November 30, 2019

$30bn borrowing: Debt service to gulp 80% of FG’s revenue

$30bn borrowing: Debt service to gulp 80% of FG’s revenue

..As experts caution FG on new borrowing plans  

By Babajide Komolafe

The federal government will be using about 80 per cent of its revenue as interest payment on its debt which may rise to $104 billion should the National Assembly approve the request to borrow an additional $30 billion.

Presently, the debt service to revenue of the federal government stands at 58 per cent while the total debt of the federal government stands at $66 billion.

Also read: Again, Buhari Presents rejected 2016-2018 External Borrowing Plan Request to the Senate

But if the National Assembly approves the President’s request to borrow an additional $30 billion, the total debt stock of the Federal Government will shot up to $96 billion, representing 45 per cent increase.

This according to Managing Director/Chief Executive, Cowry Asset Management Company, may increase the debt service to revenue to about 80 per cent.

Speaking to Vanguard, Chukwu stressed that the borrowing plan presented by the President, was outdated, given the significant change in the financial position of the country between 2015 when the plan was first presented and now.

He added that what the federal government should have done is to review its borrowing plans and present a fresh request based on the current financial position of the country.

He said: “

The first thing for me is that the borrowing plan was for 2018-2018 but we are now in 2019 and our financial position has changed.

In 2015 when the plan was first presented our foreign currency debt was $10.7 billion  and our total national debt was N12.6 trillion

“But now our total national debt is N25.7 trillion, representing 104 per cent increasing while our foreign currency debt is now $27.16  representing  160 per cent increase.

“The question now is, should we be talking about $30 billion additional borrowings when the balance sheet position has changed materially.

“Also in 2015, the debt service was 0.8 trillion, while last year it was N2.245 trillion. In 2015, debt service to revenue was 30 per cent, now it is 58 per cent.

“So given this data, should we be presenting 2015 borrowing plan.

What we should do is to review the borrowing plan based on our current financial position. This is because by the time we add $30 billion to our debt stock, the debt service to revenue might increase to about 80%. So what we should do is to present a fresh borrowing plan based on our current position.”

Alluding to the risk of further deterioration in the federal government debt service to revenue, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf stressed the need to ensure that additional borrowing should be on concessionary terms and should be strictly for infrastructure.

Speaking to Vanguard, he said: “Clearly, our debt situation is already beyond the sustainability threshold.  Debt service is already crowding out a capital budget.”

“The truth is that we have a few financing options for infrastructure development.  The risk environment has imposed considerable limitations to private sector financing of infrastructure.  “External borrowing is an integral part of the financing plan for the current budget.  What is important is to ensure that the subsequent spending is strictly infrastructure focussed.  Borrowing should also be on concessionary terms to mitigate the burden of debt service.”

On his part, Ayodele Akinwunmi, Corporate Banking, FSDH Merchant Bank noted that while Nigeria needs to spend more on infrastructure, there are alternatives to adding $30 billion to the nation’s debt stock.

These alternatives he said include money spent on fuel subsidy and electric tariff subsidy.

He said: “If the incremental benefit from the loan outweighs the cost, then we should go ahead, That is if the benefits from the projects that would be funded with the loan are far higher than the foreign exchange risk involved, the interest rate cost, then the loan is worthwhile. But if not, the loan will be burdensome on Nigeria

“As we said before there are areas that the government is spending on now that they can divert the money spent on such areas to fund critical infrastructure.

“For example, there is no reason for the government to be subsidising fuel. Similarly, the government is still subsidising electricity. They should let the tariff be cost-reflective, in fact, that will make people be more prudent in the use of electricity. So money spent on these areas can be diverted to fund infrastructure instead of borrowing more.

“It is true that we need more spending on infrastructure, so as to enhance revenue generation, and also our competitiveness, as well as enhance non-oil revenue and facilitate the emergence of new businesses which will pay tax to the government”.