The debt peonage is finally here

In our editorial of July 25, 2018, we warned of an impending debt peonage if the large scale of borrowings, at usually high interest rates, were not curbed by the government. In a poor attempt to defend the borrowings of the government, The Debt Management Office (DMO) wrote a rejoinder to our editorial, which we published on August 2, 2018, denying any debt crises and assuring the reading public that regardless of Nigeria’s high debt to service ratio, Nigeria’s borrowing is sustainable and that the “government has also embarked on several revenue boosting initiatives with a view to increasing the size of the revenue available to finance the budget and reduce the debt service to revenue ratio.” For added measure, when we advised the government to seek loans from multilateral agencies with very low interest rates instead of approaching shylock investors and borrowers, the DMO accused us of a poor understanding of the lending policies of multilateral agencies and that Nigeria could not approach these agencies because she has no balance of payment crisis.

The DMO puts Nigeria’s total (federal, state and FCT) debt stock, as at June 30, 2018, at N22.38 trillion (or $73.2 billion) representing 19 percent of GDP. This comprises external debt of about N6.75 trillion (or USD22.08 billion) and domestic debt of about N15.629 (or USD51.12 billion). Based on the debt to GPD ratio, the Director-General of the DMO, Pat Oniha, has not missed an opportunity to remind Nigerians that “Nigeria’s borrowing remains sustainable in the short, medium to long term levels, guided by the DMO objective of prudence” and has even gone ahead to review the self-imposed country specific debt limit from 19.39 percent to 25 percent in the medium-term of 2018-2020 thus providing scope for more government borrowing.

But the federal government and the DMO have continued to rely on the low debt to GDP ratio to lull the country into a feeling of complacency that all is well whereas they have disgracefully led the country into another embarrassing debt trap. Data from the Office of the Accountant General of the Federation and the Budget Office for the period January to June 2017 indicate that the total revenue accruable to the federal government was N1.3 trillion while the debt service for the first half of the year was N927.74 billion. Therefore, debt service to revenue ratio between January and June 2017 works out at about 70 percent – a figure quite high and unsustainable by global standards.

Of course the International Monetary Fund (IMF) in its most recent article IV Consultation report raised a red flag regarding the debt level which was “creating some form of vulnerabilities.” Even the result of the 2017 Debt Sustainability Analysis exercise by the DMO admitted that ‘’the ratios of external debt service-to-exports and external debt-service-to-revenue also deteriorated throughout the projection period thus, indicating that Nigeria’s total debt portfolio is highly susceptible to revenue shocks’’. So, whereas the DMO want Nigerians to believe government revenues will rise rapidly to lower the revenue to debt service ratio, in reality, government revenues have consistently been declining to this day with all revenue targets been missed by wide margins.

Yet the government has continued to borrow. The federal government is currently seeking a fresh $6 billion from the China Exim Bank for the construction of the Ibadan-Kano rail line. This is excluding around $5 billion which President Buhari said Nigeria has borrowed from China in the last three years to fund multiple infrastructure projects around the country. This could send Nigeria’s debt stock to China alone north of $11 billion.

The results of unregulated borrowings from China are beginning to show. Recently, the United States Senate expressed concern over multiple bailout requests to the International Monetary Fund (IMF) from countries heavily indebted to China. In a letter dated August 3 to US Treasury Secretary, Steve Mnuchin and US Secretary of State, Mike Pompeo, the US Senate stated that there is growing concerns over countries seeking IMF bailout funds after accepting China’s predatory infrastructure financing loans.

In 2016, IMF agreed to a $1.5 billion bailout fund for Sri Lanka due to unsustainable debts to China. Pakistan is also looking to pursue a bailout request from IMF to fund the country’s current account deficit and external debts owed to China. In Djibouti, China has lent the nation around $1.4 billion in infrastructure spending, the equivalent of 75 percent of Djibouti’s GDP.

A default will see Djibouti lose its national port to China in similar fashion like Sri Lanka after they were forced to give up their national port in a 99 year lease to China after the country defaulted on its debt. China strategically loans hefty sums to nations in hope that when the country defaults, China will be able to seize a national asset to compensate for the default.

Alarm bells ought to start ringing across Nigeria. With the government’s inability to increase its revenues, any decline in the price of oil will automatically throw Nigeria into a huge debt crisis. We hope Nigeria will not be required to cede its strategic national assets to China in the near future over its inability to meet its debt obligations.