporting the already mounting debts. This presents a huge problem because the most critical step in budget formulation is to forecast effectively the resources that will be available in the future for informed fiscal decisions. Today, therefore, Enugu is sweating profusely under the heavy weight of loans/debts, which purposes and applications leave so much to be deserved.
A peep at the documentation for loan approvals (2009 - 2014) State Executive Council (Exco), including a few submitted to the State Assembly excludes fiscal policy objectives, the macroeconomic framework, the policy basis for the loan, major identifiable fiscal risks, complete information on past and projected spending under any permanent appropriation which is not annually voted. This operation pattern has justifiably increased the fiscal risks of the State both in the short to medium term.
On September 30, 2009, the State Executive Council (Exco) meeting voted in favour of N20 Billion State Bond. On August 18, 2010, the Exco approved an N89 Million First Bank loan to fund observed gap in budget implementation and purchase vehicles for government use. On the same date, an FCMB loan of N863,552,203 was approved by Exco for payment of counterpart funding for 2009 MDGs executions. On August 5, 2010 a N12.5 Billion loan was approved for financing ongoing and new projects in its Public Private Partnership (PPP) with Nexus Ltd. A Bank PHB loan of N3 billion was approved by Exco on April 14, 2010 to bridge resource gap and fund capital projects. A Skye Bank loan of USD275,000 was approved on October 13, 2011 for counterpart funding of AIDS control project with World Bank. Diamond Bank loan of N1,551,000,000 was approved by Exco on October 13, 2011 for purchase of 300 units of 16-seater buses for the public secondary schools in the State. On September 7, 2011, Exco approved a loan of N5 Billion from GTB for infrastructural development (primarily the New Secretariat Complex). N1.8 Billion loan (Fidelity Bank) was approved by Exco on December 8, 2011 for counterpart funding for the State Universal Basic Education Board (SUBEB).
Another Fidelity Bank loan of N1 billion was approved by Exco on September 12, 2012 for the expansion of agric projects in the State and purchase of machinery for State’s pineapple project. FMCB and Skye Bank loans of N835,459,032.7 were approved by Exco on October 30, 2013 for counterpart funding of MDGs 2012 capital projects. A N120 million First Bank loan was approved by Exco on November 26, 2013 for purchase of vehicles for traditional rulers. Exco also approved a N1 billion UBA loan on March 28, 2014 for refinance of N5 billion GTB loan ealier itemised. Exco approved yet another loan of N1.5 billion (Sterling Bank) on March 28, 2014 for counterpart funding of the UBEB. Then on April 16, 2014, a First Bank loan of N600 Million was approved by Exco for MDGs.
Looking at the scenario closely, the bond request of N20 billion in 2009 did not meet the basic requirements for such bond to be accompanied by a fiscal framework detailing the investments and opportunity costs of every expenditure. Furthermore, the argument made by the State Exco to the House of Assembly regarding the cost of the bond (N540 million) being negligible in comparison to a commercial bank loan is unattainable when compared in absolute terms of what the amount can provide. It is thus obvious that Chime’s government does not possess the capacity for such expediencies in fiscal policy.
Within a year of the above request, a subsequent demand for an extra loan of N863 Million at 17% interest (N149 million) was placed via FCMB. This questions the rational of the earlier request for a State Bond.
Also, a list of the MDG projects has to be made available to the House of Assembly and the viability of these projects paying back the said sum should have been debated before the masking of figures under counterpart funding and blanket approval given for debt procurement. This is an observed outrageous, but consistent pattern in subsequent MDG projects counterpart funding requests for N835 million and N600 million in 2012 and 2013, respectively. The situation in Enugu State summarily suggests confusion as to what constitutes a development fund and from what source it should be raised.
Besides, the manner in which these requests are made, are in complete violation of the Fiscal Responsibility Act and further contravenes all laid down rules for an effective fiscal regime.
The observed ambivalence and the lack of coordination amongst the ongoing projects have compounded governance in the State. The greatest drag to the state investment policy is lack of adequate framework and complete absence of a Public Private Partnership (PPP) plan. In fact, so-called PPP in the State is more of a conjecture by Chime Administration for the continued deceit of Enugu people. The same goes for the continued remark about financing on-going projects.
The standard practice is for loans to be investment-driven or be able to catalyse production and development as in the case of key infrastructure and it should be able to offset itself. It is not really so in Enugu. Between 2011 and 2014, a total of N4.8 billion has been requested from various Commercial Banks in loans to fund the secondary education level. Sadly, they were largely ill targeted. For instance, how would 16-seater buses distributed to secondary schools with a loan of over N1.5 billion address the infrastructural decay and poor teacher morale arising from poor and inconsistent salaries?
The House of Assembly in its records acknowledged that part of the N11 billion loan would be utilised for Supply and Installation of Security (CCTV) & Access Control Systems in the offices of the New Secretariat Building valued at the cost of N2.674 million; Supply of Information Technology Facilities in the New Governor’s Office at the cost of N300 million; Supply and Installation of Audio-Visual Conferencing Solution at the Executive Chambers of the Governor’s Office at the cost of N207 Million in addition to many other on-going projects that were not mentioned. How would the N13 billion Secretariat being built with loans offset the loan?
From the selected loans also, a total request of N3 billion has been made to expand Agricultural Projects in the State between 2012 and 2013. That would have been a good one for a state that is largely peopled by farmers. But there are no details of where the projects are sited or what kind of projects that would gulp the requested amounts. Results are not felt. A mention of a Pineapple project was made in one of the loans without explanations on investment return and other multiplier effects from such venture. Are we going to have pineapple juice factories? But to begin with, where are the pineapples, two years after?
Indeed, the comparative assessment of revenue, expenditure, and debt stock of Enugu state descriptively portend increased danger of a bubble ready to burst. Aside that, recurrent expenditure growth outweighs the maximum Internally Generated Revenue (IGR) and questions are being asked as to where all the purported investments from the loans have gone.
Thus, the possibility of sustaining the already incurred debt in the state is highly improbable. The State revenue and expenditure estimates are very much at variance with the actual revenues collected and expenses made. In-addition, the State forecasting principles and fundamentals are weak and this gives disjointed figures, making planning an up-hill task. Furthermore, the State Ministry of Finance and Planning have not conducted any study on the tax elasticity or buoyancy of the State to determine its Fiscal Capacity in relation to the expanding debt profile. This would have provided an evidence-based analogy vis-à-vis alternative scenarios for debate on the procured debts in the state by all stakeholders’.
In conclusion, it is imperative to warn that generally, the impact of huge public debt on economic growth may not be immediate, but could be overwhelming in the long run if it is not utilized judiciously. This makes the current debt burden in Enugu State worrisome and humongous with disastrous consequences if not checkmated immediately. The State Government has relied excessively on domestic debts to drive governance; amidst lack of transparency and due process that in turn fuel official corruption; amidst poor project profiles; accumulating principal; interests; payment arrears and penalties. Enugu State is borrowing too much and thus has to bear the saddle of servicing high levels of debt. When debt is too high, as in Enugu’s case, the ability of the current State Government or future administrations to finance it decreases, leading to a high probability of default and subsequent downgrading by creditors. Too bad!
There is also the moral burden of a departing government acquiring an N11 billion loan instead of worrying about offsetting existing huge debts. The idea of the House approving the loan in a closed-door session, and the rising political temperature in Enugu PDP over 2015, have therefore led Enugu groups and the opposition to allege, and rationally so, that the loan is an election largesse.
A moratorium is urgently needed on the procurement of all debts henceforth by the State Executive. The State Assembly must insist on cost-benefit analysis of all approved loan requests, detailing the economic and social benefits of the purpose to which the borrowing was applied and how the investments would pay back the Loans in the short to medium term. Above all, on the N11 Billion loan, I vote “Nay”; and the Enugu House of Assembly must reverse the approval.