Managing Nigeria’s Growing Debt Stock

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The issue of Nigeria’s rising debt portfolio came to front burner, when the Monetary Policy Committee of the Central Bank of Nigeria held its first meeting of the year to deliberate on development in the economy and make decision on the way forward, reports James Emejo

The MPC last week met to appraise the performance of macroeconomic policies particularly in the areas of price stability, inflation as well as global development that have direct and indirect bearing on the country’s economy.

Part of the major highlights of the meeting was the concerns raised by the CBN over the country’s swollen external debt, which it warned had the potential of fast approaching the pre-2005 Paris Club exit level.

It is not the first time concerns were raised over the rising foreign borrowing by the present administration.

But the federal government had defended the borrowing on grounds that it was still in within the borrowing limits and are largely committed to developmental projects that could grow the economy.

In October 2018, the National Bureau of Statistics (NBS) estimated the country’s total domestic and foreign debt stock at N15.63 trillion and $22.08 billion respectively, as at June 30, 2018.

The foreign borrowing consisted of $10.88 billion from multilateral agencies, $274.98 million from bilateral (AFD) and another $2.12 billion bilateral from the Exim Bank of China, JICA, India and KFW, while $8.80 billion was commercial.

There had been growing fears that few years after exiting the quagmire of the Paris Club of creditors, the country may be headed back in the trap. The now famous Paris Club exit followed negotiations by the team led by the former Finance Minister, Dr. Ngozi Okonjo-Iweala, in the administration of former President Olusegun Obasanjo, which earned the nation a reprieve, literally described as a lucky escape.

There are arguments that if not checked, the rising debt stock could rob the country of development aspirations and result in another round of economic recession because virtually all revenues will be committed to debt service, leaving nothing for infrastructure development

The worrying external debt level was, however, re-echoed by the MPC, which noted the increase and advised for caution.

Providing further clarification on the position of the committee on the issue, Emefiele, who addressed journalists at the end of the two-day MPC meeting said though there was nothing really wrong in borrowing, the country needed to rebalance the debt position.

He said: “I have not said that going for foreign debt is bad or that it is wrong. Before now, by around 2017, Nigeria’s ratio of domestic to foreign debt was 80 per cent domestic to 20 per cent foreign to the extent that even government was being accused of crowding out the private sector. And of course, the fiscal authority thought there was need to rebalance the debt position to 60/40 and we also went last year and supported the raising of about $2.8 billion from the Eurobond market

“We are just trying to observe that we are moving close to the ratio that had been set and that there is a need for us to review the situation and then re-jig and then think whether or not we should proceed.”

Another issue, which sought for clarification during the meeting was the directive to banks to suspend interest charge on loans to oil marketers.

Emefiele noted, “There is an agreement. I had held a meeting with both the banks as well as the oil marketers and the agreement was that the banks would stop charging interest from July 2017 to date.

“That the banks themselves must play a part in what we call the hair cut- taking part of some of the consequences otherwise it took a lot to get those monies to be paid because you can imagine debts that had been outstanding for almost about two to three years owed to those petroleum marketers.

“So it is an agreement and we have told the banks that they should please suspend interest from July 2017 to those loans and whatever promissory notes that had been collected, they should collect them and credit the account of the petroleum marketers immediately.”

The apex bank boss was also asked to clarify the resolution of the controversy between it and MTN Nigeria over the alleged Illegal repatriation of $8.1 billion.

He said, “I am very delighted and gladdened that at last…I know I came here and I promised that the matter between the CBN, MTN and the banks would be resolved amicably and equitably and that everybody will be happy.

“I am glad to tell you that yes, in November, we held a round of meetings with MTN officials even from South Africa and by December, we concluded those engagements and the matters were resolved.

“It resulted in a notional, I repeat, it is not a fine, not a penalty, but a notional reversal of the sum of $53 million amounting to about N19.5 billion.

“And this amount has since been paid by MTN and the terms of settlement of these matters had already been lodged in Nigerian courts.” The planned inclusion of more items, which are to be denied access to foreign exchange at the official windows further shaped deliberation among MPC members.

Emefiele said, “The CBN will get even more aggressive, to see to it that all food items that can be produced and consumed in Nigeria and are currently being imported into Nigeria would be placed on the FX restriction list.

“What does that mean? That you cannot source foreign exchange from the Nigerian foreign exchange market to import those items into Nigeria.

“But if you have free dollars, you can bring it in, but that you will not be able to even make payments for those items from dollars sourced from the Nigerian foreign exchange market.

“This is because we think the initiative that the CBN had put in place in the past to cut import and diversify the structure of the Nigerian economy is yielding results, we will continue to be that aggressive.”

The MPC, however, resolved to leave the Monetary Policy Rate (MPR), otherwise known as interest rate, at 14 per cent.

It also retained the Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.

The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.

Emefiele said all 11 members of the MPC voted to keep the policy parameters unchanged from their current levels.

He pointed out that the observed and recent high foreign capital inflow into the Nigerian economy despite the perception of election risk was evidence of the confidence of the international community in the country’s macroeconomic management and provided a compelling reason for the committee to await

clarity on macroeconomic performance after the general elections in February and March 2019.

He stressed that going by the observed risk confronting the economy, including the global and domestic inflationary pressures that have intensified the risk of currency depreciation, the MPC was of the view that a loosening option was very remote.

According to him, weighing the balance of its judgement on price stability, conducive to growth, the MPC felt that tightening would result in the loss of the gains so far achieved. He noted that this might drive the banks to re-price their assets, thus increasing the cost of credit as well as elevating credit risk in the economy. The governor added that it would also worsen the position of non-performing loans of the banks.

The CBN further observed that tightening monetary policy would dampen investment and hamper improvement in output growth, given the already fragile growth performance so far achieved.

According to him, the committee noted with satisfaction, the performance of the economy in 2018, highlighting the achievements in key macroeconomic indicators in the face of global uncertainties and domestic challenges. In particular, it noted the stability in the exchange rate, stable accretion to external reserves, moderation in inflation and the low, but gradual improvement in real GDP growth in the last six consecutive quarters commencing from Q2 2017.

“The MPC noted that given global economic conditions and the risk confronting emerging markets and developing economies in recent times, as well as the limited productive capacity of the economy, the managed float foreign exchange management regime of the CBN has delivered the most optimal results when compared with other emerging markets in recent times. Consequently, capital flows into the domestic economy have continued unabated after an initial lull.

“The committee considered the risks to the global economy, noting the downward revision in projected global output in 2019, the adverse impact of the trade war between the U.S and its major trading partners, likelihood of lower crude oil prices, impact on capital flows of continued monetary policy normalisation.

“The committee commended the government’s focused expenditure on investment in infrastructure and urged the federal government to sustain the pace towards addressing the infrastructural deficit in Nigeria. It noted that the immediate impact of this approach on GDP may be slow in coming, but

will eventually expand the economy’s productive base, reduce unemployment and increase aggregate demand in a more sustainable manner and over a long period of time.”