Examining Buhari’s Request for $30bn Foreign Borrowing

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In its bid to stimulate development and lift the economy out of the murky waters of recession, the federal government has decided on a comprehensive foreign borrowing, but not without reactions from stakeholders in the economy, reports Kunle Aderinokun

The federal government’s intention to borrow $29.9 billion has sparked a debate as to the propriety or otherwise of making such foreign borrowing.

President Muhammadu Buhari has tabled the government’s request for approval of the loan before the National Assembly and if approved, would push Nigeria’s total external debt stock, which stood at $11.262 billion as at June this year, to $41.162 billion after three years, when the borrowing plan would have been fully executed. As a result, the move has attracted the attention of commentators from the political and economic classes. Firing the first salvo is the Peoples Democratic Party, the opposition party, which vehemently opposed the borrowing plan. The others are economic analysts and observers, who are divergent in their opinions on the idea.

Buhari’s Request

In his letter to the National Assembly seeking approval for the $29.9 billion External Borrowing (Rolling) Plan, Buhari stated that the foreign borrowing would be used to address the infrastructure deficit in the health, education, water resources and other sectors.

Besides, Buhari also sought the virement of N180.8 billion within the 2016 budget and provided a breakdown of items to which the fund would be allocated.

According to him, the projects and programmes under the external borrowing plan were selected based on positive technical economic evaluations, as well as the contributions they would make to the socio-economic development of the country, including employment generation, poverty reduction, and protection of the nation’s vulnerable population.

As proposed, some of the funds from the external borrowing plan would be deployed to emergency projects in the North-east, particularly following the recent outbreak of polio after the de-listing of Nigeria from polio endemic countries.

A breakdown of the $29.96 billion borrowing, which would span a period of three years, shows that $11.274 billion would be spent on certain proposed projects and programmes while $10.686 billion would be used to execute special national infrastructure projects and Eurobonds of $4.5 billion, with the remaining $3.5 billion to be applied as the federal government budget support. The letter conveying Buhari’s request, which revealed this breakdown, was read at plenary by Speaker, House of Representatives, Yakubu Dogara.

Further breakdown reveals that 61.2 per cent of the foreign loans have been earmarked for bankable infrastructure projects while social programmes in health and education, the federal government’s budget support facility, agriculture and the Eurobond issue account for the balance.

Out of the $29.96 billion proposed financing, the federal government would take up 86.3 per cent, or $25.8 billion, while the 36 states of the federation and the Federal Capital Territory (FCT) will account for the balance of $4.1 billion.

Besides the planned Eurobond, five multilateral institutions namely, the World Bank, African Development Bank (AfDB), Japan International Co-operation Agency (JICA), Islamic Development Bank and China EximBank, are expected to provide the $29.96 billion.

Specifically, out of the $29.96, 61.2 per cent would go towards infrastructure projects comprising the Mambila hydro-electric power plant – $4.8 billion; railway modernisation coastal project (Calabar-Port Harcourt-Onne Deep Seaport segment) – $3.5 billion; Abuja mass rail transit project (Phase 2) – $1.6 billion; Lagos-Kano railway modernisation project (Lagos-Ibadan segment double track) – $1.3 billion; Lagos-Kano railway modernisation project (Kano-Kaduna segment double track) – $1.1 billion; and others – $6 billion.

Apart from allocating the proposed funds to the infrastructure projects, the federal government also intends to raise $4.5 billion through a Eurobond issue.

But the plan has been criticised by the main opposition party, PDP, which regarded the proposed borrowing as unnecessary as arguing that it is not a solution to the economic challenges plaguing the country.

In statement issued by the party last Wednesday, which was signed by its spokesman, Dayo Adeyeye, PDP said it totally disagreed with the plan and demanded that the federal government furnishes Nigerians with details of how it had spent the ‘so-called looted funds’ and how far it had gone in implementing the 2016 budget.

In fact, it pointed out that rather than having many items lumped into one, President Buhari should itemise the projects he wanted to spend the $30 billion.

The opposition party said: “There is no gain saying that the APC led-federal government has left no stone unturned in castigating the PDP’s 16 years as wasted even with its obvious achievements, one of which was getting reprieve from the Paris Club of creditors.

“The APC led-federal government is again taking Nigeria back to 2005 when the external debt burden derailed the growth of the Nigeria economy and weakened the GDP before the total cancellation of her debts.

“This proposed action of the APC government will be a great injustice to the citizens of this country now and in the future if they are plunged back into debt.

“Let us state unequivocally that history will not forgive this APC government and its collaborators if they allow this injustice and mal-administration of our economy and citizens to stand.

“We therefore call on the National Assembly to reject this anti-people request by an anti-people government that has no genuine interest in the growth and development of the people of this country.

“We again call on all Nigerians to speak with one voice and stop President Buhari from further destroying our great nation, Nigeria and by extension, Africa,” it said.

Experts’ Opinions

However, Director General, West African Institute of Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, contends that Buhari’s request is in order.

According to him, “The projects and/or areas listed by government are vital for the economy not only to get us out of recession but also to ensure sustainable growth. The government must spend on capital projects, power in particular to get the economy out of the recession. Asking for virement is to follow due process.”

Ekpo explained that, the sharp decline in oil prices coupled with its volatility underscored the unreliability of that source of revenue to finance development.”

“In the short-term, the virement is necessary because you cannot raise taxes during a recession; even increased VAT by say 2 per cent would only increase the revenue of sub-national governments. That of the federal government would be marginal. Most of the windfall from oil was looted by previous administration from what we read every day in the news media. Hence, in my view government has no choice. The challenge is to monitor the spending on the relevant projects so that Nigerians get value for money. In addition, there is need for a drastic cut in expenditure, for example, the cost of governance is too high.

Ekpo emphasised that, “Government does not have that many options but to borrow and borrowing externally is a better option.”

“External borrowing allows for concessionary terms such as low interest rates and long period of repayment, sometimes up to 30 years. Domestic borrowing does not allow for much flexibility and more often it is for a period of 1-2 years.”

He advised government to explore the recent option with the International Monetary Fund (IMF).

According to him, “The Fund recently announced “zero” interest rate for low income countries with conditionalities. Though Nigeria is low-middle income, there is always a grace period to migrate from low income. In addition, the country can obtain loans from the African Development Bank and use the Nigerian Trust Fund as leverage. The country should avoid the Eurobond market; rates are too high.”

Giving some sort of comfort about the borrowing, Ekpo, who is a renowned economist, noted: “Because of the rebasing exercise, the external debt/GDP ratio provides space for borrowing. The country is still within the benchmark.” He was, however, quick to add that, “GDP does not pay debt but revenue. It would be necessary to compute the debt/revenue ratios for both domestic and external debt.”

“Going forward there is a need to review the benchmark of deficit/GDP of 3 per cent. It is too restrictive for countries such as Nigeria with huge infrastructural deficit. The Fiscal Responsibility Act may have to be amended though there is a clause which allows for marginal deviation if the appropriate process is in place,” Ekpo suggested.

Reasoning along the same line with Ekpo, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, stated that, even though the borrowing is significant, the funds would boost Nigeria’s economic activities with implications for tax income as long as they are channeled to investment in infrastructure.

“The request for approval for $29.96 billion foreign borrowing is very significant considering the current stock of our external debt of about $11.3 billion. In Naira terms, it is equivalent to about N9 trillion. However, since it is a rolling borrowing plan, it would be for a medium term period and would only increase the total debt stock of the country by 50 per cent to $91.45 billion. As long as the funds are channeled to investment in infrastructure, it would boost economic activities with implications for tax income,” he said.

Pointing out that, “In terms of debt to GDP ratio, it would increase the ratio from 12.77 per cent to 19 per cent,” Ademola believed, “While this is significant, it is still considerably lower than the ideal of 40 per cent suggested for emerging and developing economies.”

“And when compared to other emerging and frontiers, Nigeria will only be bettered by Russia with 17.7 per cent debt to GDP ratio after the acquisition of the planned borrowing. China’s ratio is 22.4 per cent, India has 66.7 per cent, Brazil has 66.23 per cent while South Africa has 50.1 per cent. Among the MINT, Mexico’s 43.2 per cent, Indonesia’s 27.0 per cent and Turkey’s 32.9 per cent are all higher than Nigeria’s,” he added.

“It should also be noted the debt to GDP benchmarks are not cast in stones as most countries, especially the developed economies are all above the threshold of 60 per cent. The USA has a ratio of 104.5 per cent, UK has 87.2 per cent, Germany’s is 76.9 per cent and France has 92.2 per cent. What this implies is that a high GDP ratio may not necessarily be a bad thing as long as it is properly managed,” he also noted.

Similarly, analysts at Eczellon Capital Ltd, said the request by the President for the fresh external loan did not come as a surprise “given the current weak revenue posture of the government vis-à-vis the spending requirements for the Medium Term Expenditure Framework (MTEF).”

According to them, “From available information, more than 70 per cent of the US$29.9billion loan will be expended on key capital projects, which seems positive due to the potential multiplier effects of such spending on the economy and overall development of the country. Likewise, the development marks a shift on the government’s debt strategy to focus more on external borrowings and reduce the current crowding out of the private sector borrowings in the economy.”

The analysts, however, added that, “ the two key considerations here would be the cost at which the loan would be sourced – which is still not known, and the effective deployment of the funds when eventually received by the government.”

“That said, should the National Assembly approve the loan, it will increase the nation’s external debt profile to US$41.2billion – c.9% of the nation’s GDP – from the current US$11.2billion, which is still relatively low compared to other emerging and advanced economies,” they noted, pointing out, “This should have an enormous impact on the country’s debt servicing cost which is currently about 27 per cent of the 2016 budget, especially if the country fails to diversify its FX earnings in the short to medium term.”

“ This obviously will require that the intended projects that will be financed from these borrowings generate sufficient economic benefits to cushions the huge recurrent expenditure required to service the debt. Otherwise, it will end up not just being a burden on already fragile economy but also on future generations of the country,” the Ezcellon analysts cautioned.

However, the Chief Executive Officer, Global Analytics Consulting Ltd, Tope Fasua, did not agree with the school of thoughts that Nigeria should borrow her way out of recession.

He said: “It’s beyond my imagination given that the entire foreign debt profile is still less than $20billion and that we have acquired since we tried to exit in the year 2006. It therefore sounds fantastic that we would want to acquire $30billion worth of external borrowing within three years. I cannot say I understand the underlying philosophy that propels such an argument. I am not one of those who believe we can borrow our way out of this recession. This proposal is simply egregious. We are plunging ourselves deeply into another debt trap with our eyes open, under the auspices of a change government. I hope it’s not true.”