Tag: borrow

Nigeria’s foreign debt stock is beginning to rise again. Currently, the total debt stock is about $15 billion. But the Minister of Finance, Mrs. Ngozi Okonjo-Iweala, announced recently that Nigeria is seeking about $7 billion new loans, of which nearly half are loans requested by some of the states governments. Mrs. Okonjo-Iweala said the foreign loans were required to finance much- needed investment in physical infrastructure, particularly in the woeful power sector that has become a national nightmare and embarrassment.

The objective domestic economic and financial environment for the proposed loan is quite propitious. Over time, Nigeria has achieved relative macroeconomic stability. Though still rising, inflation is relatively modest. The naira exchange rate is more stable. The foreign reserves are quite healthy to the extent that Nigeria has, under the Sovereign Wealth Fund, placed $1 billion in the international finance market for lending to other international borrowers. At an estimated annual average of 7 per cent, the economic growth rate is quite impressive. It is one of the highest in Africa. But it is fuelled largely by the record increase in oil prices and incomes. Not by non-oil exports. With the rise in oil prices and healthy foreign reserves, Nigeria’s balance of payments is in order. Nigeria can meet its import bill without much strain. International confidence in the Nigerian economy has been restored. Lenders, both bilateral and multilateral, are more willing to lend to Nigeria now, in the belief that, unlike in the early 1980s when Nigeria ran into balance of payments disequilibrium, it is now in a better position to repay its foreign loan without too much hassle. Foreign Direct Investment (FDI) in Nigeria is currently one of the highest in Africa, surpassing that of South Africa, still Africa’s largest economy. So, based on the existing health of the domestic economy, it is possible to argue as the Minister of Finance has done with some conviction that now is the time for Nigeria to borrow externally to meet its investment gap of nearly $10 billion annually.

However, despite these seemingly positive factors, some legitimate questions should be asked by the public about these planned foreign loans. First, have both the federal and states governments really identified the infrastructure projects to be financed by these foreign loans? Second, are the loans project-specific, and will they be used for the purpose intended? Third, do we really have the managerial and technical capacity to manage such huge foreign loans? Fourth, are these new loans sustainable in the long run? Can they be repaid without too much stress on the domestic economic and economic growth?

If Nigeria’s past record in managing foreign loans is any guide at all, we are likely to come to the sad conclusion that we have failed to use foreign loans wisely. By the time the Shagari government was overthrown in 1983 by the military, Nigeria’s foreign debt stood at over $40 billion. It could no longer service the loan. Technically, it was in default on its debt servicing which was several times above its average annual GNP. But there was really very little to show for the massive borrowing. The infrastructure, for which the loans were obtained, continued to deteriorate. But like the captain of a sinking ship the Shagari government continued to assure the public that all was well with the economy. It borrowed more and more.

But the overwhelming evidence is that the foreign loans were simply frittered away and diverted into private pockets. The nation hardly benefited from them. The loans, or at least some of it, had to be repaid. Some financial relief was granted with the writing down of some $18 billion of the repayable loan. It was Mrs. Okonjo-Iweala who, during the Obasanjo administration, arranged the bail out. Now, she is the one seeking new loans for the Jonathan government. But even then, the burden of the financial mess into which the country got itself, fell on the poor, who had to suffer the inevitable cuts in social spending involved in the ensuing economic reform programme. Even today, nearly thirty years later, we have not yet fully recovered from the economic and financial consequences of the structural adjustment programme. Jobs lost have not been recovered. Investments in the social sector have declined sharply, lower than the levels in the 1970s. Investments in education and health have continued to fall.

If past experience is any guide, then we have to contend with the real possibility that some of the loans will again end up in private pockets. Given the widespread corruption in the public sector, some of the loans will, as usual, be frittered away by the bureaucrats and ministers. Even the Finance Minister is in no position to monitor the use of the loan once it is released to the executing agencies. Foreign lenders do not have the ability, or even obligation, of ensuring that borrowing countries will use the loans granted them honestly and prudently. No matter what happens they will get their loans back, with the due interest. In fact, it is often the case that foreign lenders connive with borrowers from the poor countries in diverting the loans to private pockets. So, there is little or no pressure from the foreign borrowers to ensure fiscal discipline in spending by the borrowers.

We currently run a budget deficit at all levels of government in the country. The federal deficit is about a third of the entire budget. The domestic debt stock has increased hugely, putting pressure on lending to the business sector. Even then, the rate of implementation of the vast federal budget is barely 60 per cent. It is probably even less. The situation in the states is not much better. Very few of them are financially viable. There is very little to suggest that the proposed loans will fare any better in terms of the implementation of the projects for which we are borrowing. Some of these new loans will go towards funding the overblown public administration. Estimates of this vary from 50 per cent to over 70 per cent of the total budget. The jobs expected from new investment in the economy have not materialised. It is by no means certain that these new loans will generate more jobs in the economy.

All governments like to spend and borrow money. But as we have seen even in some of the rich countries, such as Greece, Spain, and Italy, or even the United States, the biggest foreign debtor, most of this lending goes towards public consumption, rather than productive investment in the economy. The fiscal responsibility act should include a ceiling on foreign borrowing. We must also contend with the vagaries in the oil sector. The medium to long term forecast is that oil prices will fall, particularly when the United States, the largest importer of Nigerian crude oil, achieves self sufficiency in domestic oil production and consumption. By 2020, it could be a net exporter of oil. This huge oil market will be lost to Nigeria.

In the circumstances, the federal and states governments government should borrow less, and generate more revenue internally. Due to poor and ineffective tax administration in the country, the rich hardly pay any tax at all. When they pay, it is far less than they should pay. Public corruption must be curbed. The scam over the so-called oil subsidy must be brought to an end. If there is any subsidy at all, this should be fully established. The proposed expenditure of N2 billion on a new banquet hall in the Presidency, and another N7 billion for a new residence for the vice president, are wasteful. It should be reviewed urgently. When obtained, the foreign loans should be utilised more judiciously in the productive sectors of the economy, so as to avoid the situation in which the country found itself in the 1980s when its huge foreign debt became unsustainable. We must not fall into another foreign debt trap.