Lagos — Thompson Ayodele And Olusegun Sotola Caution Against Any Relapse By the Government to the Past Abuse of Foreign Loans As a Source of Corrupt Enrichment By the Ruling Elite...

President Goodluck Jonathan has appealed to the G8 member countries to grant 100 per cent debt cancellation for African countries. The call for total debt cancellation is more strident at a time when Nigeria, which had only recently freed itself from the debt trap, is getting more foreign loans and consequently increasing its debt profile again. What is not clear, however, is whether African leaders intentionally get foreign loans with no specific plans for repayment, but with sole aim of thereafter asking for cancellation no matter how long it takes to get that accomplished.

Recently, the Chairman House of Representatives Committee on Business and Rules, Ita Enang, said most of the foreign loans obtained by Nigeria had been hurriedly approved without taking pains to articulate the terms and conditions of such loans. He said a good chunk of the loans from the World Bank and other financial institutions had, rather than alleviating poverty, actually perpetuated it. With more than $1 billion loans authorized within the last one year, the disclosure that many loan documents are not carefully examined could have been waved off if the National Assembly members were conducting their personal business. But in the present circumstance, the future of millions of Nigerians is being put on the line over the lawmakers' inability to properly scrutinize loans' paperwork. This will, in the long run, jeopardize the nation's prospects for economic growth.

While experiences in Africa have shown that many countries that borrowed funds to finance development ended up being heavily indebted, lending money to inept or corrupt governments is not likely to help such countries develop.

Most of the countries that obtain loans to facilitate development are Ill-advised and reckless. Many countries get into debt repayment problems because a substantial part of the loans are diverted into secret accounts overseas, and are not spent on the official purposes the loans are intended for.

Despite the shortcomings associated with foreign loans, based on past experience, there are fears that Nigeria's loan portfolio might be on the rise and consequently return the country to the league of debtor nations. It is not accidental that the Minister of Finance Olusegun Aganga has warned of dire consequences of unbridled borrowing in the face of the current cash crunch.

The current fiscal deficit rose to an estimated deficit of 10 percent of GDP in 2009 from a surplus of 3.7 percent of GDP in 2008. Nigeria is gradually on the road to being a highly indebted country. In view of the mounting debt, what is more worrisome is the penchant for increased foreign loans. The external debt stands at $4.3billion. Earlier this year, the domestic debt was $21.3 billion. This amount excluded the verified $40 million owed local contractors and $200 million yet unverified.

The Director General of the Debt Management Office, Abraham Nwankwo, has argued that Nigeria's current debt to GDP ratio, put at 13.88 per cent, is one of the lowest in the world. But a mere comparison of debt figures with other countries does not present the whole picture. The main issue is the tangible progress achieved from the loans and the volume. In the past, debts were amassed without deriving any commensurate value.

It is therefore economic folly for officials to erroneously think Nigeria's problems are over with more and more loans, as they tend to see foreign loans as easy money. On the contrary, aside from the conditionalities attached to the loans, which often favour the interest of the creditors, such loans, in the end, usually retard growth and thus undermine the potential to use the resources for development purposes rather than for debt servicing. In this year's budget, a total of $3.3billion is expected to go into debt servicing alone.

Government functionaries' statements tend to indicate that Nigeria cannot develop without resorting to loans, whether domestic or foreign. While it is easier to obtain loans, the hard part relates to accumulations on the principal as well as interest that will later accrue. The effect is that it puts avoidable pressure on interest rate, drives up foreign exchange rate and rate of inflation, and frustrates long-term economic development.

The World Bank has said that no nation with an aggressive agenda like Nigeria can succeed without borrowing a lot. But the Bank needs to be reminded, also, that a country with poor debt management and where a lot of hard earned resources is going into debt servicing will find it hard to succeed.

This is a familiar route that was trodden in the 80s, resulting in economic turmoil and consequently triggering the introduction of the Structural Adjustment Programme. The bulk of the debts negotiated for cancellation in 2005 were obtained in the 80s. Unfortunately, a large percentage of the loans were expended on projects with doubtful value, most of which became moribund or abandoned. Experience thus tends to suggest that there is a tendency to mismanage loans in such a way that only the leaders, foreign lenders and the privileged few benefit from the transaction. This does not inspire confidence that any new loan will be well spent this time around.

With depleting oil revenue arising from fluctuations in oil prices, one can reasonably infer that the government may resort to excessive borrowing to finance its deficit. One danger this presents is the tendency for government to crowd out the private sector. Excessive borrowing from the domestic market will no doubt lead to a situation where enough credit will not be left for the private sector. This will stifle the growth of the private sector as well as further enlarge the public sector disproportionately.

The natural outcome is that it will increase the interest rate and make the few available credits expensive. To forestall this, our economic policy must be geared towards keeping the exchange rate flexible and market-driven in order to help spur diversification. It is equally important to curb the fiscal deficit and keep an eye on debt increases, especially the domestic debt.

At present, the recurrent spending constitutes a substantial part of the budget. Of the amount budgeted in this year's budget, almost 60 per cent is slated for recurrent expenditure at the expense of addressing infrastructure, which is actually needed to spur economic growth. On the contrary, there is the need to invest and upgrade infrastructure.

Without such investment, economic growth is a mirage. At the same time, there is the need to discontinue with budget practices that create conditions that make debt seem normal.

What is evident, over the years, is there has been an increase in the size of government without a commensurate rise in revenue. This ordinarily puts pressure on the government's finances. The only way to prevent this is to do away with big government. There is no economic justification for duplication of several appointments. For instance, one may ask what is the need for a minister of state in a ministry, in addition to the permanent secretary of that ministry?

Already unspent capital allocations have lately been the object of the EFCC's probe. It is not clear how a ministry or agency that cannot effectively execute projects provided for in the budget will be able to execute in a timely manner projects to be funded by loans. In fact what is usually the case is that most of the ministries that are unable to utilize the previous year's budget present an increase in budget estimates the following year. Government should not frivolously seek loans when in fact the nation's woes arise from unsustainable use of available resources.

Should loans be the option in the face of dwindling revenue, it will only succeed in achieving one thing: the coming generation will be saddled with a repayment burden.

Spending a substantial part of loans on recurrent expenditure is largely unsustainable. Past experience dictates caution. There is nothing on the ground to suggest that another round of loans will spur actual growth and development. Over the years, the nation's resources have been mismanaged and cornered by its elite. Instead of aggressively seeking loans, policymakers should be more concerned with how to address the present large fiscal deficit, the huge depletion of the Excess Crude Account and the rise in domestic and foreign debt. These all call for the adoption of a more realistic benchmark and the elimination of profligacy.

Ayodele and Sotola are with the Initiative for Public Policy Analysis, a public policy think-tank based in Lagos.