$30bn External Borrowing as Necessary Pill for Economic Revival

Obinna Chima

President Muhammadu Buhari last week wrote the National Assembly seeking approval to borrow $29.96 billion under the External Borrowing (Rolling) Plan to address the infrastructure deficit in the health, education, water resources and other sectors.

The president’s letter, which was read at plenary by the Speaker of the House of Representatives, Yakubu Dogara, indicated that the $29.96 billion would be for proposed project and programme loans of $11.274 billion, $10.686 billion for special national infrastructure projects, Eurobonds of $4.5 billion, and federal government budget support of $3.5 billion.

The president said the projects and programmes under the external borrowing plan were selected based on positive technical economic evaluations, as well as the contributions they would make to the socio-economic development of the country, including employment generation, poverty reduction and protection of the nation’s vulnerable population.

Some of the funds from the external borrowing plan would be deployed to emergency projects in the North-east, particularly following the recent outbreak of polio after the de-listing of Nigeria from polio endemic countries.

A breakdown of how the proposed foreign loan would be disbursed showed that 61.2 per cent has been earmarked for bankable infrastructure projects while social programmes in health and education, the federal government’s budget support facility, agriculture and the Eurobond issue account for the balance.

Also of the $29.96 billion to be borrowed, the federal government will take up 86.3 per cent of total borrowings or $25.8 billion, while the 36 states of the federation and the Federal Capital Territory (FCT) will account for the balance of $4.1 billion.

Nevertheless, divergent views have continued to trail the proposal by the federal government. While some Nigerians believe the foreign loans would help lift the country out of its present economic quagmire, some have said they would only jeopardise the future of young Nigerians and could impose a huge debt burden on the country reminiscent of the 1990s and early 2000s.

However, officials of the Ministry of Finance have defended the borrowing plan, stating that under the external borrowing strategy, 75 per cent of the funds to be borrowed over the three years are at concessional terms with average interest rates of 1.5 per cent and tenures as long as 20 years. Only $4.5 billion comprise commercial fixed rates Eurobonds. Also, the International Monetary Fund (IMF) recently advised Nigeria to borrow to get out of recession.

One official, who preferred not to be named, explained that with the current low revenues and oil price outlook mean there are limited options to finance the capital expenditure needed to stimulate the economy and get out of recession. Fixed recurrent outgoings (despite the efficiency and payroll savings are still N200 billion per month) while debt service consumes N120 billion monthly.

In addition, funds from the Federation Account Allocation Committee (FAAC) receipts to the federal government average N200 billion and it is even projected to be N300 billion, even at full production (due to cash call arrears that were inherited), he added.

“Currently much of the global markets have negative interest rates and there is appetite for Nigeria’s paper thus the federal government should be able to get a good deal for the nation.

“Thus, the only option is for the federal government to borrow in the short-term to return to growth and then drive additional revenues to fund the additional debt burden.

“Indeed, the infrastructure investment is expected to catalyse private capital into infrastructure and drive productivity and economic growth. But in order to achieve this objective, the federal government must ensure that the borrowed funds are channelled into the fiscal levers that will drive growth,” he said.

This, he added, is to be attained by ensuring that quality, revenue earning projects, such railway, power, among others are funded. Project execution is also critical, as failure to develop proposed projects would create a crisis.

This can be attained by tying the borrowings to the projects and monitoring. The fiscal discipline to ensure the borrowed funds do not end up paying salaries as in the past is critical, the official explained.

“The efforts of the Efficiency Unit and Presidential Initiative on Continuous Audit would be critical here in reducing overheads and salaries, respectively,” he noted.

Also, the Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, who is a former vice-chancellor of the University of Uyo, has supported the plan to borrow externally.

“I have always said external borrowing is what we need. Domestic borrowing is short-term and not flexible. External borrowing is long-term and at concessionary rate(s). If you look at what the International Monetary Fund (IMF) is doing – zero interest rate.

“Our revenue is declining because of the volatility in the oil market and our production has dropped significantly because of the attacks on oil installations. So we can’t avoid external loans if we are to revive the economy. We just can’t do without it,” Ekpo explained in a phone interview yesterday.

However, the WAIFEM boss said if the federal government succeeds, it must ensure that it puts in place robust monitoring and evaluation mechanisms “so that the money doesn’t go into wrong hands and end up not utilised for what it was meant for”.

“You can’t raise taxes now because we are in a recession, you cannot sell assets now because they would be sold as peanuts, so external borrowing is the way to go,” Ekpo added.

The proposed borrowing plan is completely different from the Paris Club debt. Indeed, one of the reasons the Paris and London Club debts became unsustainable was that in the 1970s and 1980s, Nigeria booked floating-rate loans when LIBOR was about four per cent, but when it was eventually re-priced above 10 per cent, the country could no longer service its debt.

Also, prior to 2000, the debt management functions were performed in various ministries, departments and agencies – the Ministry of Finance, Central Bank of Nigeria (CBN), National Planning Commission, etc.

There was then no focus of responsibility. But today, the Debt Management Office (DMO) is now responsible for managing the country’s debt – both domestic and external under the guidance of a single minister, the Minister of Finance.

There have also been, in the last decade, new laws enacted to focus on public debt management in order to avoid the mistakes of the past. These laws include the DMO Act, 2003; Fiscal Responsibility Act, 2007; and the Public Procurement Act, 2007.

Under the new professionalised institutional arrangement, there are relevant technical analyses for advising on, monitoring and managing public debt. These include the annual Debt Sustainability Analysis (DSA) and Medium-Term Debt Management Strategy (MTDS) prepared by the DMO under the supervision of the Minister of Finance, in collaboration with other relevant ministries, departments and agencies (MDAs) – CBN, Ministry of Budget and National Planning, NBS, OAGF, with technical support from WAIFEM.

Accordingly, a nation that is highly dependent on oil exports but wasted high oil revenues of the past six years and did not spend the funds on infrastructure, has no alternative strategy other than to borrow to meet its wide infrastructure deficit. The nation cannot afford to wait for oil prices to rise again in order to fix infrastructure because Nigeria is already in a recession and so doing nothing is not an option unless the nation is prepared to endure a prolonged recession.