Mike Obadan
In the last few months, stakeholders have expressed strong reservations on the Federal Government’s Medium-Term External Borrowing Plan, 2016 – 2018, involving the amount of $22.718 billion (newspaper reports put the amount at US$29.96 billion), submitted to the Senate of the National Assembly for approval.

Some newspapers and other stakeholders have expressed opposition and described the request in very harsh and uncharitable words.
This is against the backdrop of the current public debt stock which appears high in absolute terms (although low in relation to the gross domestic product) and in relation to the proportion of domestic revenue gulped by debt servicing.

The debt stock appears to be increasing at a worrisome rate. The total public debt stock increased by 5.1 per cent, from $81,274.1 million to $85,390.82 million within six months between March 31 and September 30, 2019. Similarly, the external debt stock increased by 5.2 per cent from $25,609.63 million, to $26,941.5 million within the same period. Debt Service/Revenue ratios are between 50 and 60 per cent.

The implication of spending over 50 percent of the country’s revenue on meeting debt obligations is that only a smaller percentage is available to finance the non-debt recurrent expenditures, not to mention critical development programmes and projects.

Thus, the concerns about more external borrowing have merits. But then, the government appears to be in a dilemma. It has expressed the desire to bridge the significant infrastructure gap in the country. But the revenue challenge it faces is very real, hence its request to borrow abroad to finance human capital development, agriculture and infrastructure development in the areas of roads, railways, waterways and power which will help to unleash the potentials of the Nigerian economy.

However, the need for caution and control in further accumulating external debts is of the essence. First, a major argument for the loan plan is no longer tenable as such. This relates to the debt management strategy which seeks to increase external financing with a view to rebalancing the public debt portfolio to achieve a debt composition of 60:40 for domestic and external debt, respectively, as against the 84:16 as at end-2015.

The argument supporting the government’s present efforts to tilt the national debt portfolio mix towards external sources is that interest rates are lower abroad compared to rates in Nigeria. Borrowing abroad, it is argued, would replace short term high –interest cost domestic debt with low interest long term external debt, reduce the debt service cost and lengthen the maturity profile of debt.

The proposed new borrowing is said to be consistent with this subsisting Debt Management Strategy. As at now, following the Central Bank of Nigeria’s successful monetary policy actions since 2019, market interest rates, particularly deposit rates and treasury bill rates have crashed compared to their levels in 2019.
Fixed deposit rates crashed to between one and three per cent while the Treasury bill rate crashed to about five per cent.
The rates for other instruments used by the government to borrow – savings bonds, 1, 2, 3 or more years bonds – have also crashed. Bank lending rates are also trending downwards. These support the case for greater reliance on domestic financing of development as the government can now borrow cheaply in the country. What is important then is the sustainability of the CBN’s current policies.

Important to note too on the issue of loans portfolio rebalancing is that it ignores the implications of heavy reliance on external debt and the country’s external debt management experience of the 1980s up to the mid – 2000s characterized by crisis, the resolution of which was achieved in 2005/2006 through the Paris Club debt cancellation.
Secondly, past external debt management experience during the period before the debt relief of 2005/2006 reflected external borrowing on terms which resulted in debt crisis:
• Excessive borrowing of medium-term high cost funds in relation to profitability and export earnings;
• Inappropriate borrowing terms, reflecting variable and rising interest rates and shorter maturities as well as accumulation of trade arrears in the mid-1980s, and principal and interest arrears thereafter;
• Inappropriate debt maturity profile, resulting in bunching of debt repayments;
• Inadequate information on the volume, composition and maturity profiles of debts; and
• Continued increase in the debt stock even when no new fresh loans were contracted.
The government would need to learn lessons from the above in future external borrowing.

Thirdly, a notable aspect of the debt management flaws was that most of the loans, which were procured from private sources with unfavourable terms, were either diverted or spent on projects which were unable to generate funds to service the underlying debt. For example, the 1997 federal budget revealed very disturbing findings from the Federal Ministry of Finance’s appraisal of 145 externally financed projects executed in 30 states of the Federation and Abuja. Over 40 percent of the sampled foreign loan-financed projects were not yielding any economic and social benefits at all. The loans for eighteen projects had been drawn and were being serviced by government but the projects were never executed. Forty-three projects, categorized as “distressed” were either not commissioned or where they were commissioned, they had to close down soon after; Eighty-four projects were operating only at some capacity. The projects that survived did not contribute in any way towards servicing the loans.

Since then, there have been no signs that lessons have been learnt from the ugly episodes of poor external debt management in the country considering some abandoned externally-financed projects.
It is crucial that the concerns about the proposed external borrowing are taken into account in future borrowing. The total public debt and external debt stocks are rising rapidly. Although the public debt/GDP ratio is relatively low and within the 25 per cent limit set, it is not helpful in gauging debt burden and servicing capacity. The implicit assumption when comparing debt to GDP is that resources can easily be directed from the rest of the economy to the tradable goods sector to earn the requisite foreign exchange. However, such an assumption does not fit comfortably for Nigeria where the ratio of non-oil export to GDP or total export earning is abysmally low.

The cost of debt servicing is rising and the debt-service-to-revenue ratio is high. A continuing challenge is how to bring the ratio to more sustainable levels through an appropriate fiscal policy. And the debt portfolio remains mostly vulnerable to the various shocks associated with revenue, exports, currency depreciation, interest rate hikes and weak growth performance. The rate of GDP growth does not seem to impact proportionately on the revenue accruing to the government, hence making the debt portfolio to be highly sensitive to revenue shocks.

It is important to also watch exchange rate risk which is highly related to external debt. A real depreciation of the currency leads to an increase in the foreign debt/GDP ratio (as it increases the real value of foreign currency denominated liabilities of a country) and worsen the debt sustainability of the country. With the New Debt management strategy, there is the likelihood of an increase in potential foreign exchange risk. This can arise from the potential rise in external debt irrespective of the terms and conditions of the debt instruments. Then, should the naira depreciate in the foreign exchange market, more resources would be required to refinance or service the debt.

The 2018 Debt Sustainability Exercise of the Debt Management Office indicated that the country has a moderate risk of external debt distress and the ratio of external debt-service-to-revenue may breach its threshold by 2023. The situation could, however, be worse against the backdrop of more loans and the following threats: volatile oil prices, especially oil price declines, resulting in negative terms of trade shock; oil quantity shocks which remain a potential source of risk arising from militancy activities in the Niger Delta region coupled with the activities of oil pipeline vandals and crude oil thieves; shocks to non-oil revenue, resulting in the situation whereby the primary balance is weakening, giving rise to more domestic debt accumulation to finance growing fiscal deficits; real interest rate shock and refinancing risk along with exchange rate risk mentioned earlier.

Overall, the government needs to exercise caution in contracting future external borrowing. It should not be misled by the relatively low debt/GDP ratios. The country does not have predictable and sustainable domestic revenue and foreign exchange source unlike the countries such as the United States of America, United Kingdom and Canada and others, often quoted as having higher debt/ GDP ratios than Nigeria.

The difference is that these countries have high productivity, robust export bases, generate large amounts of domestic revenue (high tax revenue/GDP ratios) and foreign exchange earnings. Consequently, their debt service/revenue ratios are very low in contrast to Nigeria’s.

Thus, they are really not on the same pedestal as Nigeria. In the present circumstance of the country, it will not be helpful to argue that the government should abandon the borrowing plan. But it is desirable to scale down the loan amount significantly to focus on key projects that can generate revenue and/or foreign exchange to service the loans or reduce foreign exchange requirements for importation. Such projects include major roads and bridges on which tolls can be charged, railway lines, oil refineries, especially targeted at export.

It is costly for a low productivity economy to deploy externally borrowed funds to sectors indiscriminately. Importantly, the government should stick to its plan to borrow from multilateral and bilateral sources as their loans tend to be concessional and long-tenored and hence less burdensome.

Finally, the desire to rebalance the debt portfolio in favour of more external finance needs to be taken cautiously in view of the foreign exchange requirements for external debt servicing. While a Central Bank can print the local currency used for domestic debt servicing, it cannot issue foreign currencies. Even then, the former can be done only to a limit.

*Obadan is a Professor of Economics and Chairman, Goldmark Education Academy, Benin City. He was formerly Director-General, National Centre for Economic Management and Administration , Ibadan, Nigeria. Tel. 08023250853.

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