By Nse Anthony-Uko, with agency reports
(Sundiata Post) – The Federal Executive Council on Wednesday gave approval for the commencement of validation and payment of N2.7trillion inherited Federal Government debts for contractors and employee liabilities.
The obligations which were accumulated over 20 years and will be paid through bond and promissory note issuance, to resolve long outstanding dues and stimulate economic activity, Minister of Finance Kemi Adeosun told newsmen at the post FEC briefing.
Before the approval, most contractors were faced with the downside of rising debt obligations by the Federal Government, most of which manifested in their employees job losses and their partner financial institutions reducing their credit lines.
“This will reflate the economy, as it will increase the spending power of the contractors and employees,” said Uche Nwogwugwu, associate professor of economics at Nnamdi Azikiwe University Awka.
“The contractors and employees can pay their own debts, hence it will not just increase their happiness but also reduce the poverty level in the medium and long-term,” Nwogwugwu said.
The approval came, following a memo by the Ministry of Finance on the proposed validation process and promissory note and debt issuance programme, to resolve a number of inherited and long outstanding Federal Government (FG) obligations to contractors, state governments and employees.
Adeosun said the approval will be followed by a request to the National Assembly to approve the programme ahead of implementation.
Other analysts who spoke to BusinessDay on this decision by Federal Government, see it as capable of stimulating Nigeria’s economy activities.
Johnson Chukwu, managing director/CEO of Cowry Asset Management Limited, said if the money is released into the system, “it will on the macro level, dampen interest rates, and make funds available to the private sector.”
Chukwu also said it would have a positive effect on employment rate, as employees who were disengaged would be recalled and new jobs would be sought for. On the micro level, Chukwu said it would reduce the debt burden of individual firms and enable business activities.
On the flip side, he said it would lead to depreciation of the naira, with the attendant inflationary impact.
Sewa Wusu, head, research & investment advisory at Lagos-based SCM Capital, said it is an economic oscillator that will practically impact on the economy.
“It will definitely stimulate activities in the economy. It is also a relief for the contractors and their employees. We will see a lot of activities being created by that decision because this liquidity will find its way into the banking system”, Wusu added.
For the contractors, he noted that the over 20-year debt has been an impediment to their operations. “A lot of people clamoured on the need for government to pay local contractors. This decision to pay them will create employment and have a multiplier effect on the economy”, he said.
“It will stimulate a lot of activities and that is what we have been waiting for. For the employees, it will boost their spending power. The approval is a boost to the economy. The contractors play significant roles in the economy”, Wusu said.
Abiola Rasaq, head of investor relations at United Bank for Africa Plc sees the decision impacting positively on the economy. “The impact is positive and will be seen in the market. The outstanding obligations of the government to contractors have contributed to low economic activities,” Rasaq said, adding that most financial institutions had cut their credit lines to the contractors as a result of those debts.
Ayodeji Ebo, managing director, Afrinvest Securities limited, said the debt is long overdue and that the move will help to ascertain the true liability of the government.
He was concerned that repaying such huge amount of debt would hamper development because the revenue that would have been channelled to developmental projects, will be used to pay obligation.
He added that it would affect the rate at which the Federal Government can go into capital expenditure, as it would be forced to settle the obligation.
“I think we need to look at the impact it will have on employment,” said Mathhew Ibeabuchi, CEO of MD Services Limited. “It will inject a lot of liquidity into the system and government will be the beneficiary because it will be able to collect more taxes if the economy rebounds,” said Ibeabuchi.