Experts Worry over Proposed $9.3 billion External Loan

09 Dec 2012

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Finance Minister and Coordinating Minister of Economy, Ngozi Okonjo-Iweala

The federal government is planning to raise a $9.3 billion loan to fund various projects identified by the administration but experts say they are less bordered about taking the loan but are worried about whether or not the loan would be judiciously used, reports  Festus Akanbi

In order to keep faith with its determination to boost infrastructural development in the country, the Federal Government is set to borrow loans contained in its Medium Term External Borrowing Plan. Already, the Presidency is seeking legislative approval to borrow a loan portfolio of $9.3 billion, which consists of $7.9 billion medium term external borrowing plan. The $7.9bn facility is to be drawn from six multilateral agencies including World Bank, African Development Bank, Islamic Development Bank, French Development Association, EXIM Bank of India and EXIM Bank of China.

The loan of $9.3 billion, which will be obtained externally will run up till 2014 to develop infrastructure, particularly in the agricultural, housing, education, health and transport sectors.
Minister of Finance Dr. Ngozi Okonjo-Iweala said this when she appeared before the House Committee on Loans/Aids/Debts along with officials of the Debt Management Office to defend the loan. The country’s total external debt stood at $6.2 billion as of September 30, while the domestic debt profile was N6.3 trillion as of the same date.

Contrasting Positions
As the lobbying continues at the National Assembly, concerned economic affairs commentators last week took different positions over what they see as likely fallouts of the rising appetite of the federal government for debts.
Nigeria recently paid about $12 billion during President Olusegun Obasanjo’s administration to exit the London and Paris Clubs’ debt. One of the financial experts who warned against plunging the country into another debt trap is Odilim Enwegbara. According to the financial management expert, the situation at hand in Nigeria is that of loading the country with huge unproductive debts. Painting a rather gloomy picture, he said sooner rather than later ours would become a junk economy.

Enwegbara explained; “The danger with debt-trap is that as soon as a nation is inside, it becomes much easier for a camel to pass through the eye of a needle than the nation escaping the innumerable overt and covert fees-filled debt-trap, including draconian servicing, repayment, interest, and surcharge fees.

“How could it happen to a country that recently freed itself from more than two decades of odious economic savagery in the hands of the West? Had our rulers just forgotten how during the 1980s through 1990s until December 2005, Washington and London forced us into surrendering our economic sovereignty, while their IMF pointed its dreadful pistol at our heads? If our rulers have so easily forgotten that Western de facto imperialism under the disguise of IMF technocracy, have they too forgotten the unprecedented plundering and looting of our national wealth?”

Debt for Productive Ventures
He, however, defended debt taken for productive ventures. “Let’s not be misunderstood. No one is against a good national debt for fixing our infrastructure, since we all know that no amount of such investment should be considered reckless. Of course it’s the inevitable evil we too have to embrace like others. Alexander Hamilton, America’s first secretary of treasury (finance minister), championing America’s industrialisation appealing to US Congress in 1792 had said, ‘’A good national debt…will be to us a national blessing. It will be powerful cement to our nation. It will also create a necessity for keeping up taxation to a degree which, without being oppressive, will be a spur to industry.’’ So that we should borrow wisely and invest wisely is the only way to bequeath a better Nigeria to our next generations.”
In his opinion, Head, Research and Intelligence, BGL Group, Olufemi Ademola, said going for foreign debt could be both beneficial and risky.

He said: “Our recent experience with debt was not very palatable. From the account of Dr. Ngozi Okonjo-Iweala, the Minister of Finance and Coordinating Minister for the Economy, who championed the country’s debt relief project, Nigeria’s external debt was $35.99 billion in 2005 which required servicing at the rate of $4 billion per annum. Even the $1.5 billion annual debt service, which Nigeria committed to it was so high to become unsustainable in the long run. “Clearly, the only way out was to seek a debt relief of 60% of the outstanding Paris Club debt of $30 billion, which included the conditions of paying up on all outstanding interest payment (estimated at $6 billion) and a debt buy-back of $6 billion, totalling $12 billion. Our current debt stock is about N7 trillion of which about N923.8 billion ($5.96 billion) is external. So we have strong capacity to borrow more should the need arise.

“Furthermore, the key indicators of fiscal sustainability in Nigeria are positive. The debt to GDP ratio of 17.8% is substantially below the global benchmark of 60%. The debt service payment to Federal Government revenue ratio of 19% is also well below the informal global benchmark of 30%. The nation’s fiscal deficit has also remained below 3%, in line with the provision of the Fiscal Responsibility Act of 2007, except in 2009 and 2010 when the federal revenue declined precipitously as a result of the global economic meltdown,” he said.
He maintained that what is wrong with Nigerian domestic debt accumulation at the moment is in the primary use to which funds raised from the issues of government debt is deployed.

He stated “Our spending pattern suggests that the larger proportion of government debt is being deployed to funding recurrent expenditure. Over the last four years, recurrent expenditure as a proportion of total government spending has averaged 68.4%. There is therefore little to show for the increased borrowing in terms of capital investments, which contrasts with the Golden Rule being adopted globally. Beyond the sustainable investment rule which states that public sector net debt as a proportion of GDP must be held at a stable and prudent level over the economic cycle, the Golden Rule specifies that borrowing must be applied to investment such that the economic impact of the spending on government revenue should balance the budget over the full economic cycle.”

Foreign or Local Debt, which is Better?
According to the BGL chief, “At the current interest rate levels, foreign debt appears more attractive than domestic borrowing. The country would be able to borrow at single digit rate in the international market compared to the over 14% domestically. However the foreign exchange and balance of payment risks cannot be ignored. Furthermore, the high domestic interest rate was due to the increasing rate of borrowing by the government, which is not used for productive use. “Therefore, regardless of the source of the debt, Nigeria can only benefit if government could promote a budget investment policy that mandates the application of borrowed funds into investment in infrastructure with punitive measures for defaulters. Through this approach, government can tap the full benefits of the debt markets (especially the local market) with reduced fear of fiscal sustainability working with the monetary authority. The process would also support deepening the financial market and growing the economy.”

Implications of the Rising Appetite for Debt?
While agreeing that the governments, especially in states, have not shown good accounts of the management of the economy, Ademola opined: “I think there have been considerable improvement in some states over the years since 1999. And we have seen some good use of the debt market for financing infrastructure developments in some of the states. I believe that if all the parties in the debt capital transactions can play their roles in ensuring that the funds are channeled to the projects for which the debt capital was obtained, we will see better management of the funds.” He explained: “The transaction dynamics for the projects should be detailed in the capital raising documents and the trustees and the regulator must ensure that funds are only released directly to the project based on agreed terms. In my opinion, it is important to consider the glaring infrastructural gap in the country in the light of the pattern of government spending. This needs to be evaluated with consideration to the funding options that are available to the government within the fiscal risks space. An emerging market peer review suggests that Nigeria is currently making sub-optimal use of the bond market to finance infrastructure, and therefore operating below its capacity.”

Meanwhile, Director, Capital Market, Ecobank Plc, Mr. Rotimi Oyekanmi, explained that debt is a major part of development, therefore it is not an issue of whether any country should access debt or not. “The main question is what the debt is used for and if it will be productive and if it would make the lives of the citizens better and if the debt can be repaid,” Oyekanmi said.

He said the type of debt – foreign or local-would depend on the ability to repay and the sources of repayment of the debts. Also the extent of the debt servicing compared to the future revenues and the reserves of the country.

“Until we are able to reduce the size of the public sector which we know is not as efficient as the private sector, we would continue to see inefficiencies,” he said. Meanwhile, the London-based Head of Regional Research, Africa, Standard Chartered Bank, Razia Khan explained that “the difference this time is that there is faster growth, and provided the borrowing is put to productive use, the payback potential is high, so Nigeria should not necessarily accumulate debt. But as always, checks and balances are needed to ensure that this is the case. Nigeria has a long history of having borrowed to finance infrastructure without the hope-for improvements materialising, so it is important to ensure that this time things are done differently. “In general, the perception is that borrowing domestically is the safer option, as this lessens the likelihood of FX pressure (what would happen to repayment capacity if oil prices were to collapse, for example?). However, given that monetary policy is tight, and inflation is still high - meaning that investors want larger returns to compensate for risks, it is expensive to borrow domestically. For the moment the preference is to borrow externally. “It is always a concern when there are many willing to lend freely, as it means the lessons of the past will be forgotten. All debt crises are preceded by some relaxation of lending standards; before every bust, there is a boom. “I recall that the CBN had a good plan for this. Only states passing fiscal responsibility bills of their own would see their debt enjoying liquidity status at the CBN window, which would be a factor in demand for state debt. This sort of positive incentive can achieve good things,” she said.

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