While there seems to be growing animosity in some quarters over plans by the federal government to borrow money for the implementation of next year’s budget fuelling fears that this may further sink the country into a debilitating debt crisis, government on the other hand says it’s safe to borrow. Ibrahim Apekhade Yusuf and Bukola Aroloye in this report examine the issues
That the country hopes to take some loans from some of these multilateral agencies including: the World Bank, China’s Exim Bank, the Japan International Cooperation Agency and many others is already a fait accompli.
According to the presidency, Nigeria is seeking to borrow money in the form of “low cost, long-term loans,” with 1.25 percent interest rates and 20-year tenors. The government will also look to the African Development Bank for assistance and plans to secure a Eurobond.
Justification for borrowing
Of course, the federal government’s justification for obtaining these loans is to help it cover the shortfall in its revenue, caused by the falling price of oil, the sales of which constitute 70 percent of the national revenue.
Finance Minister, Mrs. Kemi Adeosun further lent her voice to this call last week in Lagos, saying the loans are part of this administration plans to address the growing economic recession in the country. According to the government, the loans will be used primarily in the agriculture, power, mining development, and health sectors.
Besides, the government is convinced that the debt GDP ratio of Nigeria, which is at 17%, the lowest in the world, is enough justification for it to still borrow.
Nigeria’s debt stock as at June 2016
According to statistics released by Debt Management Office, DMO, on its website, Nigeria’s total debt liability had risen to N16.29tn as of June 30, 2016. As of June 2015, the country’s total debt stood at N12.12tn.
This means that within the one-year period (July 2015 to June 2016), the country’s total debt rose by N4.17tn, or 34.41 per cent.
Paired into specifics, a breakdown of the country’s debt profile as obtained by The Nation shows that external debt by the federal and state governments stood at $11.26bn or N3.19tn as of June 30, 2016. It was $10.32bn or N2.03tn by July last year.
According to the DMO, the Central Bank of Nigeria’s official exchange rates of N283 to $1 as of June 30, 2016, and N197 as at December 2015 were used in arriving at the naira equivalent of the foreign debt status.
The domestic debt of the federal government alone stood at N10.61tn as of June this year, up from N8.4tn a year ago.
It shows that within 12 months, the federal government’s domestic debt profile rose by N2.21tn or 26.31 per cent.
The domestic debt of the states stood at N2.5tn at the end of June this year, whereas it was N1.69tn in July 2015. This means that within a period of one year, the domestic debt of the states rose by N810bn, an increase of 47.93 per cent.
The Nigerian Treasury Bills accounted for N2.9tn or 27.36 per cent of the federal government’s domestic debt profile.
Treasury Bonds, on the other hand, accounted for N230.99bn or 2.18 per cent of Federal Government’s domestic borrowing.
The DMO, in a document said, ‘Nigeria’s Debt Management Strategy 2016-2019’, said at least 30 per cent of the nation’s domestic debt would fall due within a one-year period.
It stated, “This debt stock is slightly lower than the published FGN’s total debt stock of $55,576.28m (N10,948,526.57m), because the Debt Management Strategy tool treats the NTBs stock based on the discount values and not on the face values; while for the external debt, the tool aggregates the debt by tranche and currency, and applies a common end-period exchange rate. These gave rise to the observed difference.
“The implied interest rate was high at 10.77 per cent, due mainly to the higher interest cost on domestic debt. The portfolio is further characterised by a relatively high share of domestic debt falling due within the next one year.
“Interest rate risk is high, since maturing debt will have to be refinanced at market rates, which could be higher than interest rates on existing debt. The foreign exchange risk is relatively low given the predominance of domestic debt in the portfolio.”
Debt relief at huge cost
It would be recalled that in 2005 when Nigeria’s external debt reached a crisis level of $36 billion, the federal government, through the initiative of the former Minister of Finance, Dr. Ngozi Okonjo-Iweala, paid $12 billion to the Paris club of creditors to obtain a debt relief of $18 billion. But in the view of experts, with the benefit of hindsight, the present debt stock clearly negates the huge sacrifices Nigerians made to exit from its foreign creditors. The current debt stock implies that government is borrowing more money than it is paying out. This could, in the long term, harm the economy if the debts taken are not channelled into productive areas that can yield dividends to repay the loans.
To these economic watchers, what it all means is that government is yet to curtail its propensity to borrow and spend at will.
Nigeria spends 80% of revenues to service debts
The Islamic Development Bank (IDB) has described Nigeria as one of the few nations, which spend almost all their revenues to service debts, subsequently causing the economy to haemorrhage.
This came as the Chairman, Senate Committee on Foreign and Local Debts, Senator Shehu Sani, disclosed that Nigeria’s debt now stands at $60billion.
Already, President Muhammadu Buhari has budgeted N1.361 trillion to service debt this year as against N953.6 billion proposed in 2015.
The IDB, which made this revelation during its visit to Sani, said whereas the Gross Domestic Product (GDP) ratio of Nigeria’s debt was rated to be as low as 17 per cent, the revenues being deployed to service the debts were outrageous, rising to the tune of 80 per cent of the nation’s earnings.
According to IDB’s representative, Abdallah Mohammed Kiliaki, Nigeria stands the risk of running into economic stampede if it continues to deploy huge sums to service debts. Abdullah who said the trend compelled his visit, advocated the need for Nigeria to urgently broaden the scope of its economy by diversifying to other areas with economic potential such as agriculture.
“My visit is very crucial because we need to look at the debt profile of a country before we give it new contractual sort of financing. We also work closely with the International Monetary Fund and the World Bank to ensure that our financing has the required threshold of grant financing which is normally 35 percent but at the same time, there is financing that is not a burden to a country to the extent that the debt may not be sustainable.
“When talking about unsustainable debt, it means that a country or a borrower is unable to pay. So, we take very serious note of that. When you look at the debt GDP ratio of Nigeria, it is very low, it is very low. It is 17 per cent compared to Italy and other countries which is about 150 per cent while that of the United States is about 100 per cent.
“But there is a caveat; it is true that debt to GDP ratio is low but when you look at the amount, the revenue, to debt servicing ratio, the amount of money that the government is collecting, the revenue of the government vis-à-vis the ratio to the total debt, I think Nigeria pays about 75 to 80 per cent of its revenue to service debt. So, this is very, very high compared to other countries where they use just 10 per cent.
“What this means is that one, the government of Nigeria needs to expand or mobilise additional resources through taxation by broadening the tax base but at the same time, we as lenders, financiers, we need to reconsider our conditions of financing meaning that we should try as much as we can, to extend to Nigeria, financing that will not make it difficult for the country to pay its debt.”
Responding, Sani said international banks and other multilateral financial institutions should stop encouraging Nigeria to keep borrowing in view of its low debt ratio servicing to GDP.
He said whereas the debt ratio to GDP put at 17 per cent may look good, it may subsequently cruise at 77 per cent if it continues unchecked and consequently bring the country back to its former place in 2006 before London and Paris clubs granted it debt forgiveness.
He said Nigeria’s total debt amounted to $60 billion out of which $10.6 billion is foreign loan. He promised that the committee would henceforth monitor every dime that every government borrows in Nigeria.
He said: “Available records have clearly shown that Nigeria’s total debt profile stands at $60billion out of which $10.6billion is from foreign loans. Borrowing should simply be a last option for any serious minded government and not just first option way out of problems at hand because we don’t need to overburden our next generations for repayment of needless loans taking before their time.”
Misused borrowing
According to the Director General of the DMO, Dr. Abraham Nwankwo, the ‘gross misuse of borrowed public funds’ by public officers in the past contributes to the rising debt profile.
“Government should draw on the positive side of borrowing,” he said, stressing that some developed nations depend heavily on borrowing to sustain their economies.
While encouraging state governments to source funds for developmental purposes, the DMO boss pointed out that the cynicism that usually trail decisions to borrow was due to the unpleasant cases where governments borrow money and misappropriate it.
He said that the misappropriation of borrowed funds had resulted in unsustainable debt portfolio.
The DMO boss, however, noted that under the President Muhammad Buhari’s administration, ‘the economy is becoming more robust’ and urged Nigerians to cooperate with the administration in order to achieve the desired change.
There has been consistent controversy over debt management in Nigeria.
The controversy includes primary objections to and justifications for borrowing.
