As Nigeria marches into another debt peonage?

Three months ago the International Monetary Fund, IMF, in its presentation of the Global Financial Stability Report warned that Nigeria and other emerging economies’ debt level was creating some form of vulnerabilities and if not checked, could undermine financial stability. Although Nigeria always retorts that its debt to GDP ratio is low in comparison to even developed countries, the real danger is in the area of debt sustainability and revenue to debt service ratio.

The Debt Management Office put Nigeria’s total national debt stock at N22.73 trillion ($66.70 billion), of which the external dollar denominated component is in excess of US$17 billion. With a GDP of almost $500 billion, Nigeria’s debt remains with 13 percent of GDP. That is why finance minister Kemi Adeosun, always respond to these warnings that Nigeria’s debt are sustainable and under control.

The real problem however is in the area of debt service to revenue. The Bretton Woods institution – and some recent calculations, put Nigeria’s debt servicing at 66 percent of revenue – surely anyone who spends 66 percent of his/her income to service debt monthly has some serious issues and may sooner or later run into difficulties. It is clear Nigeria has a problem of debt sustainability. But the government will never acknowledge it.

Reality is, the government is caught between declining revenues and rising expenditures all at once. But there are more sustainable solutions than plunging the nation into unsustainable debt. Nigeria’s tax to GDP ratio is one of the lowest in the world, meaning tax-collection rate is very poor and can be grown exponentially. Additionally, the government could sell public assets, intensify its public private partnership drive to finance capital projects and infrastructure and or outright concessioning of commercially viable government assets. But the government isn’t considering these avenues and is only looking towards borrowing.

There’s also the problem of external borrowings at ridiculous interest rates that is hurting the country. The government has explained its penchant for external borrowing on the need to balance its loan portfolio and reduce the pressure on domestic borrowing.

But why is the government borrowing so much of late? Government argues its heavy borrowing pattern is necessitated by the need to invest in infrastructure.

But even the sources of the debts are a source of concern. The government could have easily approached the International Monetary Fund for cheap loans which come in at less than one percent interest rate instead of the significantly more expensive commercial loans which it is building up. Obviously, the government is avoiding the IMF because it is not a politically popular decision. Nigerians are not particularly in love with the IMF because of the conditionalities that the fund will force the country to implement in return for its cheap money. So the fear of the IMF has pushed the Nigerian government into the arms of shylock lenders who will demand for their pound of flesh if Nigeria at any point in time is unable to repay the loans.

Sadly, unlike the IMF, investors giving Nigeria money through the Eurobond and other such means will not border to see whether the country really spends it on infrastructure as promised. All they are interested in is that the country does not default in its payment schedule. This is unlike the IMF that will put in place a monitoring programme and ensure that the funds are used as stated and future funds released only when the stated spending plan and in many cases cost plans are met. While money raised from bonds or commercially can be spent in a way and manner that suits the government, an IMF or a World Bank loan cannot be spent in a similar manner.

Sadly, Nigeria does not have a track record of judicious utilisation of loans and an IMF loan, accountability-wise, may have been the best for the country.

Currently, no Nigerian can say exactly what the borrowed funds are being spent on. For all practical purposes, it may be used to service recurrent expenditure. That is why we would have preferred a loan whose spending will be effectively monitored and supervised.

Now that Nigeria has taken the decision to procure expensive loans just to escape supervision, we expect the National Assembly to strengthen its oversight and supervising capacity to ensure that the loans procured are used strictly for infrastructure projects as stated in the request sent to them.