Nigeria: Debts on the Rise Again

Written by Vincent Obia

Mrs. Ngozi Okonjo-Iweala will forever be known as the woman who shepherded Nigeria out of one of its heaviest debt burdens. During her tenure as Minister of Finance in November 2005, Nigeria secured a Paris Club debt relief deal under which $18 billion of the country’s debt was written off in exchange for the payment of $12 billion. By this deal, $30 billion of the country’s total external debt of $37 billion at the time was discharged.

Okonjo-Iweala resigned from the administration of former President Olusegun Obasanjo in August 2006 following her sudden removal as head of the country’s Economic Team. But in 2011, President Goodluck Jonathan reappointed her as Minister of Finance and Coordinating Minister for the Economy.

Ironically, the woman who had headed negotiations that led Nigeria out of debt is today superintending what has been described as the country’s notorious emergence as a borrowing giant. The country is said to have taken a total of $4.4 billion in external loans in the past seven years, although, it remains comfortably within the internationally accepted 40 per cent debt/Gross Domestic Product ratio and the 25 per cent country specific threshold for debt stock levels. But a House of Representatives report said Nigeria had risen to become the biggest recipient of disbursements from the International Development Association between 2009 and 2012. The country is also said to currently have the biggest outstanding IDA portfolio in Africa.

The IDA is an international financial institution under the World Bank Group that offers concessional loans and grants to the world’s poorest developing countries. Many experts doubt if Nigeria really belongs to this class of countries judging by its huge surplus earnings from oil.

But the question actually is what Nigeria is borrowing for. The federal government’s Debt Management Office is wont to justify the borrowings, saying they are tied to capital projects and human capital development. But it is hard to feel the physical impact of such loans in the state of the country’s infrastructure and human capital.

Nigeria’s debt/GDP ratio is put at 18 per cent, which compares favourably with South Africa’s 41 per cent, United States’ 101 per cent, Japan’s 204 per cent (2011 estimate), and Germany’s 85 per cent (2011 estimate). Nigeria has a good capacity to borrow, but does it really have need to borrow?

“The question is not the quantity of borrowing, but what we are using the money to do,” says managing director/chief executive officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane. “What we are doing now is general-purpose borrowing – borrowing to refinance existing debts. We need to move to project-specific borrowing.”

Chief executive officer, B.A. Adedipe and Associates, Dr. Biodun Adedipe, says, “If we are borrowing for the purpose of infrastructure, then, it should be structured in such a way that the investment is able to pay the debt.

“But we shouldn’t borrow just because we have the capacity to borrow and there are people willing to lend to us.” Arguments like this do not appear to make a lot of sense to the authorities at present.

But there is another aspect of the country’s rising borrowing profile, which experts say form the bulk of the national debt: government bonds and treasury bills.

The government bonds are presumably raised to finance deficits in the budgets or infrastructure. “But why did we borrow to cover a deficit when, indeed, in every one of those years when those debts were accumulated we actually earned more income than we spent?” queries economic analyst, Dr. Henry Boyo. “There was absolutely no reason to have borrowed.”

Curiously, despite borrowing from the bond market at between 15 per cent and 17 per cent interest, the Nigerian government often stocks up surplus funds, like the now defunct Excess Crude Account, which is shared among the three tiers of government.

“A surplus is supposed to be that which is over and above what you require. You cannot have a surplus and say you are taking it to an escrow account or excess crude account or sovereign wealth account or you are dividing it in some way among the three tiers of government, when at the same time you are borrowing to cover a deficit. That is the major component that defines the debt structure we have at the moment,” says Boyo.

The government borrows with treasury bills at over 12 per cent interest, to mop up excess cash in the system. But experts say the excess liquidity is self-inflicted by the same Central Bank of Nigeria that applies the mop-up at enormous cost to the country. This measure, which involves giving the banks money and borrowing it again, has been criticised as hardly making economic sense. Experts recommend that it should be seldom applied.

Boyo believes, “The reality of the treasury bills and bonds that form the major component of our debts is that these debts were totally avoidable.”

The borrowings and the attendant debts, according to Boyo, also has the tendency to make the country lose sight of internally generated revenues that had grown by about 100 per cent (from N2.5 trillion to about N5 trillion) in the last five years under Mrs. Ifueko Omoigui-Okauru. Omoigui-Okauru bowed out as executive chairman of the Federal Inland Revenue Service and the Joint Tax Board on April 9 last year.

Instead of the current practice of substituting naira allocations for dollar revenue from oil, which it holds, Boyo says the CBN should give out “dollar certificates” for the payment of dollar-derived revenue. This is to resolve the problem of excess liquidity. He recommends proper benchmarking of oil prices – rather than the artificially fixed low targets – to try to eliminate the problem of deficit that encourages the sale of bonds.

Since the past 10 years, the country has sold oil at prices well above its official benchmarks, except in 2008, when prices fell slightly below the projected rate of $40 per barrel. Which makes it quite unnecessary for the government to keep fixing too conservative oil benchmarks.

Many are agreed that the borrowings being undertaken by the country are not doing it any good, not least when the country constantly boasts excess funds. By international standards, a country ought to have foreign-exchange reserves enough to stabilise its currency for a minimum of six months. Nigeria is said to have foreign reserves enough to shore up the naira for between 10 and 12 months.

Experts suggest that earnings above what is enough to stabilise the country’s currency for 12 months should be devoted to infrastructural development. But it seems Nigeria’s economic managers prefer borrowing to any such proposals.

Adedipe fears that Nigeria may be repeating the mistake of 1978, when it went for “jumbo loans” that had dire consequences for the country.

Just last month, the CBN governor, Mallam Sanusi Lamido Sanusi, warned that Nigeria was borrowing too much and accumulating debts that could create unmitigated hardship for its future generations.

Sanusi said at the conference of Honorary International Investments Council, in London, last December, “We are borrowing more money today at a higher interest rate while leaving the heavy debt burden for our children and grandchildren. For example, if you receive your salary and everyday the money is not enough, you have two options to adjust yourself: either check your expenditure or check your wages.”

Truth is that Nigeria can live within its means and eliminate the needless borrowings that only seem to doom the country to hardship.

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