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| Uche Uwaleke |
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 $5.5bn for the purpose of implementing the external borrowing approved in
the 2017 Appropriation Act (about N1.07tn out of the N2.32tn deficit) as well
as “re-financing maturing domestic debts through the issuance of $3bn 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 trend in the country’s
external debt profile. Since Nigeria obtained the first jumbo foreign loan of
$1bn 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 a mismatch
of loan terms and project profiles. By 2005, Nigeria owed the Paris Club of
Creditors alone over $30bn 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 indicates that Nigeria’s total public debt stock as of June 30, 2017 stood at N19.64tn ($64bn)
comprising N15tn ($49.2bn or 76.56 per cent) for domestic debt and N4.6tn
($15bn or 23.44 per cent) for external debt. A breakdown of the external debt
stock reveals that
Multilateral Debts amounted to
$9.67bn (or 64.29 per cent), Non-Paris Club Bilateral Debts took up $2.07bn (or
13.78 per cent) while commercial (eurobond) accounted for the balance of $3.3bn
(or 21.93 per cent). If the $5.5bn is eventually obtained, the foreign debt
component will rise to $20.5bn.
Expectedly, the debate has begun.
The opposition 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 the US interest rate or the strengthening of the US dollar will increase the
cost of debt service for Nigeria.
On the other hand, those in favour
emphasise 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 $3.bn 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 waste 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 a 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
$500m Eurobond issuance, the country has accumulated commercial external debts
amounting to $3.3bn with $1.8bn (of which $300m was Diaspora bonds) contracted
this year. Can these external loans be traced to executed or ongoing capital
projects?
Therefore, the real issue is not
whether or not external loans should be contracted but how the proceeds should
be utilised. 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 utilisation 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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