OUTSIDE THE BOX
By Alex Otti; email@example.com
“If you disperse people from the arena where opinions are expressed, they only go to converge at the cellar where revolutions are born” Old Sage
s a rule, I do not join issues with my readers. The reason is because as a democrat, I believe that everyone is entitled to his own views and opinion. Besides, being human, I can be wrong sometimes and would appreciate to be corrected. I do not believe in muscling my way through debates. I am therefore, quite comfortable with people disagreeing with me. I actually encourage it because it is only when ideas contend with one another that superior solutions can emerge.
In response to my last piece on the $30 billion loan proposition by the federal government, the Debt Management Office (DMO) took up paid adverts in many national dailies titled “Dangerous Misinformation by Mr. Alex Otti: Re: $30 billion Loan: Are You For Real?”
If not for the obvious misrepresentation of facts by the DMO in the rejoinder, I would not have responded. The response became more compelling because in accusing me of misinforming readers, DMO made misleading statements about the debt stock of the country. It is more interesting because I was quoting DMO in my numbers and I duly acknowledged it as my source. I had said that “According to the Debt Management Office, DMO, Nigeria has external borrowing of $11.26b as at the end of June 2016”. I then went ahead to add the above number to $12.71 billion being the dollar component of the domestic debt of the 36 states of the federation to arrive at total dollar debt stock of circa $24 billion. The next stage was to recognise the domestic dollar-denominated debt component of $37.48 billion outstanding against the federal government, thus bringing the grand total dollar debt to about $62 billion.
DMO on the other hand had argued thus, “It is completely false to state that external debt of states…was USD12.71billion. The DMO has transparently published the total external debt of the federal government, states and the FCT….which was $11.26b. For emphasis, the published external debt belongs to not only the FGN, but also to the states. Accordingly, Mr. Otti’s addition of USD12.71b and $11.26b to get $24b is a strange and speculative arithmetic”
Unfortunately, these numbers came from the DMO itself, www.dmo.gov.ng, and they remained on that website as at the time of going to press. Where DMO got it wrong was that it misinterpreted my reference to the debt stock of states as external. I had rightly acknowledged the $11.26 billion as external debt. I then proceeded to add the dollar component of the states’ domestic debts which are actually denominated in dollars to get $24 billion. Finally, I added the federal government’s domestic debt which is also denominated in dollars to get the total dollar debt of about $62 billion. There is no denying the fact that both the external debt and the dollar denominated domestic debt will all be paid back in foreign currency. Even if for any reason, the domestic creditors become so nice and want to receive their payments in naira, it would be strange if they will also give concession on exchange rate. So, for clarity, I restate that based on the numbers from DMO, we have debts of about $62 billion hanging around our neck which are actually denominated in foreign currency. Should we concede that the only debt repayable is the external debt component of $11.26 billion thereby getting a complete write-off of the entire domestic foreign currency debt of over $50 billion, I do not see how that would significantly change the argument I made in the write up.
On the issue of floating rates, the DMO once again misunderstood my point. I had acknowledged that the DG of DMO had said that the rates will be around 1.5% pa to which I added, “but I am certain he was referring to concessional rates from multilateral agencies”. It is therefore incorrect to insinuate that I had indicated that multilateral debts are normally priced at floating rates. In fact, my reference to floating rates and LIBOR was on the Eurobond. Again, talking about current yields on Eurobond, DMO again missed my point. My reference to the yields that our current bonds of 2011 and 2013 are commanding in the secondary market was not to show that it was impacting negatively on our economy as claimed in the response. DMO’s comment that “the movements of their yields in the secondary market have nothing to do with Nigeria’s debt service obligation” is therefore superfluous. At least, I should know how this market works. What was apparently lost on the DMO was that I had said that given the high yield of the existing bonds, fresh issues would attract higher rates. This is sensible as the yield is a pointer to the rating of fresh issues. I do not expect that there would be disagreement on the fact that our circumstances and fundamentals have worsened since the last Eurobond issue and these would be taken into consideration in pricing fresh issues.
The DMO also took me up on the diversification of foreign exchange earnings. It had this to say: “Unfortunately, even where Mr. Otti managed to state something true, instead of concocted or speculative, he failed to move to the next logical level. For example, he said ‘We need to diversify our foreign exchange earning capacity from the challenged oil to boost our foreign exchange revenue base’ But: he failed to say how you can diversify the forex base without addressing the huge infrastructure deficit to ensure higher productivity and competitiveness, he did not say how the huge infrastructure deficit will be funded, he did not say how big the required investment is and how much of this must come from the public and private sectors, respectively; he did not say where the government will get enough revenue to provide its share of the required investment’.”
When I read the tirade above, I jokingly asked: “If the DMO wants me to answer all these, what will it be doing?” On a serious note, I had written extensively on most of the questions posed by the DMO in my previous interventions and would encourage the DMO to read them. In my columns of September 12 and September 29, 2016, on the Diversification of the Economy, I had argued that while we needed to diversify from being a mono product economy, we needed to be wary of promoting primary products of agriculture and solid minerals. My argument was that we should deliberately encourage value addition in forms of processing, packaging, storage and exports of these commodities. The kernel of the debate was that commodities are susceptible to the same fate as oil, even to a larger degree, given that oil producing countries have OPEC to weigh in to protect prices. I concluded by arguing that we should promote education, research and development, innovation, skills, knowledge, science and technology, entrepreneurship and intellectual property as the ruling economies of the world are knowledge economies and not “luggage economies” a la Segun Adeniyi.
On infrastructure, I had been an unrepentant apostle of government spending massively to provide infrastructure for industrial production and good quality of life for the populace. I had argued in my two-part series “Chop Your Money 1&2” published on April 25, and May 9, 2016 respectively and another write-up titled “When and How to Spend the Money You Do Not have”, published on May 23, 2016, that we must spend a lot of money to deal with the present infrastructural decay. I had contended that it was more useful to spend our money on building roads, railways, refineries, power, hospitals and schools than save money in foreign bank accounts for which we do not get so much as interest, but also lose the benefits of having the much required infrastructure in place. Even in the write-up in contention, if DMO had read through properly, it would have noticed that I had answered the “how big” question thus, “According to the IMF, Nigeria needs to spend no less than $140b in the next decade to bridge the infrastructure gap in the country” Given this position, no one can sustain the accusation that I did not say how big the required investment is.
The DMO ends with a rather curious credit to itself for the healthy and welcome debate on the borrowing plan of government because according to it, it ‘democratised’ public debt knowledge. Given the age of the agency, one can understand that it was not there when a similar debate was called by the military government of General Ibrahim Babangida in the mid 80s as it wanted to access the IMF loan. The heated debate ended with the government throwing out the move to take the loan. I strongly believe that it would serve the government positively to encourage honest debate to enable it appreciate the opinion of Nigerians on this loan. It should not be hijacked by any government agency, not even the DMO.
It is interesting that in spite of the invectives, the DMO ended up attacking tangential comments and left untouched, the fundamental arguments made in my write-up. In my opinion, the issues to address would include how the $30 billion request was derived. Yes, we need several times that number to address our infrastructure deficit, but most lenders must pay attention not just to what the borrower needs, but his capacity to pay back. Even if the loan was interest-free one cannot wish away the capacity to repay. I had also contended that any loans we would take must be within an overall expenditure framework. Luckily, we have the MTEF/FSP (2017-2019) approved by the Federal Executive Council (FEC), upon which I relied to do my analysis. On the basis of the analysis, I arrived at numbers ranging from a conservative $10.5 billion, through a moderate $12.9 billion to an aggressive $14.52 billion, as the additional external debt we can take, given the assumptions of the framework itself. I actually expected that the DMO would fault my analysis on the basis that it was too aggressive. DMO had set a new debt template of 60:40 internal to external ratio to encourage a private sector driven economy. My analyses assumed a 50:50 ratio arising from the numbers I picked from the 2016 budget. If I applied the new template set by the DMO, the numbers would reduce to a range of $9.45 billion to a maximum new borrowing of $13.01 billion.
All said and done, I think we need to take another look at the framework, the amount we want to borrow, our capacity to pay back and the other issues that have been raised here and elsewhere. The government can only be the winner when things are done properly. Government agencies will also do well to encourage those who have some suggestions to make towards any issue of national importance, as no one has monopoly of knowledge. Finally, we must understand that the message is always more important than the messenger.
Permit me to use this opportunity to wish my readers, the DMO included, a merry Christmas and a happy New Year all in advance.