Why we must heed the IMF warning on the looming debt overhang
During last month the IMF issued a warning that Nigeria’s debt and that of other emerging economies has the potential to undermine financial stability. The IMF statement was made in the course of the presentation of the Global Financial Stability Report during the Washington spring meeting of the Bretton Woods institutions and was attributed to Tobias Adrian, Financial Counsellor and Director of the Fund’s Monetary and Capital Markets Department. As usual, our reflex response was to become defensive and protective of our turfs. Our finance minister Kemi Adeosun countered the IMF warning by insisting that our debt is sustainable and under control.
Nigeria’s total national debt stock currently stands at N22.73 trillion (about US$66.70 billion), of which the external dollar denominated component (FGN + States) is in excess of US$17 billion.
Well, these are staggering sums. Some people will say that the fact that most of our debt is in naira rather than dollars gives some level of comfort. Others would insist having an economy of nearly US$500 billion GDP should be able to accommodate our debt profile which remains within 13% of GDP, which is significantly lower than that of many of our comparators. My response to this is that, whether or not the debt is mostly in naira rather than dollars, the debt profile is generally becoming burdensome. According to recent calculations, government is spending some 66% of revenues on debt service payments. If you were an average worker who spends 66% of his or her salaries in loan payments every month, that would be a matter for grave concern. And yet, this analogy applies to our rising debt sustainability challenge.
For my part, I am vehemently opposed to incurring external dollar-denominated debts for projects that we can finance in local currency, even if, for now, foreign interest rates may look particularly attractive in comparison to the domestic structure of interest rates. Why should we as a country borrow for social programmes? Even if these are soft IDA-World Bank loans, they are still loans for which we are liable to pay back. I am totally opposed to taking those types of loans.
I am convinced that the only external loans that are worthy of consideration, are soft-term loans for critical infrastructure projects that promise a sound return on investment – projects that can pay their way in terms of both principal and interest and still remain viable concerns going forward.
Secondly, I am concerned about the terms and conditions attached to these loans. We in this house need to be convinced that we are getting the best terms and that the conditions are not onerous or burdensome.
As far as I am concerned, if we must borrow from abroad at all, we should ensure that the terms are fair and that the projects to be financed are those that are calculated to yield real economic and financial returns and will be able to pay off the loan going forward. At a time of rising interest rates in the advanced economies, we should also be prudent enough to negotiate fixed interest rates rather than variable interest rates.
Lest we forget: In 2005, when we began negotiating our debt forgiveness from the Paris Club, our total external debt obligations stood at US$36 billion. These were considered staggering sums in those days. They are still staggering sums even today. The irony of today is that our debt profile of US$64.03 billion totally dwarfs what was borrowed a decade ago. Wise statesmen have always warned that those who are foolish enough not to learn the lessons of history will be condemned to repeat them. I hope we will not repeat the follies of the past.
The last debt sustainability analysis that the DMO did, as far as we know, was back in September 2016. Looking back, that sustainability analysis was based on unsound premises. It was assuming a growth trend of 4.49 percent, which has turned out to be wrong. I quote the full statement that was made at the time:
“The estimated average real GDP growth rate of 4.49 percent over the projection period outweighs the expected rate of debt accumulation of 1.64 percent, indicating that under the fiscal sustainability of the FGN-only (External1 & Domestic Debt), the FGN debt portfolio is at a low risk of debt distress. The PV of Total Debt-to-GDP ratio is projected at 13.5 and 15.5 percent in 2016 and 2017, respectively. This is expected to peak at 16.1 percent in 2019, before trending downwards from 15.0 percent in 2020 to 3.6 percent by the end of the projection period, 2036. These compare favourably with the peer group threshold of 56 percent”.
As far as I am concerned, quoting GDP trends and making comparisons with other countries is not helpful. Every country faces its own unique circumstances. As matters now stand, our debt repayment obligations have risen astronomically. As we speak, some 66 percent of all federation revenues are going into servicing our debts. Given the high interest rates, banks and businesses as well as private investors are moving in droves into the treasury bills and FGN bond market. There is hardly any business that can give 15% return on investment from just putting your money in there and waiting at home to get a good return on investment. These are all reflective of the debt situation, as government has become the biggest borrower in our economy.
While I am not in principle opposed to borrowing, I am of the opinion that FGN borrowing plans heretofore must be accompanied by two major analyses. First, we will need to know the statistical implications for overall debt sustainability. And secondly, we must receive at the same time a project appraisal of the precise area in which the funds will be deployed. We must never borrow for consumption. We must borrow principally for infrastructural projects, and most specifically, for infrastructural projects that demonstrate unequivocally, a guaranteed return on investment in a manner that ensures that the project will more than pay its way.
Not too long ago, the Federal Government raised US$1.5 billion through a Eurobond issue. This was followed by another N100 billion domestic Sukuk bond issuance. All these are ostensibly intended to be invested in the infrastructure sector. The sad part of all this borrowing frenzy is that the Nigerian people are yet to feel any real impact in terms of improved livelihoods, let alone improved infrastructures. It has become a matter of grave concern to some of us.
Sometimes in February this year, we understand the Federal Government sent yet again another demand to the National Assembly to borrow an additional US$5.5 billion from the Eurodollar market. I do not know how far the matter has gone. But I would urge utmost caution. One of the worst aspects of our leadership culture is the total absence of any form of intergenerational conscience or virtue ethics. The government that borrows today is unlikely to be the same government that will be in power a decade down the road, when the debts would have matured. We borrow easy money today with the expectation that future generations will be the ones to bear the burden, not us.
It was the great economist John Maynard Keynes who famously declared that, “in the long run we are all dead”. Sadly, we tend to forget that, in the long run, future generations will still there. It is both unfair and inequitable to impose on them financial burdens that derive not from the fundamental imperatives of economic development but from the whimsical follies of our own greed and cupidity.
For every additional external dollar that the FGN wishes to incur, I would insist that they furnish full details regarding precisely what projects the proposed funds would be used to finance. We must be convinced beyond all reasonable doubt that this money needs to be incurred in dollar debt and that it would be financed for projects that guarantee a real return on investment and can be in a position to ensure repayment of the loan from the income stream generated by the project.
And lest we forget, Nigeria’s growth reached the stratosphere precisely from 2007 when we had negotiated our way out of the Paris Club of Debtor Nations. I was part of that process myself when I was Deputy Governor of the Central Bank of Nigeria. I signed the first tranche of US$7 billion that was paid out to the Paris Club. I recall that I immediately caught fever. I had to have bed rest. You can never understand what it means to sign a cheque transferring US$ 7 billion of your own patrimony to foreign powers. A lot of this debt had been incurred by way of punitive interest charges. It was heartbreaking. But we had to bite the bullet.
Freeing ourselves from the stranglehold of debt peonage gave us the room for manoeuvre in terms of macroeconomic policy management. We were free to set our own economic goals and to pursue the path of economic development without been breathed down the neck by Shylock foreign international financial institutions. This is how our country achieved the record average annual growth of 7 percent up to 2014.
Going forward, what we need more than anything else is to carry out the necessary institutional reforms that would unleash the full investment potentials of our people. We need an eco-system that will ensure domestic peace, harmony and stability so that foreign investors can come in and invest. Nigerians own an estimated US$200 billion. We can create an economic renaissance that will unlock some of that money through wisdom, vision and creativity. We need to create an inner-directed economic locomotive that generate growth, investments and prosperity.
If, on the other hand, we continue the path-dependence of incurring bigger and bigger debts, we would soon find ourselves back to square one – back to where we were in 2005 – when we were a Fourth World, debt-ridden and poor non-performing economy. This is what the enemies of our country would prefer. The cowboys from Washington will come back with their suitcases as Roman proconsuls, dishing out orders and forcing us to sell-off our remaining silverware at a pittance of their net present value. We would be fools to return to our own vomit.
Obadiah Mailafia