An economist and finance analyst, Federick Chinweokwu Onyeukwu, once said that “certain weights can never be lifted without more or equal weight pressure being exerted by the lifter.” He added: “No financial or economic challenge has been resolved without further provision. It has never been better except it first got worse.”
Nigeria’s recession and the need for debt deals in efforts to jumpstart the ebbing economy seem to be the two sides of the weight analogy. But are debt deals all about the negatives? The circumstances, needs, management, costs alternatives and ability, among others, are usually ahead of the considerations. The country really needs all the money to invest itself out of the crisis.
We must understand the implications of the recession. It is a period of temporary decline in general economic activities and visibly seen in the fall of Gross Domestic Product numbers, for successive two quarters. But it seems we are headed into the third quarter too. Even individuals, not just government alone will be looking for money.
Another financial expert and Executive Director at Access Bank, Victor Etuokwu, once admitted that the cure for recession is expansive monetary and fiscal policies, although they are diametrically opposed to the fight against inflation.
Unfortunately, Nigeria’s brand of recession came with its own complexity. The country is battling inflation alongside recession simultaneously, yet lacks sufficient funds to engage in expansive fiscal stimulus- funding projects with wealth creating capacity, which is needed now to find its footings back to growth.
The alternatives? Leave the situation until it improves itself. But when? Or borrow and incur costs to fund wealth regenerative projects, but create a definite path to economic rebound.
Still another financial expert and Group Chief Executive Officer of Stanbic IBTC Holdings, Sola David-Borha, in an interview, said “given the billions of dollars that are required to fund infrastructure development, government, for sure, is not capable of doing it alone.” This, besides involving private sector, definitely requires government borrowing too to augment shortfalls in its programmes.
The new borrowing plan of $29.96 billion articulated in the three-year plan of the Federal Government has indeed, attracted mixed feelings. While most of the reactions are based on the fears of the debt level, it must be appreciated that the current administration may not have really contributed to the current debt profile, judging by the current figures.
As at June 30, 2016, total public debt stood at $61.5 billion, which is a reduction from total debt stock as at March 31, 2015, estimated at $63.5 billion and June 30, 2015, at $63.8 billion. Of course, by June 2015, it was barely one month in the life of the current administration.
Granted, these monies ($61.5 billion) were borrowed, but they are no longer available and the country remain committed to the repayment, including its service charges, notwithstanding which administration that committed the debts.
With the dwindled fortunes of the economy, basically by the fall of our sole commodity offering, it is almost a handicapped situation. The domestic activities are even dependent of our external performance. The case of foreign exchange is an example.
The United States of America borrowed its way out of economic slump. The unique thing is that they invested the proceeds wisely- activating moribund institutions, which the popular Ford brand, among others, were beneficiaries.
Several financial analysts have corroborated the fact that there is nothing wrong with borrowing, as long as it is invested wisely. Even at the just concluded International Monetary Fund/World Bank Group meetings in Washington DC, emphasis was la!d more on public finance management capacity of troubled economies than the debt stock.
Just last weekend, the Minister of Industry, Trade and Investment, Okechukwu Enelama, said that.
He said that the primary focus should be the quality of the debt deals and ensuring that the implementation of the projects for which the debts were entered into are worthwhile and able to provide the resources to repay.
But to allay fears over the proposed $29.9 billion cumulative borrowings in the next three years, the figure also includes states’ loans, not just for the Federal Government.
With the uncertainty still hovering over the country’s main earner- oil price, it is now obvious that there are only limited options besides borrowing to finance the capital expenditure needed to stimulate the economy and get out of the recession.
From findings by The Guardian, the new debt strategy, going by the details available, might offer the country a better bargain. About 75% of the funds to be borrowed over the three-year period are at concessional terms with average interest rates of 1.5% and tenures as long as 20 years.
The only commercial loan in the package is the $4.5 billion fixed rates eurobonds. Currently much of the global markets have negative interest rates and there is appetite for Nigeria’s paper, hence the government should be able to get a good deal for the nation. The World Bank has even attested that these cheap funds are looking for a trusted destination.
From the details, these funds are mix of bilateral and multilateral, but totally different from the Paris Club and London Club deals that floats their interest rates. These proposed loans are all at fixed and largely concessional rates of interest.
The Debt Management Office has attested that despite the drastic drop in the country’s foreign exchange earnings, following the oil-price shock since mid-2014, the external debt liability has never constituted a source of vulnerability to the economy.
As at June 2016, external debt accounted for only 18.33 per cent of the country’s total debt stock of about N16 trillion ($61.5 billion), compared to the optimal target of 40 per cent established in the country’s medium term Debt Management Strategy (2016-2019).
Moreover, within that very small external debt, concessional debt, with average interest rate of about 1.25 per cent yearly and average tenor of about 40 years, accounted for about 80 per cent of the total.
The ratio of the external debt to the Gross Domestic Product was only about 2.24 per cent as at end of June 2016, compared to the internationally defined threshold of 40 per cent for the applicable peer group.
Correspondingly, the external debt service accounted for an insignificant proportion of the total public debt service expenditure for the last five years at less than 6.5 per cent. So, the country has the opportunity to borrow, especially with the recession here.
Despite the recent records of efficiency in cost structure and payroll savings, there are still about N200 billion per month recurrent bill; debt service provision of N120 billion; and sliding federal receipts averaging N200 billion, with projections of N300 billion even at full production, due to cash call arrears that were inherited.
To appreciate the financial constraint at the moment, the federal allocation of N420 billion in October 2016, showed a sharp contrast with N1 trillion shared in October 2012- four years after.
The “Idi Amin economy” of printing more money did not and cannot work. Besides, Nigeria cannot print dollar, which is the major trading currency. The only option is to borrow in the short term to return to growth path and then drive additional revenues to fund the additional debt burden.
There is need to move forward. The case of parlous infrastructure has long been emphasised. The investment is expected to catalyse private capital into infrastructure and drive productivity and economic growth.
But it needs not be over-emphasised, the Federal Government must now show responsibility and transparency by ensuring that the borrowed funds are channelled into the fiscal levers that will drive growth.
We cannot afford to wait for oil prices to rise again to fix infrastructure because Nigeria is already in recession and so, “do-nothing” is not an option unless the nation is prepared to face a prolonged recession.
The asset stripping proposal is still a tall order. For one thing, the controversy is still raging, but mostly, the valuations may not worth the “try”, as the major ones are oil-related and would be priced down now.
To ensure quality and assurance, debt management functions are now the responsibility of the Debt Management Office for both domestic and external under the guidance of the Minister of Finance. This contrasts with the practice where various MDAs negotiate debts. There is no more shifting of the bulk.
There has been, in the last decade, new laws enacted to focus on public debt management to avoid mistakes of the past. These laws include the DMO Act 2003, Fiscal Responsibility Act 2007, and the Public Procurement Act 2007.
Like the Treasury Single Account, these laws need to be evoked to ensure that these debt deals would be implemented as pledged. The country cannot afford to get it wrong at this point because it would mean absolute disaster. But it needs to be given a trial first.
Under the new professionalised institutional arrangement, there are relevant technical analysis for advising on, monitoring and managing public debt. These include the yearly Debt Sustainability Analysis and Medium-Term Debt Management Strategy, prepared by the DMO under the supervision of the Minister of Finance, in collaboration with CBN, Budget Office, National Planning, National Bureau of Statistics, Office of the Accountant-General and technical support from West African Institute for Financial and Economic Management. These cannot all be wrong at once.