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Mumu smiles back into debt trap

By Henry Boyo

1st Man:   I am disturbed by the rate at which the country is getting foreign loan.

2nd Man:  Why?

1st Man:   We’ve borrowed N7.1trn in just two years.

2nd Man:  There’s no cause for alarm, my friend.

1st Man:   Really? You think the loans will be judiciously used?

2nd Man:  No, but at our age, that should be our least concern.

1st Man:   Why?

2nd Man:             That’s the burden of our children and children’s children.


THE above narrative is culled  from NEEARO’S “NO JOKE” cartoon strip published in The Punch Newspaper edition of June 6, 2017.

In retrospect, in October 2016, the Minister of Finance, Kemi Adeosun, announced the Federal Government’s plan to borrow $29.96bn for infrastructural development from Multi-lateral Agencies, which include the World Bank and the African Development Bank.

However, in May 2017, the National Bureau of Statistics, reported that by December 31, 2016 the total debt of the Federal government and 36 States was about N18trn ($11.4bn foreign and N14.02trn domestic, respectively, calculated with the invisible exchange rate of N360/$).

According to the NBS report, between 2015 and 2016, foreign and domestic debt rose, by 6.5 and 36 per cent respectively. Incidentally, in January 2016, Christine Largarde, the IMF President, during her visit to Nigeria, endorsed concerns consistently expressed in this column about Government’s ‘ambitious’ plan to dedicate 35 per cent of all generated revenue to servicing existing debt.

Nonetheless, the Federal Government’s present borrowing plan of about N2trn is expected to push annual debt service changes well above 50 per cent of aggregate revenue; thus, over N50 out of every N100 revenue will be applied to debt service alone. It is even more alarming that 70 per cent of the 2017 loans will infact be dedicated to recurrent expenditure.

Although, some experts have glibly canvassed for a strategy of “spending our way out of recession”, regrettably, these experts have never indicated where the funds for additional spending will come from. However, if the authorities succumb to this ill considered persuasion, debt accretion will further accelerate, and debt service charges may eventually consume over three quarters of aggregate revenue, especially, if government loans continue to attract almost 20 per cent interest rates, and the collateral of aggressively crowding out the productive sector from reasonable, low cost loans that would increase productivity and stimulate employment.

Ironically, rising Naira liquidity surpluses from any ‘strategic’ increase in government spending, will definitely worsen the already existing bloated, oppressive, Naira liquidity surplus and will therefore compel additional borrowing at atrocious rates of interest to manage the threat of inflation from too much money unleashed on the system by any expanded government spending.

Thus, government’s aggressive borrowings will, inadvertently, further spike lending rates and compound the funding challenges of all sectors and also reduce any prospect of expansion in industrial production and creation of job opportunities.

Although, the Finance minister and some experts seem enamored by lower interest rates generally below seven per cent for foreign loans as against the much higher 12-18 per cent for federal government’s domestic loans, we must however, approach any foreign loan with utmost caution. For example, a $1bn loan at serven per cent would attract $70m interest or N7bn annually, if Naira exchanged for N100=$1; however, the same $1bn loan would attract N21bn if Naira depreciates to say N300=$1. So although foreign loans may be optically cheaper, but unyielding Naira depreciation would spike service and repayment cost oppressively and may ultimately precipitate another horrendous debt trap.

“This column has carried a series of commentaries on our debt status for over a decade. The following narratives are excerpts from “Budget 2010 – Mugu smiles back into debt trap” see (April 2010). Excerpts from that article follows hereafter:

“While the controversial $30bn debt we exited in 2006 took well over a decade to accumulate, it required just over three years to accumulate a fresh debt burden projected at over $30bn by 2010.

The Director General of the Debt Management Office (DMO), (see “Nigeria’s Debt creation Office” September 2009) in a report titled “Debt Servicing to Gulp N517bn in 2010” in the Punch Newspapers of 1/12/2009, confirmed that total domestic debt as at October 2009 is about N2.5 trillion naira with a deficit of about N1,500bn projected in the 2010 Appropriation Bill.  The 2009 budget set aside N283bn (8%) for debt service, but this amount has almost doubled to N517bn in the 2010 appropriation Bill before the Legislature.  In other words, if the whole deficit is financed through borrowing, our total domestic debt will be close to N4000bn (N2,500bn + N1,500bn) or over $27bn at N150=$1.

Thus, the consolidated sum for domestic and external debt would exceed $30bn ($27bn + $3.7bn)!!  No, you are not wrong for gasping in amazement!  Yes, we have been here before, only three years ago to be precise, and once again, there is nothing on the ground to show that the monies borrowed on our behalf as a nation have been wisely spent!

It is worrisome that the main beneficiaries of these juicy rates of return for government borrowing may also be the same sectoral group to whom our nation’s Central Bank has recently generously endowed with more than N600bn in bailout packages!  The cost of servicing existing external debt of $3.7bn with N38.92bn; i.e. about six per cent is also considerably untenable, as our government, itself, maintains that most of these debts are multilateral debts obtained with concessionary, low interest rates, usually between 1 – 2 per cent.

In any case, Nigerians must wonder at the wisdom of borrowing with such oppressive costs when, in fact, we continue to sit on relatively healthy reserves currently estimated at over $44bn in the 2010 budget.  It is equally worrisome that most of these debts were accumulated as a result of government’s mismanagement of its monetary policies rather than the resourceful application of the borrowed funds for social welfare and infrastructural enhancement.

In the same vein, since the establishment of the DMO, government Bond issues have also been targeted at intangible and questionable benefits such as deepening the market for Bonds and setting a benchmark rate for long term borrowing in the system.  Indeed, one would expect that the National Assembly would discharge their constitutional responsibilities to ensure that we are not dragged unwillingly into another debt trap in spite of government’s assurances that things are getting better.

In conclusion, I only need to reiterate, once again, that the adoption of dollar certificates for payment of dollar derived revenue as allocations to the constitutional beneficiaries will wean us of this tragic debt trap, and spur our economy into rapid recovery with an enabling environment of single digit interest rates to stimulate industrial expansion and increase in employment. “



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