Nigeria and the New Debt Profile

26 Nov 2012

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  • Nigeria does not need the proposed $9.3m loan. What we need is prudence in the management of our resources

In 2005, Nigeria successfully negotiated a complicated debt write-off deal of about $18 billion after a cash payment of approximately $12 billion to free the nation from the Paris Club debts of over $30 billion, most of which were accumulated interests and charges. A chunk of these loans were secured in the 1980s to fund what turned out to be white elephant projects and the profligacy of the various administrations at that time.

The debate then was whether it made economic sense for the nation to pay such huge funds to the Paris Club of Creditors just to write-off the balance of our debt. But with about $3 billion dollars spent annually just on debt servicing, the argument to exit the club was plausible. The idea was that the funds that would be saved from annual debt servicing would be channelled to productive sectors of the economy and to tackle some of the critical sectors that encompassed the Millennium Development Goals.

But seven years down the line, we are engrossed in another national debate on the appropriateness of treading the debt path. The federal government has proposed loans totalling $9.3 billion under its 2012-2014 External Borrowing Plan. The loans would come from different sources including the World Bank, Africa Development Bank, Islamic Development Bank, Exim Bank of China and India. Incidentally, one of the key figures in the efforts that led to exiting the Paris Club is also the key figure in clamouring for a new round of loans that would see our external debt stock increase more than two folds in two years. We currently have a total debt stock of $44 billion comprising of $6.2 billion external debt and N6.3 trillion domestic debt.

There are arguments that with the external reserves now put at $42.566 billion, and an excess crude account put at $9.6 billion, there was simply no basis for seeking a $9.3 billion external loan that would incur huge interests and charges over time when such funds could be drawn from the reserves. Credence is given to this argument by the fact that when the external reserves rose to $45 billion in 2005, government saw the wisdom in making a cash payment of $12.4 billion to the Paris Club of Creditors so as to free us from the strangulating shackles of debts. That payment brought the reserves balance to $32 billion before it climbed again to 41.95 billion in December 2006.

Then why should we thread the path of external debts accumulation again?

The federal government on its part has argued that the lower the external reserves, the more the naira would depreciate and has even declared its desire to push the reserves to $50 billion and the Excess Crude Account to $10 billion. But the rising prices of crude oil and the unfolding scenario in the Middle-east have shown that our external reserves and the Excess Crude Account would continue to grow, even if loans were not obtained, as long as the issue of rising cost of governance is addressed and identified loopholes are blocked. For example, the controversial payments of oil subsidy in 2011 alone which runs into trillions of naira is equivalent to a third of our domestic debt profile.

What we need now is to combat corruption squarely; close all loopholes and drainpipes in the system; tackle the massive oil theft in the Niger Delta; drastically restructure and rationalise agencies, most of which have duplicated functions; and reduce the huge overhead cost that consumes a large chunk of annual budgets at all levels. If we do all these, valuable funds could be channelled into more productive sectors. We therefore do not see the wisdom of borrowing billions of Dollars with interest from multilateral agencies at a time we are also accumulating reserves.

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