Economic Confidential, January, 2009

FEATURES

INCREASING NATIONAL DEBT: NASS BEWARE!

By Les Leba

The Senate on Wednesday, 21/1/2009 brushed aside the initial opposition from their ranks to approve President Yar'Adua’s request for $500m naira denominated bond from the international capital market.  Thus, the government obtained Senate approval to borrow the naira equivalent of $500m, which would be repaid at the current naira exchange rate in 2019!  Indeed, when the proposal was initially tabled inYaradua’s 2009 budget presentation to the National Assembly (NASS) in December last year, the naira equivalent of this loan was N60bn; however, in view of the ‘deliberate’ devaluation of the naira in the last four weeks, the naira equivalent may have increased to N75bn.  If the economy continues to be mismanaged and our export earnings are as usual stolen by treasury looters or frittered away on white elephant projects, it would be fair to assume that we may actually be repaying a capital sum of over N150bn in ten years, if our naira depreciates by about 100% to N300/$1.  This may not be an unusual depreciation, if we recognize that the naira was barely N80/$1 upto 1998!

In the event that our government is currently paying about 10% interest on its short-term borrowings with treasury bills, we may assume that the fresh long-term loan would attract a minimum annual servicing cost of over 10%!   If the current rate on federal government naira bonds is also anything to go by, the cost of borrowing may approach 15% per annum in spite of the availability of international multilateral agency loans, which attract much less for sovereign borrowings!  We recall that we exited our debt burden with the Paris and London Clubs after shelling out over $13bn of reserves and at least two former Finance Ministers (in spite of their IMF antecedents) have described this payout as a simplistic and ‘primitive’ financial strategy.  Indeed, Idika Kalu, in a Guardian interview published on 7/12/08 indicated that,  our reward of improved credit rating had “more to do with our increased cash flow from increasing oil prices, not because we paid our debts”.

Other notable analysts also queried the value of the initial loan burden insisting that the government had never been able to show how the loan was accumulated in the first place, and maintained that the atrocious and heavy penalty charges were inexplicable!  Worse still, no one could identify the successful projects, if any, that the loans had funded.  It was against this unsavoury background that the Senate Committee on appropriation, rightly, some would say, objected in December 2008 to Senate approval for a fresh loan application for $500bn by Mr. President.  The Senate Committee headed by Senator Omisore, called for caution in incurring such ‘foreign’ debt and regretted that even after the re-emergence of non-military rule, in 1999,  NASS had never until now been brought into such loan process as required by the constitution.

In support of the veracity of this observation, we recall the loans unilaterally consummated by the former President from the Republic of China for the power sector and the reengineering of the Nigerian Railways.  On the domestic front, we also recall the rapid accumulation of local debts particularly through bond issuance by almost N2000bn within four years, without recourse for NASS approval.  There is practically nothing to show for these loans, and it seems that these loans were incurred specifically for non-tangible purposes with dubious and immeasurable yardsticks!

Indeed, the Debt Management Office (DMO) had indicated in earlier offers that the loan objective was to deepen or create a market for government long term borrowings, and also set a benchmark for other medium to long term loans in the capital market.  In any case, since both objectives cannot account for the actual spending of the huge sums of monies borrowed, the mind boggles as to what ends the funds were actually applied!  It certainly could not be for funding federal budget deficits, as our revenue from all sources exceeded our expenditure for the past four years!  One can only imagine that the funds were simply stored idly in CBN vaults or accounting records in spite of annual interest payments of between 12 – 17% for such borrowings, just for the joy of creating a benchmark price and creating a market for long term government securities!

Not surprisingly, the purposes stated by the Federal Ministry of Finance (FMF) for seeking NASS approval for its $500m or N75bn loan come from the same template for government’s domestic bonds in the recent past; afterall the former D.M.O. boss is now the Minister for Finance!

However, the Senate Committee on Appropriation in a spirited attempt to do the right thing noted as follows in its response to the Executive request:  “…the ultimate goal for the implementation of any public sector programme or project is to enhance the welfare of the citizenry.  The purpose by FMF, therefore, focused on the means, rather than the ultimate end of any capital flow.  Such sweeping statements have led the nation into unbridled procurement of externally-sourced loans, only to regret thereafter.

“A major benefit allegedly derivable from this loan is that it will provide a benchmark for private sector borrowing.  In my view, the Federal Government of Nigeria (FGN) needs to prove this assertion beyond any doubt; we should note that FGN did not specify the beneficiary projects, that important information must be provided.  It is also obvious that the loan would be sourced at market rates, which should be higher than for concessionary loans normally preferred for financing of public sector projects.  The net benefit of this market-based loan must be convincingly articulated.

“FGN needs to demonstrate concisely the extent to which the procurement of the loan would reduce the cost of borrowing by Nigerian-based private sector operators from the International Capital Market (ICM).

“Both official and market sources of fund base their decision mainly on the Country Risk Assessment (CRA) reports.  I am yet to decipher how procurement of the sovereign loan as proposed will reduce Nigeria’s overall CRA.  FGN needs to clarify this relationship.

“As noted earlier, the nation has never prudently utilized external loans for the public sector, since the loan procured in 1957 for the construction of the national rail network.  FMF should, therefore, demonstrate the fundamental institutional improvements towards achieving the stated benefits of this and other forms of external borrowing.

“Research evidence has adjudged the debt sustainability criteria being employed by FMF/DMO as misleading and lacking any theoretical underpinning.  It is also geared towards a nation’s perpetual dependence on loans rather than real development.  Recourse to borrowing for development financing should be a stop-gap measure, and not a perpetual life support facility.  For example, the indicated sustainability criteria continued to claim that Nigeria’s debt profile was sustainable up to the mid-1990s,  however, others based on the incremental capital output ratio (ICOR), had shown that Nigeria’s debt profile had become unmentionable as far back as 1980.  Our lessons of experience have confirmed that analyses based on ICOR were a better reflection of the reality:

“The National Economic Empowerment and Development Strategy (NEEDS) places much emphasis on Public Private Partnership (PPP) as a major source of development financing.  The continued emphasis on (especially) external borrowing by the public sector negates this orientation, and calls to question our real commitment towards evolving a private sector-led market-oriented national economy…”

Regrettably, in spite of the serious and powerful observations by the Appropriation Committee against the $500m loan, the Senate remained unmoved and never attempted to resolve the fundamental issues raised by its own Committee.  Indeed, the Senate took cover for their action by insisting that further debate or evaluations of the loan application had been overtaken by the Senate’s hastened approval of the totality of Mr. President 2009 budget within 10 days or so in December 2008, and noted that the budget approval had consequently covered the loan application which was embedded in the budget!

In this same vein, Senate’s approval for the 2009 budget may also be seen as a blanket approval for the Federal Executive XX“to take the extraordinary step of exceeding , in the short term, the deficit target we set for ourselves under the Fiscal Responsibility Act 2007.  However, we remain committed to reverting to a more conservative and sustainable fiscal deficit of 3%, or lower, in the medium term, consistent with international best practice”.

In plain language, what Yar'Adua is asking in the above excerpt from the 2009 budget is permission to borrow more money at his discretion above the acceptable limit of 3% of GDP without further or subsequent application for NASS' approval for such borrowings.  In the event that such further borrowings are not tied to any real application, and the prevailing tradition of waste and corruption, not to mention the self-serving habit of MDAs of shoring up unspent funds for personal gratification, it would be a great disservice to the nation, if the NASS gives Mr. President such an open cheque!  Indeed, the lamentation of the Senate Committee with regard to sidetracking by the Executive even in a civilian dispensation from performing its constitutional oversight evaluation and approval for federal loans would have become crocodile tears!   Besides, in the light of the House of Reps 50% or so reduction of the projected federal deficit of N1.09 trillion, there should be less pressure for debt accumulation on the Executive. 

No rational person would thumb their nose at debt accumulation if the funds so acquired are applied to critical infrastructural projects for public welfare enhancement; but a situation where there is nothing to show for past loans, and with no verifiable façade of discipline or accountability in the use of public funds, it would be folly to expect that the application of the current $500m and indeed any other loan whether domestic or external would be to the benefit of Nigerians.  Regrettably, the matter is already foreclosed by the Senate; it is not clear if the House of Representatives will stand up on the side of the people, and also ask why the CBN is selling billions of our dollar reserves to Bureau de change every month, while we go borrowing $500m, with cap in hand, from the international capital market!

SAVE THE NAIRA, SAVE NIGERIANS!