The Rejection of Buhari’s $30bn External Borrowing Request

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Nigerians were shocked last Tuesday when President Muhammadu Buhari’s request for $30 billion external borrowing was turned down by the Senate. Kunle Aderinokun and Omololu Ogunmade report the issues surrounding the special loan request and the reaction that trailed its rejection

Shock and disbelief enveloped the atmosphere last Tuesday, when the Senate threw out President Muhammadu’s Buhari’s $29.9 billion external borrowing plan. The act was least imagined by the public which had expected the request to be hastily accepted, debated and referred to the Senate Committee on Foreign and Local Debt for thorough scrutiny and subsequent recommendation for approval to the Senate.

Hence, it was a shocked audience that watched the Senate reject the request through voice votes without being subjected to debate after the motion for its consideration was moved by the Senate Leader, Senator Ali Ndume.

The overwhelming rejection at the first voice vote prompted the Senate President, Bukola Saraki, to subject the request to another round of vote. But the situation was not better as the rejection this time was even more vehement than the first one. Hence, it became obvious to Saraki that the situation was irredeemable and consequently, the request was thrown out.

The Inside Story

Although no reason was given for the rejection at the plenary, THISDAY learnt that the request was rejected as a result of the president’s perceived nonchalant attitude about state matters, especially the manner of presenting the request. This brought reminiscences of the presentation of different versions of the 2016 budget earlier in the year which heated the polity like a furnace and which took Senate’s insistence not to consider unofficial versions of the document to compel the president to admit and correct errors in the budget.

In clear terms, whereas the president had claimed that details of the borrowing plan had been attached to his letter addressed to Saraki, no document was found to have been attached after all. Given the perceived untruth portrayed by the trend therefore, it appeared to the senators that the president was playing on their intelligence which they said would not be accepted.

The president had in the introductory paragraph of his request letter said: “I wish to refer to the above subject and to submit the attached draft of the federal government 2016-2018 external borrowing (rolling) plan for the consideration and early approval by the National Assembly to ensure prompt implementation of the projects.”

Therefore, because the “attached draft” of the borrowing plan which the president had claimed he was submitting along with the letter was never submitted, the senators found the rejection as an avenue to teach the president how to do his job diligently. Thus, there were perceptions that the president appeared to have undermined the capacity of the Senate to challenge him on any matter whether wrongly packaged or not.

It was further learnt that it took the Senate aback that the president would submit a request of that magnitude which contained one of the highest borrowing ever in the history of the country without a plan as well as the true picture of the loans, which Ndume said must ordinarily include “when” and “how” they would be obtained.

The senators, THISDAY gathered, found it to be irritating that the president, who was perceived to be a very meticulous person would try to persuade the Senate to grant anticipatory approval to the loan request instead of following the laid-down procedure. This was perceived to have portrayed the federal government as an unserious element which toys with the serious task of governance which ordinarily should be undertaken with due diligence. That Buhari asked the Senate to grant anticipatory approval to the borrowing plan, which they had not seen, thus created the impression that Nigeria was being run like a banana republic. This plea for anticipatory approval was contained in the last paragraph of the president’s letter.

The president had said: “Given the emergency nature of these facilities and the need to consolidate the peace and return the region to normalcy and considering the time it will take to get National Assembly’s approvals, it has become inevitable to request for the NASS leadership approval pending the consideration and approval of the 2016-2018 borrowing plan by the National Assembly to enable us disburse these funds immediately.”

Besides the alleged shoddy manner in which the request was presented, there were also perceptions that the request for a whopping $30 billion was too huge and scary for a nation being run by leaders whose competence to turn things around has been doubted by various segments of the society including the Academic Staff Union of Universities (ASUU). Thus, there were some lawmakers who believed that plunging the nation into a huge debt of whooping N9.12 trillion without any convincing plan or initiative brought forth to revive the economy so far, would amount to mortgaging the future of the country and creating monumental crises for future governments.

Buhari Meets with Saraki

However, Saraki on Friday cautioned against politicising the decision of the Senate to turn down the $30 billion borrowing request.

The caution came after the meeting Buhari had with him behind closed doors after the duo observed the Juma’at prayers at the Presidential Villa, Abuja. According to Saraki, who spoke with State House Correspondents on update on the loan request, shortly after the meeting, “I came here to pray, I have finished praying and I just had a general felicitation with the President. It didn’t go beyond that. We should not look at that as a reflection of the relationship. Don’t let us politicise very important issues. Our relationship is work in progress and has nothing to do with loans”.

Nigeria’s External Debt Since 2006

Following Nigeria’s exit from the Paris Club in April, 2006 after the debt forgiveness secured by the government of President Olusegun Obasanjo, Nigeria was only owing a paltry $3.348 billion external debt at the end of Obasanjo’s government in 2007.

In 2010, when President Umaru Yar’Adua died, Nigeria’s external debt profile had moved from $3.348 billion to $3.947 billion. Then came the administration of the immediate past President Goodluck Jonathan which went into further borrowing, leaving the nation in June 2015 with external debt profile of $9.3 billion. But the Director-General of the Debt Management Office (DMO), Dr. Abraham Nwankwo, had risen in defence of the current borrowing plan, saying it would help the government to address the infrastructure deficit ravaging the country.

While giving the essential features of the loan, Nwankwo reportedly said the borrowing had low concessionary interest rate of 1.5 per cent and 20-30 years repayment plan. According to him, the only way out of Nigeria’s precarious situation is to go for the loan, emphasising that once infrastructural problems are addressed by a nation, the coast will be clear for economic activities to thrive.

“When you are in this kind of economic situation, you have to decide where you want to start addressing the problem. You then come to the conclusion that the most critical point to start is to deal with infrastructure problem. If you deal with infrastructure problem, the cost of power will be lower, the cost of transportation will be lower, and the cost of most other services will be lower.”

A day after the rejection of the request by the Senate, the Federal Executive Council (FEC) rose from its weekly meeting with a resolve to correct the flaws in the president’s request and consequently re-present the loan request to the National Assembly. If the flaws are thoroughly addressed, the request has the prospects of eventual approval in the days ahead.

Economists Speak

However, following the senate’s rejection of the borrowing request, economic watchers and experts have assessed and submitted their conclusions on the scenario. To the Chief Executive Officer, The CFG Advisory, Adetilewa Adebajo, the US$30 billion loan at this stage is a distraction as he believes “emphasis should be on financing the 2.2trillion budget deficit, and getting the budget 2017 to the house for passage to sustain the stimulus, and get the economy out of recession.” According to him, “The 3 year loan request should have been submitted with the 2017 budget.

Apparently agreeing with the Senate for rejecting the request for lacking details, Adebajo said: “Considering the opaque nature of the contents with very little details on the sources and uses of the loan, the Senate has rejected the submission and rightly so, asking for more details and whipping up a political storm and grabbing the media headlines in the process.”

Going forward, he advised the federal government to consider the following before resubmitting to the Senate.

“The government should have firstly considered the bankability of the very laudable projects and seek to obtain private capital before proceeding to underwrite any shortfall. The Indian forward sale crude Oil Deal is a good idea which should also be properly considered to fund the 30billion request. Outside China-Exim, Japan Development and ADB, I am also of the opinion the IMF and World Bank loans should be considered and prioritised, since they are at 0 per cent. The IMF loan is not an issue anymore as we have floated the naira and removed subsidy on fuel. There are no more obvious rent-seeking activities in government. The discipline that comes with the management, supervision and payback mechanisms of these loans are also important to ensure we derive value.

“The proposed 30Billion loan will take the current debt stock from 61bn to 91bn US$ by 2018. Can Nigeria service and payback the loans from the value derived from the projects? The projects can be financed from alternative private capital sources and government needs not go it alone. World Bank and IMF are good choices followed by the Eurobond, LDI and FDI,” he stated.

Adebajo argued that, the DMO response on sustainability did not answer the question, noting that currently, between 35-40% of revenues are going towards $61 billion debt service. According to him, “What will be the ratio of revenues to debt service when debt stock is $91billion? Even if they shift a significant amount to foreign borrowing, the Eurobond is a Junk Bond, it’s not investment grade and attracts high yields and costs. If the government borrowing reduces locally, pension funds and banks will suffer as they do not have the imagination, creativity and innovation to create wide asset class.”

Asking, “What will they do with all that liquidity? Chase FX?,” Adebajo argued that, “according to CBN data, we can remember the last time government borrowing crowded out the private sector borrowing.”

Also, the Chief Executive Officer, Global Analytics Consulting Ltd, Tope Fasua, who considered the rejection as a temporary setback, maintained that the external borrowing plan was “a very risky move.”

According to him, “The risks involved are plethora. There is exchange risk to worry about. We took the first rash of foreign currency loans when the Naira was stronger than the US Dollar and repaid when it was N120. The Naira is presently at N470 (real terms), to the USD and there’s a risk it could fall further.

“Then there is the moral hazard that creeps in when a people find themselves awash with liquidity.” Cautioning the federal government not to “mortgage the country because it is trying to solve a liquidity problem,” Fasua pointed out that, “Certainly the amount is too large and we have never acquired such an amount within such a short time as proposed.”

He believed, “There is every possibility it will dump the country back in the debt trap we exited in 2006,” stating that, “ No one should bring up the jaded argument of Debt to GDP.

“Already we spend a huge proportion of government revenue servicing existing debts. So the focus should be on debt to revenue ratio. And even if there is a long moratorium, the day of repayment will creep up sooner than we think and those who contracted the loan would have gone into retirement. This is simply unfair and I cannot support it,” he contended.

But the Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, see no “big deal” about the rejection, even though he expected that “they would ask pertinent questions and do a thorough review of the plan before turning it down.”

“Although the plan has stalled, it may just be a temporary setback as the executive is planning to engage the Senate to resolve the “technical” issues,”

Ademola noted : “Like the experience in Europe where it was believed that the transfer system has a huge role to play in the financial crisis, the recklessness of past governments and economic wastage are important causes of the current recession in Nigeria. However, unlike the European economies that have more advanced infrastructure system and therefore could focus on cost cutting to manage the crisis, the poor infrastructure level in Nigeria signifies that the country may need to spend itself out of this recession.”

He added: “And like the US in 2008/2009, a significant fiscal expenditure (mostly through debts) which was approved by the Congress would be required. Nigeria’s immediate need to look for revenues outside of the oil industry also supports the need for developmental spending to open up opportunities in other sectors to rival the oil sector and provide infrastructure development with the aims of boosting economic activities and improve tax revenues.”

Ademola, who did not express any doubt that, “the amount is significant considering the current stock of our external debt of about $11.3billion”, pointed out that, “When we remember that the country negotiated a debt write off of $18 billion out of $30 billion in 2005, it is usual to be worried about going on with the new debt.” He, however, believed that, “as long as the funds are channelled to investment in infrastructure, it would boost economic activities with implications for tax income.

“And in terms of debt to GDP ratio, it would increase the ratio from 12.77 per cent to 19 per cent. 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.

“It should also be noted that 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.”

Ademola is therefore of the expectation that the National Assembly would do a rigorous review and debate of the borrowing plan with a view to ensuring that the proposed items are necessary and if eventually approved and the plan executed, the funding attracted would be channelled to the appropriate sectors.

Harping on the alternative sources of financing the economy out of recession in the event the Buhari external borrowing request does not scale through, an economic analyst, who is also an investment manager, Adetola Odukoya, argued: “In reality, besides taxation, duties and levies, there are no other immediate sources of funds for Nigeria today given the current headwinds facing the oil sector i.e. lower prices and production levels.” Therefore, in my opinion, the borrowing option is not a surprise, he stated.

He was, however, quick to add that, “Without any doubt, the loans being sought will significantly increase Nigeria’s debt profile and debt to GDP ratio; this is against the backdrop of the country’s declining economic output versus increasing debt.”

Nevertheless, Odukoya expressed the view that, “The most important factor is the judicious deployment of the funds to critical sectors- and projects- within the economy that will facilitate creation of employment, increase domestic production and aid overall growth. Otherwise, Nigeria may find herself back to the pre-2006-debt-forgiveness days when a substantial portion of the national budget was being utilised for debt servicing. “