The Nation Newspaper

Tag: borrowing

  • World Bank supports states’ borrowing

    World Bank supports states’ borrowing

    The World Bank is not opposed to states’ independence to borrow since Nigeria operates fiscal federalism, the body’s Lead Economist, Nigeria Country Office, John Litwack, has said.

    He said: “It is good to give states independence in terms of borrowing,” adding, however, that state independence on borrowing is a “complicated matter.”

    Litwack told The Nation that he was satisfied with the way Nigeria was handling its debt matters, and that “it’s a positive development that issues of subnational debts are becoming clearer since the Debt Management Office (DMO) started monitoring” the nation’s debts.

    Litwack advised those involved in managing debt issues in the country to keep track of “contingent liabilities” which have the potential of impacting on the resources of state governments.

    He cited Lagos State which is planning to build the Blue Line under which agreement the company handling the project has been given guarantee on returns. While the idea of the Blue Line is good, he cautioned the government to ensure adequate provision for “contingent liabilities” for the project.

    However, an official of a Non-Governmental Organisations (NGO), who asked not to be identied, said at an event organised by the Centre for Social Justice, that though he was in support of states independence, he was also in support of a single economy for the country.

    He argued that if a state misbehaves after borrowing, it could influence other states to act in the same manner, and that it is the fear of such a scenario that the World Bank is supporting the Federal Government in coordinating debts for both federal and state governments.

    The World Bank in its first edition of the Nigeria Economic Report had stated that “rules for subnational borrowing are more restrictive than might be expected in such a decentralised federation.”

    The report declared that the DMO “appears to have more control over state bond issues than other types of commercial borrowing, and it is not clear what kind of sanctions would apply to states that exceed their prescribed debt ceilings.”

    In Nigeria, states can only borrow externally with the permission of the Federal Government and to service these external debts, deductions would be made from the state’s share of the federation account revenue before distribution.

    “Debt servicing by Nigerian states are not to exceed 40 per cent of their average monthly allocation from the Federation Account,” the World Bank report said.

    On what the sanction(s) would be for a state that exceeds its debt ceiling, the Director-General of the DMO, Dr. Abraham Nwankwo, said: “No state would want to exceed its limit.”

    Nwankwo said there was an urgent need to reassess the structure of the nation’s debt because the interest rate payable on domestic debt was too high, adding that the ratio of the Federal Government’s domestic debt stands at 88 per cent, while the ratio of the foreign debt stands at 12 per cent.

    He said the appropriate ratio should be 60 per cent for domestic debt and 40 per cent for foreign debt.

    The ratio of domestic and external debt stock as at end 2011 was 88:12, whereas the appropriate ratio would be 60:40.”

    He said at present the difference between the domestic and external average cost of borrowing is about eight per cent per annum.

     

  • Gov Obi: What could be wrong with borrowing?

    Gov Obi: What could be wrong with borrowing?

    SIR: That is the question for Gov. Peter Obi of Anambra State. As a student of Finance and

    Investment, I can remember the principle of Investment Analysis. Basically, a corporation borrows money from a bank or other financial institution to undertake a business transaction. When the operation is duly effected, the corporation pays back the money to the bank or the institution with the revenue collected from the satisfied customers. The bank is happy, the investor is happy and the consumers are happy.

    This approach seems to be a win-win situation and one can see the brilliant applications of it in public administration by Gov. Raji Fashola of Lagos State and Gov. Rotimi Amaechi of River State. Gov. Obi, on the other hand, prides himself as the only governor in Nigeria who has not borrowed money to run his administration. One wonders if this aversion for borrowing makes fiscal policy sense or if it is a consequence of small-mindedness. Anambra State is underdeveloped and needs a serious injection of fund to stimulate its economy. The governor’s choice of not borrowing to boast development is a leadership shortcoming that is bearing down on the progress of Anambra State.

    One is not disputing that the governor has done some work in Anambra State by applying a tight string on the state’s purse. One questions the wisdom of one sitting on top of the ocean and watching one’s hand with spittle. The governor, like other state governors in Nigeria, has access to development loans. He declines to utilize such an opportunity that stands to better the life of the people of Anambra State. Frugality may have its place in one’s personal business but broader vision is required to institute the right programs for the growth of the society. Anambra State is highly commercialized and therefore has the propensity to tolerate risk. It is baffling to understand why the governor is shy to borrow money for development. This is not to say that stories do not abound of governors who abused such privileges but Gov. Obi seems to intend well for Anambra State. The governor must have a better explanation why he should be proud of this business anomaly.

     

    Pius Okaneme

    Umuoji, Anambra State.

     

  • Senate urges Fed Govt on $600m borrowing plan for Lagos

    A MOVE by the Lagos State government to shop for $600 million loan yesterday got the backing of the Senate, which demanded the state’s request to raise the funds through loan.

    It demanded the request as part of its recommendation on the proposed pipeline projects under the Medium Term (2012-2014) External Borrowing Plan (MTEBP).

    Chairman of the Senate Committee on Local and Foreign Debts presented the report of the Joint Committee on Local and Foreign Debts and Finance.

    The committee noted that Lagos State has a subsisting borrowing understanding with the World Bank for a three-year borrowing framework for $600 million, with a yearly disbursement of $200 million which commenced in the current outgoing fiscal year.

    It noted that based on the arrangement, the Lagos State government built in as revenue the tranche $200 million in its budget for 2013.

    The committee, however, said the Minister of State for Finance, Alhaji Yerima Ngama, explained that the facility Development Policy Operation (DPO) finance is no longer a lending product within the current Federal Government acceptable lending instrument.

    After considering the submission of Ngama, the Senate advised the Federal Government, as a matter of urgency, to forward a request for Lagos State in order to avert imminent crisis in the implementation of the 2013 budget.

    The Senate also approved projects to be implemented by the Federal Government and its agencies as projects for states for which the amount for on-lending have been stated.

    It deferred for states on any facility which the amount for on-lending are not stated.

    The Senate rejected the proposal of $56.61 million which is no longer required by the Kaduna State for its national urban water sector reforms for the French Development Agency (FDA).

    the senate said some of the projects were not indicated in the loan schedule submitted to the Senate by the President and as such it was difficult to appreciably assess them.

    It said that some state commissioners of finance failed to appear to defend their loan requests.

    According to the Senate, the Federal Government’s external debt profile is at a level it can accommodate more borrowings without exceeding the international limit of 40 per cent debt/GDP ratio and the country’s limit of 25 per cent.

    The breakdown of the loan showed that states would borrow $2,263.239 billion and the Federal Government $4,846.3 billion.

    The Senate also approved a continuation of the Eurobond Issuance to the Federal Government to the tune of $1 billion and another Diaspora bond of $0.1 billion to the Federal Government.

    This brought the total amount of foreign loans for 2012 to 2014 to $8,209.53 billion.

    Also yesterday, the Senate received N315.8 billion budget proposal of the Niger Delta Development Commission (NDDC) for next year.

    After the approval of the borrowing plan, the Senate adjourned plenary to January 16, 2013 to enable it observe the Christmas and New Year break.

     

  • Civil servants ask lawmakers to stop govt’s borrowing

    The Association of Senior Civil Servants of Nigeria (ASCSN) has called on the National Assembly to stop Federal Government’s plans to borrow to execute projects in the country.

    ASCSN’s President Comrade Bobboi Bala Kaigama stated this at an interactive session with reporters after the asociation’s National Executive Council (NEC) meeting in Lagos.

    He said: “We hereby challenge NASS to be more resolute in its oversight function to stop not at merely criticising the borrowing plans of the Executive arm, but to protect present and coming generations by forbiding new loans plans under any guise, and insist on prudent management of our resources through diligent performance of their legislative duties.

    “We are worried that we will soon be back in the forest of mounting debts that may this time around consume the entire country because from records, Nigeria is negotiating a new debt deal of about $7.46billion, which has nothing  to show that our earning from daily crude oil sales is being judiciously used.

    “We also call on well-meaning Nigerians, including the labour movement to reject this loan move as keeping quiet may translate into mortgaging the future of our unborn children,” he further said.

    Kaigama, who said the nation’s leaders have bad track records on borrowed money for executing projects, said: “The International Monetary Fund (IMF) report reveals that for every N100 Nigeria spends as service, about N80 goes into private pockets.”

    According to him, ASCSN insists on  Ministries, Departments and Agencies (MDAs), both at the federal and state levels, to embrace trade union best practices and act proactively to promote industrial harmony in the system, adding that the use of strikes to address labour issues was not the best.

    He advised MDAs, particularly the Federal Ministry of Education, to embrace dialogue with labour, it is done in other parts of the world.

    ”I wish to recall that in 2009 the leadership of this union and the management of the Federal Ministry of Education agreed to institutionalise quarterly meetings where outstanding labour issues and nascent ones including the vexed issues of non-payment of promotion arrears and inappropriate placement of officers after promotion will be discussed and amicably resolved in line with contemporary trade union best practice,” he said.

    He noted that the formulation and implementation of policies without taking input from stakeholders, is not in tandem with democratic cultures.

    “It is, indeed, surprising that a country that wants to be among the best 20 economies in the world by 2020 cannot guarantee basic social needs, such as electricity, potable water, and good road network, decent housing, and healthcare delivery, affordable and qualitative education, among others for its citizenry eight years to the envisaged Eldorado.”

    “We call on the federal, state and local government to open up more frontiers of employment opportunities to engage millions of idle youths who are willing and eager to earn a living because there is no doubt that if the various government embark on massive road construction, building of housing estates, extensive agriculture farm projects, there will be lots of job opportunities for the able-bodied youth to be productively engaged,“ he said.

    He, however, pleaded with them to unit e, preach love and avoid acrimonious tendencies that would not add value to the system.

  • ‘Nothing wrong in borrowing’

    ‘Nothing wrong in borrowing’

    At the last count, eight states Lagos, Edo, Ekiti, Imo, Yobe, Kwara, Bayelsa and Delta, had borrowed from the capital market to fund some infrastructural projects, raising fears about the sustainability of their debts. But the Director-General, Debt Management Office (DMO), Dr Abraham Nwankwo, says there is nothing wrong in states or the Federal Government borrowing, as long as it is within acceptable limits.He spoke to with Group Business Editor AYODELE AMINU on a wide range of issues on the sidelines of the World Bank/International Monetary Fund (IMF) annual meeting in Tokyo, Japan. Excerpts:

     

    Some states have gone to the capital market to borrow. Given that most of them have low internally generated revenue (IGR) and rely on federal allocation and oil, can they sustain these debts if something happens?

    The issue of borrowing is global. Borrowing is for regions, countries both developed and undeveloped. It is for states, provinces and households. So, first of all, let me make it clear that it is specifically wrong, politically and methodically to single out states and start talking about states borrowing or not borrowing. We have to say that whether as an individual, family, school, organisation, company or country, you have to borrow responsibly. So, let me make it clear that there is nothing that makes borrowing by a state sinful in itself. Every economic agent should borrow responsibly. In the case of Nigeria, of course states borrow within acceptable limits .There are rules and guidelines and states follow those rules and guidelines. First of all, no state in Nigeria can borrow from the capital market without following the process of borrowing from the capital market.There are guidelines that apply to every government entity that wants to borrow from the capital market and those rules have been there and are still there and they are being enforced by Securities and Exchange Commission (SEC) through the investment and security Act as amended. There are terms and condition for any entity whether private or public that wants to borrow from the capital market. So, it is for SEC to ensure they monitor states or make sure that whoever wants to borrow comply with the various specifications in the investment and security act 2007. Hence, the procedures, which private companies that wants to borrow from the capital market undergo is the same with that of the states in the hands of SEC.

    Secondly, in the case of states because they are government’s entities and sub-nationals, they have additional regulations and monitoring guiding them as contained in the fiscal responsibility law in the debt management office Act. And based on the authority given to the DMO and the authority given to the minister of finance in the Fiscal Responsibility Act, states are also enforced to comply with additional requirements beyond what is already provided in the Investment and Security Act. So, linking states’ability to service their debts with their Internally Generated Revenue (IGR), of course, is the prudent thing to do and that is what is being done. That is why the guidelines allows no state to borrow in such a manner that its total debt service on a monthly basis is more than 40 per cent of its monthly allocation from Federal Allocation. What is taken into account is the fact that the money is essentially oil revenue. So, as a state, it is expected that your total debt service should not be more than 40 per cent of Federal Allocation money. This means that the idea of sustainability of oil revenue has already been factored in. Everybody must realise that it has been taken into account that oil revenue is volatile and unstable. What this means is that for states that already have internal generated revenue now have a buffer. The rule has been made such that every state must depend not 100 per cent on oil revenue. This is to account for the volatility and vulnerability of oil revenue. So, if you have internally generated revenue, it is being neglected and considered as a back up. The second way to look at it is that every year, DMO conducts a debt sustainability analysis and takes into account that oil revenue may drop to as low as $30 per barrel. It is on this basis that the DMO has an idea of the total debt owed by the country and looks at it and consider what could happen if oil revenue were to drop to as low as $30 per barrel.

    This means the way we manage our debt or control it is such that the vulnerability or volatility of oil revenue is essentially taken care of. The second thing is beyond the figures – that is the value added. This is what I believe every country and states should be focusing on. What value do you generate in terms of productivity, growth and employment with the use of financial resources whether borrowed or not?

    From the guidelines, I can say Nigeria’s method meets the best standard in the world. But in addition, over the past few years, effort is being made so that emphasis is not placed only on the statistics. Emphasis should be on using resources effectively and efficiently so that you can use it to generate maximum growth, employment and eradicate poverty.

    When you look at the discussion going on at the IMF/World Bank meeting, you can discover that all over the world, countries are battling with issues of debt sustainability and the like. But you can say that Nigeria is relatively lucky because even before the global financial crisis started Nigeria has been on path of reform since 2004. We continued on that path of reform up till the time that the global crisis set in and that is why despite the global crisis, the country has not been badly impacted like other parts of the world. Because if Nigeria had not been on the path of reform in 2004, when the crisis set in 2008 up till about 2001, it means that with the turbulence in the oil market it is possible for us to now be experiencing the serious impact too. But go and look at the statistics, we will see that even despite the turbulence our growth still averaged about seven per cent. There are few countries in the world that did better than Nigeria in terms of growth and stability during this turbulent period. The country has been minimally volatile and vulnerable. It continues to maintain stability and growth.

    The lesson to take is that Nigeria is not isolated from the global turmoil but because it has continued to maintain a path of reform its economy is stable. What it means is that we should take advantage of the situation and continue with the ongoing structural reforms by intensify the processes.

    Despite the period of growth and rising price of crude oil that the country is touted to be enjoying, why then are we still borrowing?

    Can you tell me any country in the world that do not borrow? It is like saying that because Mitsubishi is producing and making sales it should not borrow. The economic fact is that for any country or business that is doing well it should be able do what can ensure its expansion and that includes borrowing. It would borrow to build more factories to give it a competitive edge and make it dominate the global market. That is the rule. In the history of the economy of the world, borrowing, I must say, has played a significant part. Developed countries, such as United States, Germany, Japan and China are not left out in the exercise as every economy is looking forward to expanding its business and that means it must seek for fund through borrowing. So, we must not look at borrowing as an absolute thing but relative to something.

    So, is that why Nigeria is embarking on another borrowing come next year?

    Nigeria is not borrowing next year.Borrowing is done on a medium term based on the development project to be executed. That is why there is a budget to help decide how the available resources can be used to execute these projects. We should be praising the government for coming up with this medium term expenditure framework

    How sustainable is the cost of servicing these debts?

    When you talk of debt sustainability it has to do with solvency and liquidity. In fact, that explains why we do debt sustainability analysis every year. It is the duty of the public including the media to get a copy of the report and see whether the solvency and liquidity ratios are okay or not. After looking at, it we must ask ourselves this question; what is the relation between our total debt – both domestic and external with our revenue generation? These two things would lead to liquidity ratio and answer these questions. Every year, we do debt sustainability analysis, which includes solvency and liquidity ratios.

    So, if we are not going to service our debt, then it means we won’t borrow. Nigeria borrows at fixed rate and that makes it easy to service our debt. Once we go to the bond market, we borrow at fixed rate. So, upfront you know how much you are going to pay because it is fixed. You don’t borrow free. Even for external loan, where borrowing is done on concessional terms, you still have to pay service charge and commitment fee, which is very low. But it is these combinations that make it possible to know if you can service your debt. But the issue is, do we have the framework for managing our debt?

    But it appears the private sector is being crowded out?

    What do you mean by crowding out of the private sector? Crowding out means you have a market where private sector is borrowing and the government too is borrowing. Before now, in Nigeria, there was no bond market, it is the government that tried to develop the market. So, there is no justification for accusing the government of crowding out the private sector when in actual fact the bond market was not in existence until the government started it. There was no way a three- or 10-year loan could be got before now until the government created the bond market, which has made it possible to get a 20-year money from the market. It is wrong and mischievous to say that the government crowded out the private sector when in actual fact there was no bond market until the government developed it.The government is retreating by reducing its borrowing from the market since the past three years if one looks at the statistics.

    But it seems that the objective for which the borrowing is done hasn’t been realised going by the fact that the projects are not feasible on the ground?

    We don’t have to make conclusions if we have not done our investigations on this. If your revenue is less than your expenditure, then you have to borrow.That is why there is a budget. But before the budget gets approved, stakeholders including the media and civil society organisations are called together to look at it. After then, it goes to the National Assembly which considers the Appropriation bill before making it an Act. They would have looked into the budget to see the expenditure and the revenue before taking action on whether to approve or not. At the end of the day, why would anybody say there are no feasible projects if the budget contains the expenditure both capital and recurrent? And the same budget tells you the difference between the two to decide how much to borrow. You can’t come back and say, you don’t know where the bond money goes to.

    But there is always a contention between the National Assembly and Executive on the execution of projects for capital expenditures. So, why do we have 50 per cent implementation of the budget?

    I know you are aware that in certain years the money meant for capital expenditures were returned. Every year, we know that every penny allocated for capital expenditures, which was not spent is returned to the treasury. If you are not able to spend, you should be able to account for what you did not spend. Secondly, on the issue of capital budget implementation, Nigeria needs to improve on it and that is why measures are being put in place to make this possible. Last year, for instance, I am aware that all Ministries Departments and Agencies (MDAs) were tasked to start execution of projects in advance to make a significant implementation of the budget feasible. They were told not to wait until the funds were available. This is to encourage them to make preparations so that when the fund is made available, they can commence the implementation straight off. There are corrective measures that have been put in place to ensure that there is higher implementation of the budget.

    Secondly, we must realise that the budgetary process is not completed until some months into the year, sometimes up till April. So, when you are talking of budget implementation in Nigeria, it is done for nine months and not 12 months as expected. That is why this year, the1 government is committed to working with the National Assembly to ensure the process is completed on time so that the implementation can start in January of the New Year.

    If the budget is not fully implemented after borrowing by the government, don’t you think this could have consequence?

    I think there is no linkage. Of course, when you borrow there is a cost on doing so. Each year, you also look at the revenue generated and expenditure to be made even without borrowing at all. If what is expended is not up to what is set aside for projects, would it not be returned to be used the next year? I must say that borrowing is the way of helping you to boost your cash flow.

    Shouldn’t we have a penalty for non-implementation of budget, especially by the MDAs?

    I would not answer you either yes or no because it is not as simple as you think. But you can come up with that proposal so that Nigerians can look at it and decide whether it is good for them or not.