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EXTERNAL DEBT: AT WHAT COST?

BY: LES LEBA

“In an earlier article titled “Increasing National Debt: Nass Beware” (20/1/09), in this column, we sounded a note of caution on our ballooning domestic debt, especially when there is little on the ground to show for the accumulation of these debts, apart, of course, from the intangible objectives of deepening our nation’s debt market, setting benchmark prices for domestic debts and the control of CBN’s self-inflicted excess liquidity.

We had prayed that the House of Reps would stand on the side of the people by refusing to approve Mr. President’s budget request to take “the extraordinary step of exceeding in the short term the more conservative and sustainable fiscal deficit of 3% of GDP that is consistent with international best practice without recourse for further approval by NASS!” We also, questioned government’s plan for a bond issue of US$500m, especially when such borrowing remains untied to any verifiable project that would improve the lives of our people.

“In any event, why borrow US$500m at interest rates of 10-15% when $7,000m of our national reserves remain with 14 Nigerian banks who pay possibly less than 6% for the joy of using our funds?  Indeed, what stops these banks from lending us our own money with a clear profit for themselves?

Now that NASS have ignored our entreaties to tread carefully on national debt accumulation without appropriate frameworks to ensure discipline in the loan application for critical infrastructural projects, we are regrettably, once more, left in the hands of the sharks and shylocks in our midst, who wish to have our scalps to decorate their dinner plates.”

In the same vein, we had also alerted NASS on the obvious omission of any comment on the value and servicing cost of our current external debt in Yar’Adua’s 2009 budget proposals.

The following is an excerpt from former President Obasanjo’s 2007 budget: “Total external debt stock outstanding as at the end of June 2006 stood at $4.8bn … made up of London Club $1.4bn, multilateral debts $2.7bn, promissory notes $0.6bn, other non-Paris-Club debts US$0.1bn.  We have earmarked the sum of N61bn for servicing of our external debts ….”.

The implication of the above excerpt is that it cost us about 12% to service our total debt of $4.8bn in 2006!  We note that by the usual standard of sovereign debts, 12% service cost is generally considered high.

Now, let us take a look at the next excerpt from Yar’Adua’s 2008 budget with regard to external debt: “… Since our exit from the Paris Club debts, the structure of our external debt has changed significantly. Our total foreign debt stock now stands at US$3bn down from about $32bn in 2005….  Our analysis indicates that there will be no financial benefit from undertaking any restructuring or otherwise for paying these debts.  We therefore have earmarked the sum of N66bn for servicing our external debts in 2008!”

A closer examination of the above excerpts should make one wonder why the servicing costs for our external debts increased when the capital sum is depleting!

Why did we need N62bn to service our debt of $4.8bn in 2007, but require more i.e. N66bn to service a smaller debt of $3bn, especially when the exchange rate remained about the same for both years?  Furthermore, the service cost of our debt in 2008 is almost 18% of the capital sum, a rate which must be considered excessive for such sovereign debts!  Needless to say, we had drawn the attention of NASS to these anomalies in several articles, such as, “National Assembly Fiddles as Debt Burden Cripples” in this column, (26/05/08) but our entreaties obviously fell on deaf ears.

Now, let us consider the projection of our external debt sum and service cost into Yar’Adua’s 2009 budget!  The truth is, we cannot do this because there is no mention of an external component in our national debt stock in the budget proposals!  Does this mean that we have liquidated all our external debts?  This is not likely as an examination of government outflows in 2008 does not suggest such exit.

Then, how does the government intend to settle external debts for which N66bn was provided last year, but for which no provision has been made this year?    The answer must be from the latitude already granted to Mr. President’s request to borrow above the acceptable level of 3% of gross domestic product without further recourse to the NASS for approval.

Thus, we should not be surprised if our external debt more than doubles when next Mr. President presents his budget for 2010!

Afterall, we have just accepted to borrow a $500m naira denominated loan, and lately, news reports suggest that that the IMF have come knocking on our doors to advance us a $3bn loan at a time when our own Central Bank is busy selling over $3bn of our rapidly depleting reserves to Bureau De Change (BDCs) every month; without minding the dislocations to the economy caused by capital flight engendered by treasury looters and disruption to local manufacturers caused by smugglers from their easy access to the dollars supplied by the CBN to BDCs!

“On the domestic front, we also recall the rapid accumulation of local debts particularly through bond issuance by almost N2000bn within four years, without recourse for NASS approval.  There is practically nothing to show for these loans, and it seems that these loans were incurred specifically for non-tangible purposes with dubious and immeasurable yardsticks!

“Indeed, the Debt Management Office (DMO) had indicated in earlier offers that the loan objective was to deepen or create a market for government long term borrowings, and also set a benchmark for other medium to long term loans in the capital market.

In any case, since both objectives cannot account for the actual spending of the huge sums of monies borrowed, the mind boggles as to what ends the funds were actually applied!  It certainly could not be for funding federal budget deficits, as our revenue from all sources exceeded our expenditure for the past four years!

One can only imagine that the funds were simply stored idly in CBN vaults or accounting records in spite of annual interest payments of between 12 – 17% for such borrowings, just for the joy of creating a benchmark price and creating a market for long term government securities!

“However, the Senate Committee on Appropriation, led by Senator Omisore, in a spirited attempt to do the right thing noted as follows in its response to the Executive request to borrow $500m:  “…the ultimate goal for the implementation of any public sector programme or project is to enhance the welfare of the citizenry.  The purpose indicated by the Ministry of Finance, therefore, focused on the means, rather than the ultimate end of any capital flow.  Such sweeping statements have led the nation into unbridled procurement of externally-sourced loans, only to regret thereafter.”

“Regrettably, in spite of the serious and powerful observations by the Appropriation Committee against the $500m loan, the Senate remained unmoved and never attempted to resolve the fundamental issues raised by its own Committee.

“No rational person would thumb their nose at debt accumulation if the funds so acquired are applied to critical infrastructural projects for public welfare enhancement; but a situation where there is nothing to show for past loans, and with no verifiable façade of discipline or accountability in the use of public funds, it would be folly to expect that the application of the current $500m and indeed any other loan whether domestic or external would be to the benefit of Nigerians.

Regrettably, the matter is already foreclosed by the Senate; it is not clear if the House of Representatives will stand up on the side of the people, and also ask why the CBN is selling billions of our dollar reserves to Bureau de change every month, while we go borrowing $500m, cap in hand, from the international capital market!”

The above contain excerpts from two articles: “External Debt: At What Cost?” (02/02/09), and “Increasing National Debt: NASS Beware” (26/1/09). Also recommended for reading is “Bleeding us to Death with Debt 1 – 3 (12/9/08, 6/10/08, 13/10/08).  To God be the glory, last week, 23/7/2009, Hon. Halims Agoda moved a House motion querying the direction and essence of government borrowings!

All articles referred to above can be found at www.geocities.com/lesleba

SAVE THE NAIRA, SAVE NIGERIANS!


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