Nigeria’s expensive debts

This week the National Assembly approved president Muhammadu Buhari’s request to raise additional $500 million Eurobond from the international capital market to fund the 2016 budget deficit. This is coming on the heels of the US$7.8 billion in subscription received when the country raised its US$1 billion Eurobond. The huge demand for the Nigerian Eurobond indicated that investors had a huge appetite for the country’s debts. From the level of subscription, the country could have easily raised US$5 billion.

Perhaps this is the motivation for seeking to raise an additional US$500 million. This will take the country’s borrowing in the first quarter of this year to US$1.5 billion.

With the latest issue, Nigeria’s cumulative bond issues to date stands at US$3 billion with maturities ranging from 2018 to 2032. The federal government has also announced plans to issue US$63 million in green bonds and possibly another US$300 million in Diaspora bonds all within this year. All these issues combined will take Nigeria’s cumulative commercial loan exposure US$4 billion by the end of this year. With loans attracting an average interest rate of 7 percent, they cannot be said to be really cheap internationally even though when compared to the average of 15 percent paid on domestic debts, they look cheap without taking into consideration the foreign currency risk that the country is exposed to in the case of a further weakening of the naira.

The argument for external debt has been that the country’s external loan profile is low. Figures from the debt management office (DMO) shows that as at June 30, 2016, total external debts stood at US$11.26 billion when compared to total domestic debts of US$37.5 billion at the federal level. States owed another US$12.7 billion in debts, most of which are domestic debts, bringing Nigeria’s total debt to US$61 billion or N16.3 trillion.

So the current trend to borrow externally, according to the government, is aimed at balancing the loan portfolio and reducing the pressure on domestic borrowing. But the government is also arguing that it is not borrowing for borrowing sake. It tells critics of its heavy borrowing pattern that it is borrowing to invest in infrastructure even though there is no indication that the loans have been project-tied.

Critics have rightly noted that the government could have easily approached the International Monetary Fund for its 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 will not border to ensure that the country really spends it in 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 the Eurobond can be spent in a way and manner that suits the government, an IMF 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.