9 October 2017

Nigeria: Still On Nigeria's Debt Profile

opinion

Barely eleven years ago, Nigeria was compelled by pressure, from International creditors, particularly the London and Paris club, to 'voluntarily' part with almost $12.4bn allegedly owed, so that another $18bn debt could be written off, from the country's total external debt of about $30bn.

Notably, the debt write-off was, primarily, the product of pressure from civil society groups, such as the Jubilee Debt Campaign, committedly led by one, Trishia Rogers. Regrettably, while countries, like Ghana and Zambia with similar debt overhang got 100% debt relief, Nigeria, with a more formidable array of celebrated negotiators received 60% of the so called "debt forgiveness".

Notably, by 2005, the cost of refinancing and servicing $30bn, existing external debt, was generally considered as unsustainable. Thus, after 'debt exit' in 2006, Nigeria's debt profile became lighter, with barely $3bn as external debt, while domestic debt, excluding debts owed contractors was just over N1Tn.

However, the public's concern on increasing debt accumulation is clearly that, there is nothing to show, as positive product of the Nation's, earlier oppressive debt accretion, which precipated the controversial 2006 debt reprieve!

It would be expected therefore that, Government's fiscal plans after 2006, would be more circumspect and efficient with regards to debt, especially where foreign creditors are involved. Consequently, in order to effectively address such issues, the Debt Management Office, DMO, was created in year 2000 with a mandate to also deepen, the evidently, shallow, existing domestic market for government borrowings. Instructively, the National Bureau of Statistics' recent data on Nigeria's debt profile, which shows embarrassingly bloated, Federal and State government's debt, probably suggests, that the DMO has been very active in driving its mission to deepen the market for government debt.

The latest NBS data, however, disturbingly indicates that the Federal Government has already chalked up over $15billion in foreign debt and N14Tn (about $45billion) in domestic debt as at June 30th 2017, (compare this with below $3bn and N1Tn, respectively after debt exit in 2006).

According to NBS, the Federal Government presently accounts for 74% of the Nation's totalforeign debt, while all states, including FCT account for the remaining 26%. Similarly, the FGN accounts for 78.66% of the country's total domestic debt, while the balance is held by the 36 states and FCT.

Curiously, however, the NBS report failed to comment on the clearly important issue of sustainability of the related debt service charges, and arrangements made for a viable liquidation schedule for these loans. Nonetheless, the report, probably suggests that we have, once again, come full circle to where we were before the 2006 debt exit? The glaring reality gleaned from the latest NBS study, however, is that our debt profile is probably now in a worse situation than it was before morally driven, One World International activists, came to our rescue in 2006.

Furthermore, the NBS report also indicated that while the DMO had borrowed N7.5Tn (or 68.5% of total debts) from the domestic market on behalf of the federal government to fund FGN fiscal deficits, the CBN had in turn borrowed N3.2Tn or 29.64% of total domestic debt, by offering to pay juicy, interest rates on the Treasury bills it sells, to remove perceived excess money supply from the financial system and thereby breach the smoldering inflationary embers with its devastating consequences on mass welfare.

Regrettably, nonetheless, the social impact of the N7.5Tn borrowed from the domestic market to fund annual fiscal plans since 2006, still remains superficial as in the past. Sadly, the impact of the current over $15bn external debt, (from $3bn in 2006) and over $15bn reportedly expended on power infrastructure, has inexplicably, not also trickled down to the masses.

Indeed, after the heavy scars of debt exit in 2006, our national debt burden may have unexpectedly again, become another albatross. For example, Catherine Pattillo, IMF Chief of Fiscal Policy observed at a monetary briefing in Washington on 14th October, 2017 that two thirds of all Nigeria's tax revenue is presently applied to just servicing debt annually.

Furthermore, total domestic debt would invariably further expand, if the accumulated debt arrears, owed over many years by government to contractors, pensioners, Oil marketers etc are also factored.

It is, however, unlikely, that the debt level will recede in the foreseeable future; for example, the DMO is expected to borrow about N500bn fresh loans before Dec 31st 2017, to fund the apparent short falls in revenue projections in this year's budget. Furthermore, invariably conservative, revenue projections from crude oil, in the near future, may also compel increase in the deficit in budget 2018 and beyond; in such event, FGN debt burden would become, clearly unsustainable, as well over 50% of aggregate revenue would be required annually just for debt service alone, even when recurrent expenditure continues to gulp well over 60% of annual budgets.

Consequently, FGN's increasing debt accretion, which is consolidated to fund annual budget deficits, will also become additionally compounded by over N6Tn, which CBN will also be compelled to borrow with the usual oppressive interest rates, to reduce perceived excess money supply and the related inflationary threat.

The odious rape of the Treasury with such borrowings, which regrettably have no direct positive social impact, is generally benignly reported by the media as the fee CBN pays to "help the banks manage their surplus cash"; in practice however, it is very unusual for anyone to continuously incur an increasingly knowingly huge debt, in order to help another party manage their surplus cash efficiently!

The Finance Minister has severally, unexpectedly, expressed concern and surprise at the extremely high cost of loans sourced by government from the Domestic market; Kemi Adeosun, has therefore suggested that government would shift preference, to cheaper external loans which carry single digit interest rates, in place of rates nearer 20% for local debt.

However, we must be very cautious of the attraction of cheaper foreign loans; for example, a $1bn loan at 7% would require N150bn + 7% to service and repay when Naira exchanged for N150 = $1. Government would, however, require N300bn + 7% to service and repay the same loan when Naira exchange rate is N300=$1.

Clearly, so long as the persistent inexplicable surplus Naira liquidity challenge subsists, and CBN's forex auction system remains skewed against the Naira, it is not a matter of if, but when the Naira will tumble beyond N500 =$1; when this ultimately happens, government would need over N450bn + 7% to service and repay the same $1bn loan. Ultimately, the foreign creditors would return, once again, with another noose around our necks! Will the Nigerian Government ever learn?

SAVE THE NAIRA, SAVE NIGERIANS!

Nigeria

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