August 21, 2017

FG refinances debt and adds more loans



By Dele Sobowale

THE recent announcement by the Federal Minister of Finance of the government’s decision to refinance the country’s debt by borrowing dollars at seven per cent instead of locally at between 13 and 18.5 per cent would have been commendable if it was not just a mere paper exercise which would still not reduce the quantum of debt the country is owing. On paper it would reduce the cost of borrowing, but at maturity it would require the country to source for dollars to repay.

Unsaid by the Minister is the fact that the Federal government’s requirement for loans has almost totally squeezed out private sector borrowing and has driven up domestic interest rates beyond levels that are healthy for investment. At rates ranging from 25 to 40 per cent few companies can afford to borrow and survive. So, the shift to external borrowing was borne out of necessity which is always the mother of innovations.


Interest rates abroad have always bee far lower than what obtains in the domestic financial market. In some markets, even the seven per cent touted by the Minister are regarded as extortionate when prime customers can obtain loans for as low as three per cent. Islamic banks, in fact, offer interest free loans. But, their conditions for lending are so stringent it is almost impossible for Nigeria to qualify.

Borrowing per se is not bad; if the loans are targeted towards projects that will earn return on investments and help to repay the loan. The best customers for loans are those who develop plans for repayment of the loans by using the funds to promote enterprises that earn revenue with which to repay. Nigeria’s borrowing is largely devoted to wasteful endeavours.

We borrow to pay salaries, to give away free money and provide free food and to repay loans previously obtained. Even the $3bn Treasury Bills to be refinanced are meant to repay old debts incurred to finance such wasteful expenditures. We construct roads and build airports with public money which elsewhere are concessioned to the private sector thereby freeing funds for social interventions like health, education and social welfare.

Furthermore, a look at the Medium Term Expenditure Framework reveals that the country expects to run a deficit in the three years in the future. The nation has been running deficits from 2012 and that means we are proposing eight straight years of deficit spending. Each year means more loans to raise and increased debt servicing burden. At the moment, close to 28 per cent of government revenue goes towards debt servicing. By 2020 it will be close to 35 per cent even with the shift to dollar debt.

This government operates with one fallacy as the basis of its economic policy. It assumes that Nigeria can borrow indefinitely to run annual deficit budgets well into the future. Nothing can be further from the truth. Unless our totally generated revenue is high enough to keep debt to revenue low, more borrowing, external or domestic, will only increase the risk of default which will make borrowing more difficult in the future. For a government addicted to the borrow-and-spend strategy, the day of reckoning might not be too far.

Perhaps the most frightening aspect of this government’s appetite for loans is the fact that it is actively mortgaging the future of Nigeria. The MTEF, which is obligatory, runs into 2020 – one year longer than the tenure of this administration. Unless re-elected, its successors will inherit a debt burden almost as great as what President Obasanjo faced in 1999. But, Obasanjo was fortunate. The price of crude oil was on an upward bound escalator; crude prices kept on rising until 2013. That made it possible for Nigeria to exit the debt trap in 2004.

Today, the MTEF presented is a salad bowl of illusions. The framers of that document must be the only people left on the planet who are unaware that the Age of Oil is over. Leading experts worldwide project a downward trend in global demand for crude and gradual decline in crude prices.

The combination of low volume and plummeting prices already pose threats to oil producing countries. Nigeria is the most vulnerable. It was the recognition of that vulnerability which prompted the other members of the Organisation of Petroleum Exporting Countries, OPEC, to grant exemptions to Libya and Nigeria earlier in the year. But, that exemption will not be continued. Instead the country’s export of crude will be pegged at 1.9 million barrels per day henceforth. That already casts doubt on the forecasts for crude revenue in the three years covered by the MTEF.

Furthermore, India, Nigeria’s largest importer of crude recently decided to diversify its sources of crude oil by importing from the United States. It is too early to determine how much Nigerian will lose on account of the Indian policy which is based on their perception of what President Trumps new trade policy would be.

If America decides to encourage trade with countries buying US products, then India will have no choice but to patronize American crude producers. America is a more important market for goods and services made in India than Nigeria. National self-interest demands that they make the shift. So, it is not a decision likely to be reversed any time soon.

Finally, resumed threats of disruptions to oil production in the Niger Delta cannot be dismissed with a wave of the hand. Like it or not, the possibility that pipelines might again be bombed and rigs attacked cannot be   ignored. They raise the possibility that the projected 2.3 million barrels per day, already unlikely, might turn out to be wildly optimistic.

Even the 1.9 million quota granted by OPEC might prove to be off the mark. In that regard, the recent report by the Directorate of Petroleum Resources, DPR, might constitute the handwriting on the wall. According to the DPR, revenue for May and June was $56bn and $44bn respectively instead of the budgeted $76bn. By half year the actual revenue is already well below the budget.

How on earth are we going to get the dollars to repay the loans if the trend continues like this?