To borrow or not to borrow?

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To borrow or not to borrow?

By Henry Boyo

THE issue of sustainability of Nigeria’s debt service burden, has returned to the forefront of public discuss in recent years. Instructively, after the controversial, stupendous payment of almost $20bn, to exit a $30b oppressive debt overhang, owed primarily, to a consortium of London and Paris creditors by 2005; Nigeria’s total debt, has rapidly  climbed again to well over $60bn, from less than N1trillion domestic and just over $3bn, external debt in 2006.

Curiously, by 2005, the extremely high service and penalty charges, for delayed payments on the ballooning $30billion debt, was considered unsustainable and oppressive; ironically, however, Nigeria’s National debt, is now indicated to be well in excess of $60 billion, that is,  double, the alleged crisis, debt level of $30bn, before the debt exit.

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

So, let us begin with Christine Lagarde and the IMF boss’s observation, 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 program is going to be needed.” “Nigeria does not need to borrow”. Indeed Lagarde also cautioned that “it weighs heavily on the public purse, when already, about 35kobo of every naira collected by the federal government is used to service outstanding debts”

Comment:

It is worrisome that Nigeria spent about N250b per quarter in 2016 on debt service compared to an average revenue per quarter of about N623 billion. This comes to a ‘crazy’ debt service to revenue ratio of 40%. Nevertheless, Law makers should ignore the loud suggestions that our economy is relatively under borrowed, just because debt level is still about 5% below the critical debt to GDP benchmark of 19%!

Recent statistics from the Debt Management Office indicate total external debt as at 31st March, 2017 was over $13bn. Not surprisingly, therefore the Finance minister has noted that “we do 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%, and then we’ll blend that with the money we took from the Eurobond market which is now 7.5%,” (The cable, May 18, 2017)

However, in October 2016, President Muhammadu Buhari had asked the National Assembly to approve the Federal Government’s external borrowing plan, totaling $29.960 billion, for 2016 to 2018.

COMMENT: There is currently no certainty that the National Assembly will consider this loan package, unless it accommodates adequate provision for legislators’ constituency projects, the indications are that the Executive’s inclination to constituency projects is at best distasteful.

However, while speaking at a quarterly presidential business forum in Abuja, Wednesday July 12th, 2017, the Finance Minister unexpectedly noted as follows:

“That 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.” “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, in another statement signed 24 hours later on 13th July, 2017,by Salisu Dambatta, the Director of Information, Federal Ministry of Finance, Kemi Adeosun was reported to have reversed her earlier position “we cannot borrow anymore” to “Nigeria will continue to borrow to fund its budget”.

The statement stoutly reiterated that “Nigeria will continue to borrow and that nothing has changed.  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”.

The minister also noted that, “Nigeria’s debt to GDP ratio is low when compared to our contemporaries in Africa, and across most of the developed world.”

COMMENT:

“Invariably, Nigeria’s present debt burden will rise beyond $90bn when compounded with the $29.9bn loan currently sought. Additionally, if the present loan package excludes the widely reported billions of dollars’ Chinese loans and the trillions of Naira which will also be borrowed from the domestic market to fund annual budget deficits, then of course, we may soon require well over 50% of our actual annual revenue just to service our debts, while the balance will be predominantly consumed by recurrent expenditure with little left for capital projects. Unfortunately, serial defaults in payment of service charges will instigate overbearing foreign creditors to exercise their rights and insist on more socially oppressive economic reforms to guarantee their loans.

Furthermore, the Senators should not also be deceived by the allegedly low cost of borrowing below 2%, reportedly, attached to the proposed loans. Intuitively, however, it is evident that if the Naira rate continues its freefall, well beyond N500=$1 to say N5000=$1, in the next 5 years, the economy will certainly be in deep trouble, because, despite the optically low interest rate, we may still require 10 times more Naira to service such dollar denominated loans annually. Thus, we would, effectively be paying over 20% in Naira value, on these seemingly “concessionary” loans.” (See “To concession is more responsible than to borrow $29.9bn” at www.lesleba.com)

Nigeria’s odious debt accumulation would be reasonably reduced with active private sector participation in the provision of infrastructure, through concessions and privatization of public enterprises in an enabling economic environment.

Indeed, at a recent quarterly presidential business forum in Abuja, the Minister for works, Fashola noted 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 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, 11 July, 2017).

COMMENT:

Mr. Fashola may not be aware that unilateral substitution of naira allocations for dollar denominated revenue is the most significant challenge to providing an enabling economic environment to facilitate private sector involvement in infrastructural enhancement, industrial expansion and job creation. The odious process of Naira substitution fuels the ‘curse of Excess Naira liquidity which instigates higher rates of inflation, cost of funds and weaker Naira exchange rate that all collude to constrain demand and paralyse the private sector.

 

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