17 May 2019

Nigeria: Debit Financing Can Address Nigeria's Infrastructure Deficit If... - Former DMO DG

Nigeria's infrastructure deficit can be addressed with debt financing, Dr. Abraham Nwankwo, a former Director General of the Debt Management Office (DMO) has said.

Dr Nwankwo, however, said the conclusion that public debt should be used to finance Nigeria's massive infrastructure needs is a paradox because of the existing precarious public debt profile.

The former DMO DG, who was the Guest Speaker at the 3rd Just Friends Club of Nigeria(JFCN) Annual Lecture which held in Abuja, yesterday, contended that the resolution of that paradox lies in a creative unbundling of the concept of debt sustainability.

In the context of financing infrastructure for the structural transformation of the economy, he explained that distinction should be made between conventional debt sustainability, which is essentially static, and what one would identify as structural debt sustainability, which is based on a forward-looking view of the economy.

He noted that assessment of debt sustainability in the latter case should focus on whether and how, the additional debt would be effectively applied to the development of infrastructure, to pull the economy out of backwardness.

He said: "The secret is that it is feasible to articulate a bold plan for the transformation of the economy, the Transformation Plan, financed with new debt towards one that is more diversified, more competitive, more export-capable and less vulnerable to external shocks. Specifically, the new debt will generate adequate output and cash-flow to cover its servicing and amortization and create surplus, while avoiding, by design, foreign exchange risk. The net impact of the new debt on debt sustainability, therefore, is that by creating value added, it even helps to reduce the pre-programme debt burden, rather than exacerbate it."

Nwankwo, who spoke on "Realism and Paradox in Financing Nigeria's Huge Infrastructure Needs", argued that such plan is a condition-precedent to effective debt financing of infrastructure.

"A robust macroeconomic model with detailed financial programming is perhaps the most important component of the plan documents; it will elicit the trajectory of transformation, breakthrough and self-sustaining growth that would result from the capital injection in big infrastructure development. It will demonstrate how exchange rate risk will be neutralized," he said.

He explained that the design of infrastructure development will mainstream the real sector and its objectives - diversification, encouragement of small and medium enterprises, export drive, etc.

According to him, it will specify the major channels or sources of stimulus for the economy derivable from a plausible transformation plan that supports massive debt-financed infrastructure investment.

The former DMO boss explained that in spite of the country's problematic debt profile, a plan-based, project-tied, output-driven, and commercially-modelled and private-sector-managed debt programme remains a "robust option (arguably the most robust option) for financing Nigeria's infrastructure development.

"It is a solution that can be intelligently structured to produce a transformed and self-sustaining economy without worsening debt sustainability," he added.

According to him, a major issue which has to be addressed while using debt financing for infrastructure is the impact of exchange rate risk since substantial portion of the debt is obligated in foreign currency.

Nwankwo also pointed out that infrastructure development investment must be undertaken, not in the hope of, but in conjunction with, real sector development; hence, the imperative of planning and executing it closely with the private sector. "

Nigeria

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