President Muhammadu Buhari’s letter to the National Assembly, last week, seeking the legislature’s approval of plans by the Federal Government to borrow $29.96 billion in the next three years, has raised fears that the country could be plunged into another debt trap. TONY CHUKWUNYEM writes
If data from the Central Bank of Nigeria (CBN) is anything to go by, Nigeria’s total external debt stock could increase to a record $40 billion if President Muhammadu Buhari’s request to borrow $29.96 billion gets the nod of the National Assembly and if the country fully draws down on the proposed loan. A recent report released by the apex bank states:
“External Debt in Nigeria increased to 11261.89 USD million in the second quarter of 2016 from 11194.65 USD million in the first quarter of 2016. External Debt in Nigeria averaged 6660.80 USD million from 2008 until 2016, reaching an all-time high of 11261.89 USD million in the second quarter of 2016 and a record low of 3627.50 USD million in the first quarter of 2009.”
Apart from the fact that with an external debt stock of $40 billion, Nigeria will rank among the most indebted countries on the continent, industry watchers point out that the $40 biliion would be $10 billion more than $30 billion foreign debt that the country had accumulated when it was caught in a debt trap in the early 2000s.
A debt trap is generally regarded as a situation in which a debt is difficult or impossible to repay, usually because high interest payments prevent repayment of the principal. Then, it took a lot of effort before Nigeria got out of that trap in 2005, as it had to negotiate with the Paris Club of creditors to write off 60 per cent or $18 billion of that amount after making a controversial bullet payment of $12.4 billion.
The consensus in financial circles at the weekend was that the government was seeking the record external loan because it sees the funds as critical to getting the country out of recession. In his letter to the National Assembly, President Buhari said that the total loan will fund a number of key projects in the country.
He explained that the projects were aimed at reviving vital sectors of the economy, ranging from infrastructure development, agriculture, health, education, water supply, growth and employment generation, poverty reduction to social safety net programmes and governance and financial management reforms.
He said the proposed programmes would receive about $11.274 billion of the total loans, while special infrastructure projects would take $10.69 billion, adding that Euro bonds will take $4.4 billion and federal budget support, $3.5 billion. Throwing more light on the government’s borrowing plans, the Minister of Finance, Mrs. Kemi Adeosun, in a statement last Thursday,
revealed that the funds would be sourced from institutions such as the World Bank, African Development Bank (AfDB), Japan International Co-operation Agency (JICA), the Islamic Development Bank (IDB) and China EximBank. According to the statement, out of the total amount, Federal Government will take $25.8 billion and states $ 4.1 billion. A further breakdown shows that $18.3 billion will be spent on infrastructure development, with $14.6 billion going to federal projects and $3.7 billion dollars going to state projects.
Some of the projects billed to benefit from the loans are the Mambila Hydro Electric Power Project, which will get $4.8 billion and the Abuja Mass Rail Transit project, phase two getting $1.6 billion. In addition, $3.5 billion is slated for the completion of the Railway Modernisation Coastal Project from Calabar to Port Harcourt- Onne Deep Sea Port segment while about $2.4 billion dollars will go to the Lagos-Kano Railway Modernisation project.
Interestingly, before the president sent his letter to the legislature, the government had earlier announced a $15 billion (N4.72 trillion) fiscal stimulus plan. The Minister of Budget and National Planning, Udoma Udoma, who unveiled the plan, said it would be funded mainly through a number of sources, such as sale of some national assets and advance payment by joint venture operators for license renewals.
Other sources included infrastructure concessions, use of recovered funds as well as long term, low interest loans to bridge funding gap. Similarly, the Minister of Finance, Kemi Adeosun, had also said as part of an external borrowing plan approved by the Federal Executive Council, government would borrow funds at the cheapest available rates to fund key ongoing projects.
She contended that government was focusing on external borrowing because in addition to the rates being more attractive compared to what obtains in the domestic debt market, the government did not want to crowd out the private sector from the latter.
However, despite backing Adeosun’s position that it is still safe for the country to engage in significant external borrowing (as Nigeria is still within the healthy debt stock ratios), financial experts cautioned that in the government’s bid to attract external funding, which would help the economy exit from recession, the country faced the risk of getting into another debt-trap.
Specifically, respected economist and Chief Executive Officer, Financial Derivatives Company (FDC) Limited, Mr. Bismarck Rewane, warned that it was risky for government to be using half of its revenue to service debts
Rising debt servicing costs
Indeed, a recent report, citing figures obtained from the Debt Management Office (DMO), stated that external debts cost the country a total of $1.62 billion in interest payment in the last five years. According to the report, the country spent a total of $331,059,850 on servicing its external debts in 2015 while in the previous year a total of $346,723, 290 was spent on the same item. Figures for 2013, 2012 and 2011 show that a total of $297,329,300; $293,003,540 and $351,619,070 respectively was used to service foreign debts.
The report further stated that the trend has continued in 2016 with $117,660,770 spent on servicing the country’s external debt in the first quarter of the year and $47,998,430 in the second quarter.
DMO sets borrowing limit
Also last week, the Debt Management Office (DMO) released its debt sustainability report, stating that the maximum amount that Nigeria could borrow in 2017 from both local and foreign sources without breaching the debt threshold it had set for itself was $22.08 billion.
The debt office said that the country could afford to borrow $22.08billion next year, equivalent to 5.89 per cent of the projected Gross Domestic Product (GDP), if it wanted to keep the overall borrowing under the limit of 19.39 per cent of the GDP that had earlier been set. The agency projected total public debt-to-GDP ratio of 13.5 per cent for this year, noting that the total public debt stood at 28.10 per cent of revenue in 2015, slightly above the 28 per cent threshold set by government.
The DMO said: “Although the level of debt stock is still appreciably low relative to the country’s aggregate output, the debt portfolio remains mostly vulnerable to the various shocks associated with revenue, exports and substantial currency devaluation.
“This highlights a potential risk to the debt portfolio, which could be exacerbated by the developments in the international oil market, as further decline in global oil prices would exert undue pressures on the already fragile economy, including the debt position.”
It proposed that the new borrowing next year be split as $5.52 billion from the domestic markets and $16.56 billion from offshore, subject to local market conditions and the options available abroad, adding that foreign borrowing should have a minimum maturity of 15 years.
Although most analysts seem to agree with the authorities that the country does not have a debt sustainability problem at the moment and could embark on external borrowing, questions have been raised on whether the projects government has earmarked the funds for can generate the revenue to repay the loans. A senior analyst at Delta Associates, Benard Okoro, said: “Nigeria still has one of the lowest debtto- GDP ratios, at about 14.6 per cent.
The external portion of the country’s overall debt is also one of the lowest among its peers. So the issue is not whether we should borrow, but it is about how we are going to finance the debt. I don’t see how most of the projects they say they want to borrow the funds for will generate the revenue to repay the loans.”
He argued that apart from oil exports the country does not have any other major source of generating revenue. “My worry is about how the loans are going to be repaid.
Has the government really thought about this or they are hoping that oil prices will recover? If this is what they are relying on they are wrong because unless there is a major event such as the Gulf war, for instance, oil prices are not likely to rise above $60 per barrel in the next three years,” he stated.
A bank executive, who spoke on condition of anonymity, also expressed worry about the huge size of the proposed loan and the government’s ability to repay it. He said: “The economy is in a bad shape so the government definitely needs to borrow to stimulate economic activities.
However, I’m worried about the huge size of the loans they are asking for. I fear we don’t yet have the capacity and discipline to effectively manage such massive amounts. I won’t be surprised if some of the key projects they are making so much noise about end up being abandoned.”
However, another analyst noted that concerns about the country approaching another debt trap due to the proposed loan might be premature at this point, as there were no indications that the government will succeed in securing 50 per cent of the proposed loan even if it gets the National Assembly’s approval.
According to the analyst: “The advanced economies carry out due diligence before lending to anyone. If they are not convinced they will get their money back, they won’t lend. When the President visited China some months ago, we were told that the Chinese were going to lend Nigeria billions of dollars. So what happened to that money?