To borrow or not to borrow?

Henry Boyo

The issue of sustainability of Nigeria’s debt and service burden has returned to the forefront of public discourse lately. Instructively, after the controversial, stupendous payment of almost $20bn in 2005-2006 to exit an oppressive $30bn debt overhang, owed primarily to a consortium of overseas creditors, Nigeria’s total debt has climbed rapidly again, from less than N1tn domestic and just over $3bn external debt in 2006 to almost $60bn in just over 10 years.

Curiously, in 2005, the extremely high service and penalty charges for delayed payments on the steadily ballooning $30bn debt was considered unsustainable; ironically, however, Nigeria’s debt is now almost  double the crisis level of $30bn, before the debt exit.

Hereafter, some observations of the IMF and senior Nigerian government officials with regard to the sustainability and impact of the present debt level and related service charges on critical infrastructure and social welfare would be juxtaposed, to highlight, what appears to be an incoherent approach to national debt management.

Incidentally, the IMF boss, Christine Lagarde, observed, during her trip to Nigeria in January 2016, that “frankly, given the determination and resilience displayed by the Presidency and his team, I don’t see why an IMF loan programme is going to be needed.” That is, “Nigeria does not need loan support.” Furthermore, Lagarde cautioned that “it weighs heavily on the public purse, when already, about 35kobo of every naira collected by government is used to service outstanding debts.”

Comment: It is worrisome that in 2016, Nigeria spent about N250bn per quarter, on debt service alone, compared to an average revenue per quarter of about N623bn. It is alarming that despite this already “crazy” debt service to revenue ratio of 40 per cent over N2tn additional debt would be required to cover projected expenditure in 2017 budget. Consequently, Nigerians should ignore any assurance that our economy is still relatively under-borrowed, just because debt level remains about five per cent below the critical debt to GDP benchmark of 19 per cent!

Furthermore, recent statistics from the Debt Management Office indicate that total external debt as of March 31, 2017 was over $13bn. It is probably in recognition of this precarious debt burden that the Minister of Finance, Kemi Adeosun, noted in May that “we do not need to go outside and borrow, but we need to borrow as cheaply as possible. So, we’ve approached the World Bank, China Exim (bank) and some other concessional lenders, who lend as low as 1.5 percent, and then we’ll blend that with the money we took from the Eurobond market which is now 7.5 per cent.”

Curiously, there is no explanation why we seek foreign loans when the CBN continues to freely auction its own dollar reserves!

Notwithstanding, earlier in October 2016, President Muhammadu Buhari requested the National Assembly to approve his government’s additional external borrowing plan, totalling $29.960bn, for 2016 to 2018.

Comment: The National Assembly may not consider this loan package unless it explicitly accommodates bountiful provision for legislators’ constituency projects. However, indications are that the Executive’s inclination to such constituency projects is at best distasteful.

Furthermore, Adeosun, unexpectedly, remarked while speaking at a quarterly, Presidential business forum in Abuja, on Wednesday July 12, 2017, that “the diversification of revenue base would ensure that we do not continue to overly rely on debt to fund our budget spending over the long term.” She therefore suggested that “we have got to get our budget bigger, and to do that, we cannot borrow anymore. We simply have to generate more revenue; we have to plug the leakages, and we have to improve tax collection so that we can manage our borrowing.”

Surprisingly, however, barely 24 hours later on July 13, Salisu Dambatta, the Director of Information, Federal Ministry of Finance, issued a circular, on behalf of his minister to correct and reverse the earlier statement that “Nigeria cannot continue to borrow anymore to fund its budget.” The reversal stoutly reiterated that “Nigeria will continue to borrow” and that “nothing in fact has changed” as “we have headroom to borrow and are doing so aggressively to stimulate growth. The Economic Recovery and Growth Plan provides for an increase in spending over a three-year period, which is reflected in the 2017 budget”. Besides, according to the statement, “Nigeria’s debt to GDP ratio is low when compared to our contemporaries in Africa.”

Comment: “Invariably, Nigeria’s present debt burden will rise beyond $90bn if compounded with the $29.9bn loan currently sought, and the trillions of naira which will be compulsively borrowed from the domestic market to fund annual budget deficits between 2016 and 2018. Consequently, we may soon require well over 50 per cent of total annual revenue just to service our debts, while our rapidly exploding recurrent expenditure will conversely leave very little leftover for socially enhancing capital projects. These heavily accumulated debts will inevitably lead to serial defaults in payment of service charges, which may ultimately precipitate socially oppressive economic reforms, as, for example, witnessed recently in some EU countries like Greece, to guarantee loan repayment to creditors.

Furthermore, the National Assembly should not also be deceived by the relatively low cost of borrowing, reportedly below two per cent attached to proposed external loans. It is plausible and evident however, that if the naira exchange rate continues its freefall beyond N500=$1 to say N5000=$1, in five years, as a result of further crash in crude oil prices, Nigeria’s economy will certainly be in deep trouble, because, despite the optically low interest rate attached to presumed soft external loans, 10 times more naira value may ultimately be required to service such dollar denominated loans annually. Thus, we would effectively be paying over 20 per cent in naira value on these presently seemingly “concessionary” loans. (See, “To concession is more responsible than to borrow $29.9bn” at www.lesleba.com)

Instructively, Nigeria’s odious debt accumulation would be reasonably reduced if the private sector actively participates in funding infrastructure, and if concessions and privatisation of public enterprises are effected in an enabling, and supportive economic environment.

Indeed, the Minister of Power, Works and Housing, Babatunde Fashola, knowingly noted at the same quarterly business forum in Abuja, that “the private sector has always been, in any economy, with a capital disposition, the driver of growth, the driver of development, and ultimately, government must interface with the private sector.” He further said, “We want to hear from them where the shoes pinch most, where we can make it easier; where we can make it better and how we can do so.” (Premium Times, July  11, 2017)

Comment: Well, this writer can confirm, as a manufacturer and a member of the National Council of the Manufacturers Association of Nigeria that apart from power inadequacy, the productive sector will be contented and enabled if inflation falls below three per cent as best practice, so that consumer purchasing power and demand can be protected to sustain more investment in production. Furthermore, the cost of borrowing should fall across board below 10 per cent, while the naira should rapidly become stronger; if such indices are in place, the presently overbearing cost of power may become tolerable.

Fashola may or may not be aware that in addition to inadvertently instigating unyielding deficit budgets, the unilateral substitution of naira allocations for dollar denominated revenue is the most significant challenge to providing an enabling economic environment to facilitate the private sector’s heavy involvement in infrastructural enhancement, industrial expansion and job creation. The odious process of naira substitution undeniably fuels the curse of excess naira liquidity which instigates higher rates of inflation, cost of funds and weaker naira exchange rates that all collude to constrain demand and paralyse the private sector from actively and successfully galvanising the economy. (See also “Mumu smiles back into debt trap” at www.lesleba.com).

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To borrow or not to borrow?

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