20 February 2012

Nigeria: 'Proposed Loan'll Not Endanger the Country's Debt Sustainability'

Photo: IRIN
Bridge overlooking Lagos central business district,Nigeria.

Despite criticism that had trailed the recent move by the federal government to borrow from international financial institutions to finance some oil and gas projects, financial market experts at Standard Bank Plc at the weekend maintained that the proposed debt, if approved, would not hurt Nigeria's external debt sustainability.

Emerging Markets Strategist, Standard Bank, London, Samir Gadio, in a note made available to THISDAY, welcomed the concessional term of the loan.

The federal government had on Wednesday, sought the approval of the National Assembly to borrow $7.9 billion for oil and gas projects from the World Bank, the Islamic Development Bank and Export-Import Bank of China. The presidency had indicated that the funds would be used to cover pipeline projects in the 2012-2014 External Borrowing Plan. Under the plan, government would borrow $2.64 billion annually.

Gadio explained: "The new loans would not endanger external debt sustainability assuming they are approved, especially because of the concessional form of the financing. The said, $7.9 billion represents more than the outstanding foreign debt stock, so the planned borrowing will probably be controversial in some circles.

"There has been some reluctance to borrow externally at the sovereign level after the deals reached with the Paris Club in 2005 and London Club in 2006, and such a qualitative shift, even from a low base, will only be justified if there are tangible projects in the pipeline whose implementation can be properly monitored and tracked."

Nigeria's external debt, according to the Debt Management Office (DMO) was at $5.7 billion or 2.6 per cent of Gross Domestic Product (GDP) by the end of 2011. The debt office had said that the debt structure was one of the lowest Africa.

However, Gadio argued that in reality, Nigeria did not even need to issue FGN bonds to fund its domestic requirements (primarily on the recurrent expenditure side so far), if fiscal savings were properly managed in an optimal scenario.

"The issue is that excess crude account (ECA) proceeds are constantly monetised and shared among the three tiers of government, with very limited accountability. What the authorities have done is to almost entirely monetise the ECA and borrow from the bond market at the same time.

"So yes, there is an opportunity cost (in terms of resources) for the government if it reduces FGN bond supply, but this is much less an opportunity cost for the country.

" It is possible that the DMO and finance ministry may not want to lock in elevated yields at the auctions, so they could seek to decrease the amount on offer on February 29, which would contain secondary market yields," the analyst said.

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