The Debt Management Office (DMO) has put Nigeria’s total debt ( external and domestic debt) as at the end of September this year, at $40 billion.
Director-General, DMO, Dr. Abraham Nwankwo, who disclosed this at the weekend in an interactive session with journalists in Lagos, however allayed fears that the country’s debt profile had risen astronomically.
A breakdown of the figure by Nwankwo, showed that whereas the country’s total external debt stood at $5.6 billion, its domestic debt was N5.3 trillion ($34.4 billion).
He argued that the total debt figure at 19.6 per cent of the nation’s Gross Domestic Product (GDP), was sustainable.
Nwankwo explained: “Now, the global standard for all countries that are in our peer group is that you total debt to GDP should be about 40 per cent.
That is the global standard. We did not set the standard and we are at 19.6 per cent. So, if you ask me, I will say that in view of the benchmark, we are doing very well in terms of being comfortable to be within the sustainable limit. However, even though the global standard is 40 per cent, Nigeria had set for itself, a limit of 25 per cent. So even if you look at that, we are still below the standard we set for ourselves.
He however added: “Our plan is that Nigeria should not reach 25 per cent, even by 2015 and then we can look at the figures again and see whether we have improved in our ability to manage resources better before we can borrow additional resources.”
He further explained that when analysing the debt of any country and particularly Nigeria, the debt level should always be related to another variable.
“You relate debt stock to the GDP, you relate debt service to your export earning, relate debt service to your revenue. So, with that, you get the appropriate sovereignty ration, liquidity ratio, because if you don’t do that, you take a wrong decision.
“I challenge you to go and look at Nigeria’s GDP five years ago, either in nominal or real terms and look at the GDP currently. You have to relate the resources to the level and volume of economic activities. So, when you look at Nigeria’s domestic debt, it is not too big. It has grown because when you relate it to the GDP, it is about 16 per cent and when you add that to the external ratio which is about 2 per cent, it gives your 19.6 per cent. So we are stable,” Nwankwo declared.
Responding to question on the high demand for bond by state governments, the DMO helmsmen said that for any state to issue such debt instrument, there are certain criteria and conditions that must be met.
He however challenged the Securities and Exchange Commission (SEC) , government agencies responsible for project monitoring, civil society groups and individuals in the country to ensure that funds raised by states, are properly utilised for the projects that had been indicated in the prospectus before such funds were raised.
L-R: Sanusi,Christine Lagarde (C), Okonjo_Iweala in Lagos (AFP/IMF, Stephen Jaffe)
“Amongst other things, for a state to borrow, its total debt service deduction is established. That is, the amount of debt owed by state that is being deducted from their revenue –particularly from their Federation Account Allocation Committee (FAAC) revenue, to service the debt.
“Now, the rule is that your (states) total monthly debt service deductions should not be more than 40 per cent of your FAAC allocation average for the past 12 months. So, you can see that states do not just go to the debt market and borrow nor do they just go to the bank and borrow. There is a serious level of control and they must follow certain guideline,” he added.
Nigeria is steadily but gradually accumulating foreign debts
Nigeria is leveraging her good credit standing for massive and staggering borrowings. The dizzying amount of money that numbers in billions of dollars will be flowing into Nigeria’s coffers. Nigerian government has confirmed that it secured a $900 million loan from China after she signed the loan agreement with the Export-Import Bank of China. The China loan was part of the larger borrowing package of $1.54 billion approved by Nigerian Senate. The remainder of the borrowings of $152.2 million and $170 million will be coming from World Bank and French Development Agency respectively. Then comes the $500 million Euro-bond expected to be traded on the EU capital market and the borrowing continues.
The $500 million Eurobond was slated to go to European capital market December 2010, but according to Dr. Abraham Nwankwo, Director-General of the Debt Management Office (DMO), “Given the rumblings in the euro zone over the past few weeks ... we have considered it important to watch carefully over the next couple of weeks and as soon as possible make the offer.”
“The $500 million Eurobond is the commercial portion of the $3.702 billion foreign loans from different sources, as part of the $5.3 billion peg placed on external borrowing by the National Assembly, out of which approval had earlier being granted for $2.4 billion. The loan to be secured on concessionary terms and with a repayment period of between 20 and 40 years by the Abuja would also have a moratorium of seven to 10 years and is for use to address major infrastructure gaps across the country.”
In October 2010, Reuters reported that Nigeria auctioned 123 billion naira in sovereign bonds: "Nigeria sold 122.93 billion naira ($820 million) in 20-year, 7-year and 3-year sovereign bonds at its tenth debt auction of the year, the Debt Management Office (DMO) said on Thursday. Sub-Saharan Africa's number 2 economy sold 58.76 billion naira in the 20-year, 37.50 billion naira in the 7-year and 26.67 billion naira in the 3-year instruments at Wednesday's auction. All the instruments are re-openings of previous issues, the debt office said in a statement."
According to Nigerian government, the borrowed money will be utilized for revitalizing and upgrading Nigerian dilapidated infrastructures. Minister of Finance Olusegun Aganga, confirmed during a press conference that $900 million loan from China will be utilized for the “construction of a $500-million railway linking the capital to the northern city of Kaduna and a $400-million public security communications project.”
What's going on?
Even with Nigerian economic growth of 7.8 percent in 2010, Nigerian credit rating was downgraded to BB-, by an international ratings agency, Fitch Ratings. The rating of BB-minus was three levels beneath investment grade because Nigeria continued to withdraw excessively from its crude account. But even with the excessive withdrawal, Nigeria’s appetite for borrowing was not satiated.
Dr. Abraham Nwankwo, Director-General (DMO)
Nigeria with her bold and can-do attitude of borrowing begs for some explanations. Nigeria has a documented history of mismanagement and corruption. It might be easy to borrow massively and piled the debt on poor Nigerians in the name of fixing and providing infrastructures. But it may not be easy to pay back the loans. Where is the assurance that all these funds will be efficiently allocated and used appropriately for the planned projects?
The Finance Minister Olusegun Aganga and DMO chief, Arthur Nwankwo were quick to say that Nigeria’s debt-to-GDP ratio that stood at 13.8 percent has not exceeded the international permissible benchmark for third world countries.
Nwankwo, his words, “The international benchmark requires that countries in our group do not exceed a debt to GDP ratio of 45 per cent, which means that we are at a very comfortable level… After exiting the Paris Club, we have maintained prudence and restraint in ensuring we do not go back to the dark days, “we are under pressure to mobilize funds for infrastructure deficit.” While it was reported in the news that Aganga said, “Nigeria’s debt to GDP ratio which currently stands at 16.6 percent is low compared to the internationally acceptable benchmark of 40 percent for developing countries.”
Minister of Finance, Olusegun Olutoyin Aganga
The so-called international acceptable benchmark needs more explanation to Nigerian people, while one person is saying 40 percent, another is saying 45 percent. Apart from the numeric inconsistencies, the international body that set the standard does not have the final say on what Nigeria will do to protect herself from financial crisis. The Euro zone has their deficits and debts ratios-to-GDP benchmarks. Nigerians and Africans are busy quoting some international standard without making any initiative to come up with their standards and benchmarks. When Nigeria falls again into higher debt trap and inflation, there will be no international body to bail Nigeria out.
The Nigerian financial managers and leaders especially the Minister Finance and DMO should take some responsibilities and stop quoting the so-called international standard. Nigerians would like to hear those in authorities say that the borrowed money will be properly utilized with accountability and probity.
In spite of the so-called international permissible benchmark, the increasing borrowing by the government is giving a serious concern to so many Nigerians. The elite and ruling class might not lose sleepless nights but the average Nigerians are worried that borrowed money might not be utilized for the proposed projects. And their concerns are rooted in history of mismanagement of erstwhile loans of yesteryears.
When these resources are prudently invested and the projects intended are efficiently completed especially the electricity project, it will enable Nigerian economic growth to amplify and highly appreciated. But when resources and funds are mismanaged the Nigerian people will be laden with a heavy yoke and sadden with massive debt.
Nigerians do not want history to repeat itself, which is going back to the gloomy days of payment of monstrous foreign debts. When Nigeria settled her debts from Paris and London clubs, her citizens cheered on the development. Nigerians are not ready for IMF austerity measures and servicing of unending foreign loans with its unending arrears and malleable interest rates.
The greatest threat and the major contributory factor in the undermining of a given economy and its currency is inflation. The monetary well being of a nation can go under and deteriorated drastically when inflation rears its ugly head and a once buoyant economy can become sicken with depressing currency, GDP and lower productivity. But in most cases Inflation could become a tool to erode the debt of a nation; a country with large domestic and foreign debts can utilize the inflationary trends to reduce the burden of its debts. In the 2006 negotiation for the payment and the final settlement of the Paris Club debt, Nigeria was granted the famous 18% write-off that reduced the debt. But the reduction that inflation could have offer was not wholly taken advantage by Nigerian negotiators. Inflation with regards to debt can be use to grind down a given debt. Nigeria do not have to be necessarily overjoyed and satiated with the 18% write off because net debt would have gone down to 45-50% by the application of inflation – debt ratio. The bad era of the double digit inflation would have be effectively utilized and applied to erode the country’s debt.
Nigeria would not be the first country to inflate away her debt; America did it during Great depression, Second World War and in 1970s debilitating recession. Renowned economists Joshua Aizenman and Nancy P. Marion stated in a paper that “Inflation can rise, eroding the real value of the debt held by creditors and the effective debt ratio.” Aizenman and Marion in the 2009 paper emphasized that “we examine the role of inflation in reducing the Federal government’s debt burden. We conclude that an inflation of 6% over four years could reduce the debt/GDP ratio by a significant 20%.”
Therefore we can extrapolate that Nigerian payment of the foreign debt in 2006 would have been way lower, the so-called 18% write off notwithstanding. Applying the model used by Joshua Aizenman and Nancy P. Marion, the Nigeria’s average inflation since the IMF’s structural Adjustment Program (SAP) to the time of the debt settlement was hovering between 15%-25% that will significantly and drastically reduced the total payments that Nigeria made to both Paris and London Clubs of Creditors.
In furthering thesis of the application of inflation as a tool to inflate away debt, it makes sense to understand what inflation is all about. According Economist Onosewalu Okhiria , “Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in the prices. Simply put, inflation depicts an economist situation where there is a general rise in prices of goods and services, continuously. It could be defined as .a continue rise in prices as measured by an index such as the consumer price index (CPI) or by the implicit price deflator for Gross National Product (GNP). Inflation is frequently described as a state where .too much money is chasing too few goods. When there is inflation, the currency losses purchasing power. The purchasing power of a given amount of naira (currency) will be smaller over time when there is inflation in the economy. For instance, assuming N10.00 (Nigeria unit currency) can purchase 10 shirts in the current period, if the price of shirts double in the next period, the same N10.00 can only afford 5 shirts.”
But it must be made perfectly clear that nothing good comes from inflation except the decimation of standard of living with surplus but devalue currency that do not worth the value of the paper it was printed on. This is not a new paradigm in economics where inflation is celebrated, but far from the truth, even with its debilitating effect it can reduce or wipe-off of a given debt. The people of Zimbabwe are testament to the disaster inflation can bring to a nation. The dire poor health of the economy caused by inflation makes lives unbearable. To buy a loaf of bread, one can carry cartoons of the worthless paper notes currency to do the purchase. Even some war historians argued that hyperinflation in the Weimar Republic were among the causative agents of the Second World War making it possible for some Germans to become vulnerable to the manipulations of the Third Reich.
The payments and servicing of Nigerian foreign debts owned to both Paris and London Creditors did not happened for the first in 2006. Prior to the final settlements of debts to both international syndicates – Paris Club of Creditor and London Club of Creditors, Nigerian government in early 1990s have started to buy back Nigerian debts and Naira from foreign creditors. But finally the government of President Obsanjo took the initiative to payoff the debts owned to the creditors. Of course it was a good thing to settle the debt for it did help to booster the economy and stimulate the economy due to availability of disposable resources. By this Nigeria will use her resources she accumulated by saving not borrowing to stimulate her economy. The only issue was the payment she made to Paris Club of Creditors was a large sum of money, without putting into account the dynamics of inflationary trends that kicked in after Nigeria borrowed the money from foreign institutions.
In the paper by Joshua Aizenman and Nancy P. Marion on “Using inflation to erode US public debt” - the two academic intellectuals illustrated with graphs shown below how inflation was used to erode US debts in both scenarios of the during Second World War of 1940s/50s and recession of 1970s.
“Figure 1 depicts trends in gross federal debt and federal debt held by the public, including the Federal Reserve, from 1939 to the present. In 1946, gross federal debt held by the public was 108.6%. Over the next 30 years, debt as a percentage of GDP decreased almost every year, due primarily to an expanding economy as well as inflation. By 1975, gross federal debt held by the public had fallen to 25.3%.”
Figure 1. Debt as a share of GDP
“The immediate post-World War II period is especially revealing. Figure 2 shows that between 1946 and 1955, the debt/GDP ratio was cut almost in half. The average maturity of the debt in 1946 was 9 years, and the average inflation rate over this period was 4.2%. Hence, inflation reduced the 1946 debt/GDP ratio by almost 40% within a decade.”
Figure 2. US debt reduction, 1946-1955
(Graphs and figures by Joshua Aizenman and Nancy P. Marion)
Nigerian government in the year 2006 paid almost $20 billion (including the human capital invested in the negotiation) to two giant international syndicates: Paris Club and London Club of Creditors to settle her foreign debts. The government of President Obasanjo, made the arrangement and secured the $18billion debt relief for Nigeria from the Paris Club of Creditors, and Nigeria pay off her $36 billion foreign debt. Nigeria's total foreign debt stood at $35.916billion as of June 2005. The largest chunk of the debt $31billion was owed to 15 of the 19 creditor-countries of the Paris Club.
Nigeria paid off $12.4 billion in arrears and debts as was stipulated to fulfill arrangement and concord reached with the Paris club in June 2006. Nigeria paid the final installment of $4.518billion to exit the Paris Club.
Federal government of Nigeria finally paid off the last batch of outstanding debts owed to the London Club amounting to $2.15 billion. For the settlement of both Paris Club and London Club of Creditors, Nigeria paid off almost $20 billion. This is one of the largest transfers of wealth by a third world nation to the first world nations.
Recognizing the impact of inflation in the piece: “Understanding the Nigeria’s debt situation” the then Minister of Finance, Dr. Ngozi Okonjo-Iweal wrote: "We have been implementing our own home grown reform program – NEEDS - and the results for last year have been quite positive. GDP growth was 6% compared to a 5% target. Average annual inflation came down from 22% to 15%, while point to point inflation (December to December) came down from 23% to 10%. This was not the single digit inflation we targeted but we came pretty close at 10%. The fiscal deficit at $25 a barrel was 1.9% of GDP, better than the 2.1% we targeted and the reserves recorded healthy growth again from $7 billion to $19 billion thus ensuring that our exchange rate remains fairly stable.”
By this she acknowledged the severity of inflation in the country and its disablement with their policy. Therefore the negotiators for settlement of Nigeria’s foreign debt must have made their case or override making the case of justifying lower settlement because of inflation.
But in some cases according to Professor Alan Auerbach of University of California, inflating away debt may not be possible because, “Sudden inflation can only inflate away the debt that is (1) not indexed, the way TIPS are; and (2) not very short term (i.e., not T-bills), so that the interest rates cannot be reset to much higher rates that would compensate for inflation.” Nigerian foreign debt was not indexed against inflation; maybe all the conditional ties appropriated to the debt were not unearthed by the citizens of the country.
To further extrapolate the issue with regards to inflation, Nigeria final payment to both Paris and London Clubs would have been smaller had inflation-debt ratio been applied.
Inflationary trends and inflation were devouring Nigerian economy in 1970s and 1980s and the era of oil boom notwithstanding. The Statistical bulletin of the Central of Nigeria was keeping statistics of the rate of inflation. In 1970s and 1980s inflationary trends were becoming explosive except in 1972 and 1973 inflation was modest hovering between 3% - 5%.
YEAR INFLATION RATE %
1986 5.4 2
(Central Bank of Nigeria Statistical bulletin).
Naira was very strong in 1970s and early 1980s even with high inflation. Why this scenario? Because of financial and economic mismanagement, incoherent and uncoordinated monetary and fiscal policies. Together with overtly importation as Nigeria becomes the center of the dumping of foreign made commodities. It does look like that the party will last forever but then comes the oil bust and the crash of the oil price. Nigeria went on borrowing insanity to appease her spending appetite. Then it happened: IMF stepped in with its structural adjustment programs that encourages the devaluation of the naira. At this juncture inflation shoots up to 22%. Therefore, Nigerian negotiators would have exploited the inflationary paradigm tool for eroding debt; probably the final payment to the foreign creditors in 2006 would have been half or even one third of what was paid to the foreign syndicates.