Monday, February 16, 2009

Nigeria Increasing National Debt

by Les Leba

The Senate, on January 21, 2009, brushed aside the initial opposition from its ranks to approve President Yar'Adua's request to borrow the naira equivalent of $500m (in bonds) from the international capital market, to be repaid at the current naira exchange rate in 2019. Indeed, when the proposal was initially tabled inYar'Adua's 2009 budget presentation to the National Assembly (NASS) in December last year, the naira equivalent of this loan was N60bn.

However, in view of the 'deliberate' devaluation of the naira in the last few weeks, the naira equivalent may have increased to N75bn. If the economy continues to be mismanaged and our export earnings are as usual stolen by treasury looters or frittered away on white elephant projects, it would be fair to assume that we may actually be repaying a capital sum of over N150bn in ten years time, if the naira depreciates by about 100% to N300/$1. This may not be an unusual depreciation, if we recognize that the naira was barely N80/$1 up till 1998!

In the event that our government is currently paying about 10 per cent interest on its short-term borrowings with treasury bills, we may assume that the fresh long-term loan would attract a minimum annual servicing cost of over 10 per cent. If the current rate on Federal Government naira bonds is also anything to go by, the cost of borrowing may approach 15 per cent per annum in spite of the availability of international multilateral agency loans, which attract much less for sovereign borrowings! We recall that Nigeria exited its debt burden with the Paris and London Clubs after shelling out over $13bn of reserves and at least two former Finance Ministers (in spite of their IMF antecedents) have described this payout as a simplistic and 'primitive' financial strategy.

Other notable analysts also queried the value of the initial loan burden insisting that the government had never been able to show how the loan was accumulated in the first place, and maintained that the atrocious and heavy penalty charges were inexplicable. Worse still, no one could identify the successful projects, if any, that the loans had funded. It was against this unsavoury background that the Senate Committee on Appropriation, rightly, some would say, objected in December 2008 to Senate approval for a fresh loan application for $500bn by Mr. President. In support of the veracity of this observation, we recall the loans unilaterally consummated by the former President from the Republic of China for the power sector and the reengineering of the Nigerian Railways. On the domestic front, we also recall the rapid accumulation of local debts, particularly through bond issuance by almost N2,000bn within four years, without recourse to 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 in accounting records in spite of annual interest payments of between 12-17 per cent for such borrowings, just for the joy of creating a benchmark price and creating a market for long term government securities! Not surprisingly, the purposes stated by the Federal Ministry of Finance (FMF) for seeking NASS approval for its $500m or N75bn loan come from the same template for government's domestic bonds in the recent past; after all the former Debt Management Office boss is now the Minister for Finance!

However, the Senate Committee on Appropriation in a spirited attempt to do the right thing noted as follows in its response to the Executive request: "...the ultimate goal for the implementation of any public sector programme or project is to enhance the welfare of the citizenry...A major benefit allegedly derivable from this loan is that it will provide a benchmark for private sector borrowing. In our view, the Federal Government of Nigeria (FGN) needs to prove this assertion beyond any doubt; we should note that the FGN did not specify the beneficiary projects; that important information must be provided. It is also obvious that the loan would be sourced at market rates, which should be higher than for concessionary loans normally preferred for financing of public sector projects. The net benefit of this market-based loan must be convincingly articulated. FGN needs to demonstrate concisely the extent to which the procurement of the loan would reduce the cost of borrowing by Nigerian-based private sector operators from the International Capital Market (ICM). Both official and market sources of fund base their decision mainly on the Country Risk Assessment (CRA) reports. We are yet to decipher how procurement of the sovereign loan as proposed will reduce Nigeria's overall CRA. FGN needs to clarify this relationship."

As noted earlier, the nation has never prudently utilized external loans for the public sector, since the loan procured in 1957 for the construction of the national rail network. FMF should, therefore, demonstrate the fundamental institutional improvements towards achieving the stated benefits of this and other forms of external borrowing. Research evidence has adjudged the debt sustainability criteria being employed by FMF/DMO as misleading and lacking any theoretical underpinning. It is also geared towards a nation's perpetual dependence on loans rather than real development. Recourse to borrowing for development financing should be a stop-gap measure, and not a perpetual life support facility.The National Economic Empowerment and Development Strategy (NEEDS) places much emphasis on Public Private Partnership (PPP) as a major source of development financing. The continued emphasis on (especially) external borrowing by the public sector negates this orientation, and calls to question our real commitment towards evolving a private sector-led market-oriented national economy. 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. Indeed, the Senate took cover for their action by insisting that further debate or evaluations of the loan application had been overtaken by the Senate's hastened approval of the totality of Mr. President 2009 budget within 10 days or so in December 2008, and noted that the budget approval had consequently covered the loan application which was embedded in the budget!

In this same vein, Senate's approval for the 2009 budget may also be seen as a blanket approval for the Federal Executive "to take the extraordinary step of exceeding , in the short term, the deficit target we set for ourselves under the Fiscal Responsibility Act 2007. However, we remain committed to reverting to a more conservative and sustainable fiscal deficit of 3%, or lower, in the medium term, consistent with international best practice." In plain language, what Yar'Adua is asking in the above excerpt from the 2009 budget is permission to borrow more money at his discretion above the acceptable limit of 3% of GDP without further or subsequent application for NASS' approval for such borrowings.

In the event that such further borrowings are not tied to any real application, and the prevailing tradition of waste and corruption, not to mention the self-serving habit of MDAs of shoring up unspent funds for personal gratification, it would be a great disservice to the nation, if the NASS gives Mr. President such an open cheque! Indeed, the lamentation of the Senate Committee with regard to sidetracking by the Executive even in a civilian dispensation from performing its constitutional oversight evaluation and approval for federal loans would have become crocodile tears!

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