“I, however, place the economy among the first and most important of virtues, and public debt as the greatest of the dangers to be feared” Thomas Jefferson
I have been struggling to come to terms with the request of the presidency to borrow $30 billion, to no avail. I have tried to compute the numbers from available statistics with limited luck. I then decided to wait for clarifications or better still, a correction of the error by the authors, but still, no dice. I am sure I may be missing something somewhere.
Let me start by clarifying my position on borrowing, lest I be misunderstood. Those who have followed my views about the recession will agree that my preferred approach to dealing with the problem is stimulation of the economy. This is the approach that supports increased government expenditure, lowering of taxes and increasing consumer spending as a way of improving production and creating jobs. Some people refer to it as “spending our way out of recession”.
For stimulation to happen, there must be external funding. One of the most important sources is borrowing. Borrowing could be domestic or foreign. So in principle, I am not against borrowing in a period of recession. However, a lot of issues must be addressed before we can safely talk of borrowing. According to the Debt Management Office (DMO), Nigeria has external borrowing of $11.26 billion as at the end of June 2016. If you add that to the foreign debt stock of the 36 states of $12.71 billion, you end up with a total foreign dollar debt stock of circa $24 billion. Meanwhile, there is also some domestic dollar-denominated debt component of $48.74 billion outstanding against the federal government, bringing the total dollar debt to about $62 billion.
Details available on the current request indicate that the loan is to be broken down into projects and programmes loan, $11.274 billion; Special National Infrastructure Projects, $10.68 billion; Eurobonds, $4.5 billion; and federal government Budget Support, $3.5 billion.
Specifically, 61.2% of the proposed loan or $18.34 billion would go towards infrastructure projects comprising the Mambila hydro-electric power plant – $4.8 billion; railway modernisation coastal project (Calabar-Port Harcourt-Onne Deep Seaport segment) – $3.5 billion; Abuja mass rail transit project – $1.6 billion; Lagos-Kano railway modernisation project (Lagos-Ibadan segment double track) – $1.3 billion; Lagos-Kano railway modernisation project (Kano-Kaduna segment double track) – $1.1 billion; and others – $6 billion.
There is no doubt that we require to spend heavily to solve the problem of infrastructural decay in the country. A lot of money needs to be spent on power if we have to jump start production and ensure energy sufficiency for the take-off of an industrial and technologically-driven economy. We should have done this a long time. But since it has not been done, the only option we have is to do so now as no amount of whining and bellyaching will cure it. The same is true of our roads rails, health care delivery and education. According to the IMF, Nigeria needs to spend no less than $140 billion in the next decade to bridge the infrastructure gap in the country. That means that beyond the $30 billion, we will still need to source another $100 billion. So, without bringing the recession discussion into the equation, there is little doubt that we require a lot of money to take this economy out of the woods. However, most people have a lot of concerns on the recent move by the federal government no matter how desirable it may appear. I shall discuss them under the following headings:
PHILOSOPHY AND STRATEGY
A lot of people will agree that the managers of the economy are yet to come up with an articulate and coordinated philosophy for managing this economy that is challenged by both recession and inflation. A clear strategy will define the steps government would take and point out how it intends to attain its defined goals, the time frame and what happens thereafter. A blue print will also help in measurement and evaluation. Other than the Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) of the government which is at best very hazy, I am yet to see a clear planning document under whose framework, this borrowing is supposed to come. Specifically, the 2016 budget provided for a deficit of N2.2 trillion out of which N1.84 trillion is supposed to be borrowed. The budget makes provision for N984 billion to be raised from the domestic market while the balance of N900 billion was to be borrowed from the international market. The budget was based on the exchange rate assumption of N197 to the dollar. This means that the external loan for 2016 would be about $4.56 billion. Given that the MTEF/FSP (2017-2019) projects budget deficits of N2.7 trillion, N2.5 trillion, and N1.7 trillion for 2017, 2018 and 2019 respectively, with average exchange rate of N290/$, I have taken the liberty to work backwards to determine projected foreign borrowing for the years in question. Extrapolating from the 2016 numbers, it would be safe to assume that 84% of the deficits would be funded by debt out of which 50% would be foreign. Projected foreign borrowing would be $3.9 billion for 2017, $3.6 billion for 2018 and $2.46 billion for 2019. When you sum up the figures for the four years, the total foreign borrowing based on government’s own numbers should not be more than $14.52 billion. If one wanted to be more realistic in applying the current official exchange rate of N305 to the dollar to the foreign borrowing of N900 billion for this year, then the total figure will reduce by $1.61 billion to $12.91 billion. Given that 2019 is the terminal date of this administration, it would also be safe to back out the figures for 2019. The total loan this administration can take would therefore be in the region of $10.5 billion. In the light of all these analyses, the government needs to explain how it came by the humongous $29.96 billion foreign borrowing over a period of two or three years.
SOURCES AND COST OF BORROWING
There also needs to be some clarity on where the loans are coming from. Government had indicated that five multilateral institutions namely, the World Bank, African Development Bank (AfDB), Japan International Co-operation Agency (JICA), Islamic Development Bank and China Exim Bank, are expected to provide most of the loan. Also, some $4.5 billion is to be sourced from the issuance of Eurobond. This is where the danger lies. Multilateral and bilateral loans are always cheaper than commercial loans. Even the fiscal responsibility act requires that governments should focus on concessional loans, from multilateral sources rather than the more expensive commercial sources like the Eurobond. In my previous life, I had led a bank to issue a five-year Eurobond whose process was not only cumbersome but pricing was very steep. Given our situation, I can say without fear of contradiction that we cannot access this market at any rate lower than double digits. Dr. Abraham Nwankwo of the DMO had talked of an average rate of 1.5%pa, but I am certain he was referring to concessional rates from multilateral agencies. Besides, rates in this market are normally floating and indexed to the London Interbank offer rate (LIBOR) just like the $1.5 billion Eurobond component of our existing outstanding debt stock whose yield is around 7% at the moment. A fresh issue would definitely be much more expensive. I will also be surprised if the multilateral organisations that have indicated interest in lending to us would not accompany the loan with “conditionalities” some of them may hurt our attempt at economic recovery.
USES OF THE BORROWING
While we are not clear about how this loan would be disbursed, we are compelled to point out that in a recession, any expenditure that happens outside the local economy does not stimulate the economy. The funds would end up stimulating the economy where the bulk of the money is spent. So if we are relying on a foreign country to build the infrastructure for which we are borrowing, the multiplier and the stimulus effects would not be felt in Nigeria but in that foreign country. Of particular concern is the outcry by some sections of the country that they were excluded from the proposed projects which should not be contemplated as the debt will be paid by all of us.
FOREIGN EXCHANGE MANAGEMENT POLICY
Because this loan is denominated in foreign currency, we need to think through how it would be affected by the present foreign exchange policy. We still run a managed foreign exchange policy based on allocation. The exchange rate is fixed by the CBN at levels below market. The difference between the CBN rate and the real market rate is in excess of N150 to the dollar. That is why people now pay premium to get allocation because CBN is unable to meet all requests at the subsidised rates. Assuming we are able to borrow the money, at what rate would it be exchanged? This is necessary because while we can afford to sell our oil money at subsidised rates, I don’t know that we will be willing to sell borrowed funds that way. To bring it further home, if we sold the entire funds at current CBN rate, we would be losing over N4.3 trillion with that singular action. The other issue is that this money would have to be paid back someday. At what rate is it going to be paid back? Assuming we exchanged at the current rate, we must also be able to exchange our naira to dollar as we must pay back dollars with interest. Except if we are sure that we will continue to generate enough foreign exchange for the repayment, we may be walking into a transaction fraught with unpredictable exchange rate risk which may ruin the economics of the loan. Investing in infrastructure is the best thing we can do for this country at this time. But we also know that most investments in infrastructure are social in nature and do not yield that much money to pay back loans with interest. Even where they do, they will yield local currency and not dollars.
This refers to the ability of the country to service the loan without impacting negatively on other important activities. In its current Debt Sustainability Analysis (DSA), the DMO had this to say: “The results of the 2016 DSA showed that for the first time since the exit from the Paris and London clubs of creditors in 2005 and 2006, Nigeria’s debt position experienced some deterioration and slipped from a Low-risk of debt distress to a medium-risk of debt distress. Although the level of debt stock is still appreciably low relative to the country’s aggregate output (GDP), the debt portfolio remains mostly vulnerable to the various shocks associated with revenue, exports and substantial currency devaluation. This meant that, as in the previous DSA, while the GDP-related indicators appear normal, as they remained below their respective thresholds, the revenue-based indicators were mostly sensitive to the revenue shocks”. Note that this analysis predates the current request of $30 billion. To buttress the point made by the DMO, it is useful to highlight that in the current budget, about 27% of government expenditure is earmarked for debt service. We do not have capacity to service the new borrowing. We need to diversify our foreign exchange earning capacity from the challenged oil to boost our foreign exchange revenue base.
In a democracy, there is need to communicate effectively and get the buy in and opinion of the populace before major decisions are made. It is easy to dismiss this comment by arguing that most people do not have the required knowledge to understand a complex issue like debt. However, we must know that opinion is moulded by those who know. If those who know have not been convinced, how would anyone expect that the rest of the people will buy it? I strongly believe that if an attempt had been made to socialise this with the people, someone would have realised that something is simply not adding up and probably returned it to sender.
All told, I believe that the government still needs to borrow to stimulate the economy. How much the government needs to borrow, where it needs to borrow from, for how long and the cost of the borrowing are details that require more serious work than has been done so far. I will recommend that we go back to the drawing board and diligently craft an integrated economic framework that will articulate all that is required to move this nation out the present economic doldrums. It is a lot of work. Very serious work, but it has to be done in a comprehensive manner and the earlier, the better.