Cause of Nigeria’s rising debt profile | Independent Newspapers Limited
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Cause of Nigeria’s rising debt profile

Posted: Apr 7, 2015 at 6:57 am   /   by   /   comments (0)


The recent declaration by the African Development Bank (AfDB)  that Nigeria is West Africa’s largest market with great potential to be a main driver of regional integration considering its population, contained in  the West African Mid-Term Review and Regional Portfolio Performance Review Paper 2011 – 2015 of the AfDb has drawn arguments from economic experts in the country that there is more, yet undisclosed reasons by the federal Government in its steps to source $2 billion  loan to assist in the implementation of its policies and programmes this year. In this special report, Sylvester Enoghase, Andrew Airahuobhor, Emmanuel Okwuke,  Abel Orukpe, and Bamidele Ogunwusi, examines the issues and reactions of Nigerians to the loan.

At a meeting with Organised Private Sector (OPS), Finance Minister, Dr. Ngozi Okonjo-Iweala, had expressed worry at the growing rate of Nigeria’s domestic debt, which rose by $32 billion. It rose from $12 billion when she left government in 2006, to $44 billion on her return. She absorbed the Debt Management Office (DMO) of blame in the 266.66 per cent rise.

According to her, “If there is anybody who will be allergic to accumulation of debt, it is me. When I left, domestic debt was about $12 billion; I came back and found it at $44 billion. It is not the DMO that caused it. It is the choices made by the society.

She added that, “You all should have been lamenting this when you saw it happening,” and she argued however that the debt ratio was alright and sustainable at this moment, hence the upgrade by the rating agencies at the time others were being downgraded.

She said, “Our debt-GDP ratio, if you just take federal debt, is about 17 per cent-both domestic and foreign. If you add what we have from the states, we could get up to 21 per cent as opposed to a standard of 25 to 30 per cent, which we have set for the country.”

Dr. Okonjo-Iweala stated that what Nigeria should worry about, is the cost of servicing the debt and that even if Nigerians are okay internationally, there is the need to look at the composition.  In her words, “It is true that domestic debt (N5.9 trillion) is worrying. I have said that before. Our problem is not external debt; our external debt is very low, two per cent of GDP. But we really need to slowdown the rate of borrowing domestically.”

She also decried the interest rate at which the Federal and State Governments are raising debt, adding that the rate is too high at 15 per cent, considering the fact that they have to finance expenditure and capital.

On the sustainability of the debt, she expressed worry over the cost of servicing the loan, which according to her is still a major challenge.

She calls for the need to slow down the rate at which domestic debts is accumulated, but that the external component of the debt remains very low at 2 per cent of GDP.

Walking into the debt trap of the 80s?

Financial experts in the country have expressed fears over the $3.702 billion about (N555 billion) external loan sought by the Federal Government for the construction of railway project and other facilities.

Their fears are that the rate at which the Federal Government is taking loans could take Nigeria to the debt trap of the 1980s.

The Senate had approved $1.54 billion (N231 billion) out of the total $3.702 billion loans sought by the government. The Senate also suspended the approval of an external borrowing of $ 1.5 billion (N225 billion) for the construction of railway projects in Lagos and Abuja.

The $1.5 billion about (N225 billion) unapproved loan was meant for the development of the Lagos-Ibadan railway modernisation and the Abuja light rail project. The government had sought to secure the loans from the People’s Republic of China’s Global Facility.

The $1.54 billion loan approved includes $152.2 million from the Expert/Import Bank of China for the Abuja- Kaduna rail line and national security. It also includes the $315 million from IDA for Public-Private Partnership (PPP) projects, and $170 million from the FDA for national electricity and gas improvement projects.

Mr. Lekan Salami of Cash Craft Asset Management Limited, argued that external loans sometimes were incurred to finance increase in the government expenditure. Salami explained that borrowing was not bad, but should be carried out with caution, adding that government borrows to finance investment for economic growth.

In his words, “The effect of external borrowing is loss of economic activities which can be seen in terms of under-utilisation of the nation’s resources”.

He advised the Federal Government to look inward in creating more revenues by harnessing the non-oil sector, which had been neglected for long, adding that unemployment would be on the increase since money borrowed were not effectively used for infrastructure building that could have attracted investors willing to create jobs.

President, Finance Houses Association of Nigeria (FHAN), Mr. Eddie Osarenkhwe stated that the rising external debt profile would lead to viciously cumulative debts in the near future and that it would also compound the external debt service problems of the nation.

According to him, “The intellectual community and those that understand the challenges of economic fundamentals should respond passionately to this challenge of trying to get government to be more responsive in the way it seeks external loans”


Legislator, Financial Analysts reacts to rising Debts

Members of the Joint Committee were also taken aback by the rate at which the country’s debt profile was rising, just like other Nigerians are shocked at the development.

Chairman of the House Committee on Legislative Budget and Research, Hon. Opeyemi Bamidele, lamented the continued shut out of private sector borrowers by government. “We are now aggressively borrowing in such a manner that the private sector is now being stifled as the government is now the only big spender in the economy. The private sector cannot access funds domestically and that means they cannot create jobs that is expected of them,” Bamidele said.

In the September 17 Edition of “Bond Watch”, Analysts at Dunn Loren Merrifield, an independent full-service investment house based in Lagos, which provide asset management services in addition to cutting-edge research to clients, stated that at N7.1 trillion in June 2012, Nigeria’s total debt was about 1.7 times its level in 2005, before the nation got debt forgiveness from its creditors, which include Paris Club in 2006.

In an area report following the announcement of the second Eurobond, Dunn Loren contended that the development could take the nation back to the era of bloated international debt.

The bond is part of efforts to significantly reduce the country’s high debt service payments in view of the prevailing high interest rates in Nigeria  and in line with the Federal Government resolve to reduce domestic borrowing from the current N744 billion to about N500 billion in the medium term.

Already, the 2012 debt level was reduced from N852 billion, just as there are efforts to bring it further down to N500 billion “in the medium term”.

Coordinating Minister of the Economy and Finance Minister, Dr. Ngozi Okonjo-Iweala at meeting with members of the Organised Private Sector (OPS) in Lagos, decried the 15 per cent interest rate, describing it too high for investors and that  the Eurobond is part of efforts to “raise debt at zero or one percent.

The Minister called for an expansion of the tax base, which is presently too narrow and the biggest challenge being faced with the recurrent side of the 2012 budget, hence the need to bring in many more people into the tax net.

Rather than seeking to refinance domestic debt at about 12 per cent interest with the Eurobond, the Dunn Loren analysts advocated for a concerted approach to Nigeria’s economic management by both fiscal and monetary authorities.

Recalled that there was a similar warning by the Central Bank of Nigeria (CBN), in its published, “Development in the External Sector”, noting that the nation’s external debt profile rose by 5.64 per cent from $5.67 billion in the fourth quarter of 2011, to $5.99 billion at the end of March 2012.

The report published by the CBN’s Economic Policy Directorate reported that the private sector external debt stood at $0.27 billion, down from $0.39 billion in the corresponding period of last year, and $0.44 billion in the 2011 fourth quarter.

The growth in external debt in the period under review was blamed on additional loans incurred within the period, following which the CBN warned that “the continued increase in the public sector external debt may constitute a threat to the existing debt sustainability position of the country if future loans are not project-tied and self sustaining.”

A Shipping expert, Aminu Musa is worried that the outgoing government is contemplating a new $2 billion AfDB loan to finance anticipated deficit gap in the 2015 budget. He said that the outgoing administration has done a lot of things that has brought tensions to the economy and political situation of the country. He said ‘I believe that was why many people turned out in large number to create that change we all anticipated’.

He said, “Recently, when we heard about the proposed $2 billion loan, trying to secure from the AfDB to finance anticipated deficit gap in 2015 budget, it hit me negatively, because, when the finance minister was called to the House to give a summary and evaluation of the budget, she declared an austerity measure, one of those objectives of the measure was to bridge the gap because of fall in global oil prices, and the domestic insurgency the government was battling and economy that wasn’t doing too good after it was rebased, making Nigeria the largest economy in Africa.”

Musa said that the Finance Minister had made certain projections and measures on how government can bridge that deficit gap, which she said was about N1.9 trillion, and they have made measures to fund that gap, proposing austerity measures, from where government can save revenue.

“She talked about taxation rather than depend on the oil, which price was dwindling. She also talked about imposing taxes on luxury lifestyle as well as luxury properties. I can remember when she said that 10 percent import surcharge will be imposed on private jets, she proposed that government can recoup about  N3.7 billion in revenue to bridge that gap in the budget.

“She talked about 39 percent import surcharge too on luxury yachts, wines, Champaign etc. as source of tax to bridge the gap. If government is proposing to get that huge amount of loan from AfDB, you begin to see that the objective that they have set out to achieve does not really have element of sincerity in it. This is because if you have presented a budget and source of expectation of revenue and you have told Nigerians this is how you can bridge that gap, and how many days before expiration of tenure, you want to secure as high as $2 billion from AfDB, I really don’t understand what they intend to achieve with that,” he said.

He said incoming APC government has strategies in place to finance government budget, saying that the party leaders have indicated that it is anticipating zero fund in the treasury from the outgoing government. “I think that whatever programme the outgoing government thinks it has in place that they want to achieve, those programmes will still be evaluated and assessed by the incoming government and those that do not tally or fit into the new government’s programme, certainly, they wont run along with it. So, I don’t see any reason why they should embark on wild goose chase of something that in the long run will be a burden to Nigerians. We know that many peope see Buhari as somebody with integrity and character. Buhari has always said there are areas if they cut wastages, what they can generate from that is enough to run government. I believe we don’t need to go down in that area of loan procurement,” Musa said.

He said the new government should be left to decide on what to do, saying that they “understand the dynamics of the economy,” and also understand that they have a project that must be accomplished. He said that the incoming administration has just a few weeks away from inauguration, “I don’t think there is need for loan.”