A former Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo, has said that Nigeria’s infrastructure deficit can be addressed with debt financing.
He however admitted that the conclusion that public debt should be used to finance Nigeria’s massive infrastructure needs was a paradox because of the existing precarious public debt profile.
Nwankwo, who was the guest speaker at the 3rd Just Friends Club of Nigeria (JFCN) annual lecture, which held recently in Abuja, contended that the resolution of that paradox lie in a creative unbundling of the concept of debt sustainability.
In the context of financing infrastructure for the structural transformation of the economy, he explained that distinction should be made between conventional debt sustainability, which was essentially static, and what one would identify as structural debt sustainability, which was based on a forward-looking view of the economy.
He noted that assessment of debt sustainability in the latter case should focus on whether and how, the additional debt would be effectively applied to the development of infrastructure, to pull the economy out of backwardness; how it would enable the economy to establish a growth trajectory that will enable it regain or enhance debt sustainability and more stable growth, by a forecasted time.
He said: “The secret is that it is feasible to articulate a bold plan for the transformation of the economy, the Transformation Plan, financed with new debt towards one that is more diversified, more competitive, more export-capable and less vulnerable to external shocks. Specifically, the new debt will generate adequate output and cash-flow to cover its servicing and amortisation and create surplus, while avoiding, by design, foreign exchange risk.
The net impact of the new debt on debt sustainability, therefore, is that by creating value added, it even helps to reduce the pre-programme debt burden, rather than exacerbate it.”
Nwankwo, who spoke on “Realism and Paradox in Financing Nigeria’s Huge Infrastructure Needs”, argued that such plan was a condition-precedent to effective debt financing of infrastructure, adding, “A robust macroeconomic model with detailed financial programming is perhaps the most important component of the plan documents; it will elicit the trajectory of transformation, breakthrough and self-sustaining growth that would result from the capital injection in big infrastructure development. It will demonstrate how exchange rate risk will be neutralised.”
He explained that the design of infrastructure development would mainstream the real sector and its objectives – diversification, encouragement of small and medium enterprises, export drive, etc. To him, it would specify the major channels or sources of stimulus for the economy derivable from a plausible transformation plan that supports massive debt-financed infrastructure investment.
The former DMO boss explained that in spite of the country’s problematic debt profile, a plan-based, project-tied, output-driven, and commercially-modelled and private-sector-managed debt programme remained a “robust option (arguably the most robust option) for financing Nigeria’s infrastructure development. It is a solution that can be intelligently structured to produce a transformed and self-sustaining economy without worsening debt sustainability.”
According to him, a major issue which had to be addressed while using debt financing for infrastructure was the impact of exchange rate risk since substantial portion of the debt was obligated in foreign currency.
“Concerns about exchange rate risk and, generally, concerns about the ability of a country that is a weak player in the global market, to meet its external debt obligations are quite relevant. So how could one justifiably propose more foreign currency denominated borrowing under this condition?” he rhetorically asked, responding that, “The answer lies in the Turnaround Plan (TP): The essence of the financial and structural programming contained in the TP, is that within five to seven years, the implementation of the plan will have produced a sustainable and continuously strengthening economic progress, and that from about year eight to year 10, the economy will start generating adequate public revenue, including in foreign exchange, with which the external debt will be serviced and repaid. That is why the external borrowing for the purpose of achieving the turnaround will be at favourable terms including, particularly, a moratorium period and a long tenor.”