The real issue in Nigeria’s debt story
Concerns about the country’s growing public debt appear to be mounting following the recent letter by the President to the Senate requesting the approval of external loans to the tune of USD5.5 billion for the purpose of implementing the external borrowing approved in the 2017 Appropriation Act (about N1.07 trillion out of the N2.32 trillion deficit) as well as “re-financing maturing domestic debts through the issuance of USD3 billion Eurobond in the International Capital Market or through a loan syndication.”
Not surprisingly, the Peoples Democratic Party, leading the opposition camp, has advised the National Assembly not to approve the request because it would ‘mortgage the future of the nation’’. But the government has a contrary view. In a recent widely publicised article titled ‘the debt debate: deconstructing the debt story’ the Minister of Finance, Kemi Adeosun, made a strong and persuasive case for foreign loans to ramp up the country’s stock of infrastructure.
It is easy to see why the discourse on public debt has become an “emotive issue” (to borrow the words of the Finance Minister) especially with respect to the the trend in the country’s external debt profile. Since Nigeria obtained the first Jumbo foreign loan of USD1billion in 1978 from the International Capital Market, the narrative has been nothing to write home about. It is well documented in literature that the massive external borrowing which took place in the 1980s, largely to offset the collapse in oil prices, was not linked to future growth or exports.
Sufficient regard was not given to economic viability of projects coupled with mismatch of loan terms and project profiles. By 2005, Nigeria owed the Paris Club of Creditors alone over USD30 billion with very little to show for the huge debt. So, not a few Nigerians heaved a sigh of relief when the country pulled free from the yoke of the Paris Club in 2005 following a debt buy-back arrangement. Today, the foreign debt component is once again on the rise.
Data from the Debt Management Office indicate that Nigeria’s total public debt stock as at 30th June 2017 stood at N19.64 trillion (USD64 billion) comprising N15 trillion (USD49.2 billion or 76.56 percent) for domestic debt and N4.6 trillion (USD15 billion or 23.44 percent) for external debt. A breakdown of the external debt stock reveals that
Multilateral Debts amounted to USD9.67 billion (or 64.29 percent), Non-Paris Club Bilateral Debts took up USD2.07 billion (or 13.78 percent) while Commercial (Euro-Bond) accounted for the balance of USD3.3 billion (or 21.93 percent). If the USD5.5 billion is eventually obtained, the foreign debt component would rise to USD20.5 billion.
Expectedly, the debate has begun. The opposing side worry that Nigeria’s debt burden is becoming unbearable in view of the high debt service to revenue ratio of over 30 per cent. They point to the country’s unpleasant experience with external loans and express the fear that the proceeds might be used to fund recurrent expenditure.
They argue that economic growth is still weak being driven chiefly by unpredictable oil revenue and so foreign loans carry a lot of exchange rate risks and make the economy vulnerable to external shocks. There is the concern that despite the fact that foreign loans may be relatively cheaper, the debt burden will become more severe in the event of another oil price shock. Their aversion to foreign loans is also tied to the uncertainties in the global environment given that a rise in US interest rate or the strengthening of the US dollar will increase the cost of debt service for Nigeria.
Those in favour emphasize that the country’s huge infrastructural deficit can only be addressed through foreign borrowing until the economy is more diversified. They contend that the country has scope for foreign loans since the ratio of external debt service to government revenue is low compared to indicative thresholds or even that of peer countries. Their support also stems from the fact that foreign loans have a positive effect on the stock of foreign currency leading to improved liquidity in the foreign exchange market and attendant appreciation of the local currency.
Besides, the shift to foreign loans creates more borrowing space for the private sector in the domestic market and when the government competes less with the private sector for funds, interest rates will most likely drop with positive effects on inflation and the stock market. The President’s letter to the Senate points out that part of ’the external borrowing of USD3.billion to re-finance maturing domestic debt would not lead to an increase in the public debt portfolio since the debt already exists in the form of high interest short term domestic debt’. It further explains that ‘the substitution of domestic debt with relatively cheaper and long-term external debt will lead to a significant decrease in debt service cost’.
On balance, securing foreign loans for infrastructure development stands to reason. To be sure, other alternatives exist but in the face of shrinking revenue to finance the capital budget, uptake in foreign loans lends itself as the most viable option. Printing of money is a no-go area in view of the high rate of inflation much as embarking on the sale of national assets or increasing the VAT or company tax would be counter-productive. The current attempts at diversifying the export base, reducing wastes in the public sector, recovering stolen funds and widening the tax base through the Voluntary Asset and Income Declaration Scheme are other viable options but these measures will take some time to yield any significant result.
Against this backdrop, the National Assembly is called upon to approve the request for the foreign loan but not before obtaining detailed cost-benefit analysis incorporating satisfactory explanations to the following questions: at what costs are the foreign loans being procured? Have the terms of the foreign loans been appropriately matched with the specific project profiles to be financed with the loans? Are the external loans self liquidating?
If no, what will be the source of their repayment? What arrangements are in place to ensure the proceeds are ring-fenced and judiciously applied? Since January 2011 when Nigeria launched into the Eurobond market with a 10-year USD500 million Eurobond issuance, the country has accumulated commercial external debts amounting to USD3.3 billion with USD1.8 billion (of which USD300 million was Diaspora bonds) contracted this year. Can these external loans be traced to executed or on-going capital projects?
Therefore, the real issue is not whether or not external loans should be contracted but how the proceeds should be utilized. The IMF recently underscored this point when it alerted developing countries to the dangers inherent in misapplying foreign loans. To this end, the National Assembly Committees on foreign and local debts, the Ministry of Budget and National Planning, the Debt Management Office and the Fiscal Responsibility Commission should be actively involved in monitoring the application of foreign loans. Special audit report by the Auditor General for the Federation should be made available to the National Assembly through the Public Accounts Committee regarding the utilization of external borrowings. The key challenge is to ensure that foreign loans are put to very good use and in ways that enable the needed traction to the country’s economy.
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