14 August 2017

Nigeria: NASS - Stop Executive Madness to Refinance T/Bills With $3bn Debt

The Federal Executive Councils' approval to borrow $3bn from external sources, to refinance an estimated N915bn 'Naira denominated' Treasury bills, was announced to the media by Finance Minister, Mrs. Kemi Adeosun, last Wednesday.

Hereafter, Adeosun's explanations on the need and utility value of this fresh foreign debt will be followed by this Column's comments on the economic implications. Kindly read on.

FINANCE MINISTER: "$3bn worth of Treasury bills will be refinanced into dollars. So, as the Naira T/bills mature, we will be issuing dollar instruments. We are not increasing our borrowing; we are simply restructuring. Instead of borrowing naira, we are borrowing dollars."

COMMENT: In practice, T/bills are government debts which mature for interest and repayment within 3-12 months. Instructively, the funds so borrowed are simply sterilized or deliberately warehoused from any tangible application, as the sole purpose of the loan is to remove perceived excess Naira supply, that could spur a destabilising inflationary spiral. Incidentally, the higher the threat of systemic excess money supply, the higher will be the inflationary threat and interest payment on government borrowings to discourage banks from lending liberally to customers to propel increasing consumer demand that cannot be readily satisfied from domestic production.

Alarmingly, Banks now receive upto 18% interest annually to lend their excess Naira stock to government, who will in turn, sterilize the borrowed funds from use, to restrain inflation.

Sadly, since these funds are not invested in any profit making business, on loan maturity government simply prints more Naira to pay interest. Thus, even if Naira further depreciates before such loans, ultimately mature, government's capacity to repay is never in doubt.

However, servicing interest on Naira T/bills with borrowed dollars is another kettle of fish; clearly, since the funds are not applied to productive investment, there can be no returns. Invariably, therefore, annual interest and eventual repayment of the $3bn T/bill loan, will gulp government forex revenue and therefore severely sustain the acute investment deficit in industrial and social infrastructure.

MINISTER: "The advantages are two: one is cost reduction. The average rate at which we borrow internationally, is at 7%; whereas we are paying between 13% and 18.5% on our Treasury bills. Thus, we are almost halving the cost of borrowing and this is to try and reduce pressure on debt service."

COMMENTS: Incidentally in July this year, the Adeosun warned that we can no longer increase our debt burden as Nigeria's debt service/revenue ratio was already, uncomfortably, beyond 50% of aggregate revenue and she therefore suggested that the drive for other internal revenue sources will be intensified. Consequently, the apparent celebration of a fresh $3bn foreign loan to refinance a zero utility debt, is arguably a gross disservice to the economy.

Nonetheless, the acclaimed superior 7% interest rate is ironically, actually applicable to 'mismanaged' economies such as ours; better managed economies pay much less on their sovereign, risk free borrowings.

Nonetheless, a truthful, explanation should be revealing on why government inappropriately pays such high interest rates, in a domestic market, where government has absolute control over Naira supply.

MINISTER: "The second thing is that we will be spreading the maturity profile of the debt. All our T/bills mature within 364 days maximum. We will be taking that borrowing ($3bn) out for up to three years, in the expectation that, as the economy recovers and grows, we will be in a better position to repay, instead of just rolling over the debt, just as we are doing now."

"So, by reducing government's borrowing by $3bn, we will be creating more room for banks to lend to the private sector and hopefully that will also create some downward pressure on interest rate, which we all agree needs to come down."

COMMENT: Clearly, Nigeria's economy will continue to totter, if inflation and cost of funds remain in high double digit rates. Besides, the unceasing presence of surplus Naira liquidity will continue to drive inflation, cost of funds and weaker Naira rates. Consequently, unless the perennial burden of excess Naira supply is minimized, we may actually end up borrowing more, with disturbingly high interest rates to service all debts; ultimately, these debts will, again be rolled over and we may require well over 60% of aggregate revenue to service debts, and this, undoubtedly will have serious consequences for infrastructural development and social welfare.

Furthermore, with CBN's projection to mop up about N7tn excess money supply in 2017, it is likely that 'by reducing government borrowing by just N915bn ($3bn), the banks will only have marginally "more room to lend to the private sector; notwithstanding, interest rate will remain high so long as excess Naira liquidity continues to fuel inflation.

MINISTER: "It ($3bn loan) actually increases our foreign reserves. If you look at our debt profile, 80% is in Naira and that is actually challenging the economy because government is borrowing heavily. There is no room for the private sector to get loans from the banks and there is no incentive for banks to lend to the private sector."

COMMENT: In practice, a predominantly domestic debt profile is a sign of good economic management, as the economy is well shielded from the destabilising influence of nimble footed international portfolio investors, who have no interest in leaving any productive footprint in any country.

Furthermore, the persistent flood of excess Naira liquidity that forces CBN to crowd out real sector with high interest rate mop ups, clearly suggests that there is actually no shortage of funds in the market.

The reality of course is that CBN's inability to effectively and efficiently manage money supply and tame inflation, is actually the primary cause of excess liquidity, double digit inflation, cost of funds and a weak Naira.

Invariably, if government continues to pay very high interest rates for its risk free sovereign loans, even a Nigerian bank, managed by angels, will also rationalise that, it is less risky to lend to government than to expect any serious business to survive and successfully repay loans with 20% and above interest rates.

FINANCE MINISTER: "It (loan process) will commence when the National Assembly resumes. We will need the resolution to be able to do this. As soon as that is done, we have already negotiated with the various lenders and they are ready to do this."

COMMENT: Instructively, we will pay about N630bn as service charges on this $3bn (N915bn) loan within three years; the huge service charge and full repayment will invariably increase simultaneously with further Naira depreciation beyond the present rate of N305=$1.

The National Assembly should resist this loan and arrest this present madness!

Save the Naira, Save Nigerians!!!

Nigeria

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