Experts Caution Federal Govt on $30b Loan Plan

Experts Caution Federal Govt on $30b Loan Plan

EXPERTS has raised the red flag which the federal government should watch in its plan to take the $30 billion loan.

The loan, which is under consideration by the National Assembly.

President Muhammadu Buhari on November 28, 2019, forwarded a request for lawmakers’ approval to take a $30billion loan, to enable his administration to execute “major infrastructural projects” between 2020 and 2021. Some of the projects are captured in the 2020 Budget which has already gone into effect.

Senate President Ahmad Lawan has promised speedy consideration and approval. If approved, the loan will take the nation’s debt portfolio to $113. 883. from $83. 883 billion

The experts, who spoke in separate interviews, are Prof. Emmanuel Chibundu,  Dr. Muda Yusuf, Chief Okechukwu Unegbu, Mr. Richard Obire, and Mr. Bayo Rotimi. They are unanimous that while there is nothing wrong with borrowing, the nation’s capacity to repay is worrisome.

They urged the government to critically look at Nigeria’s debt profile viz-a-viz the challenges of repayment to determine whether an additional loan would not worsen the challenges.

They also suggested the need to outline the means of repayment, to allay the fears over the ability to meet up with repayment.

They added that to have public support or understanding, the government should clear the air on what it means by “major infrastructural projects” which it plans to spend the money on so that the people could keep a tab on them.

Yusuf, who is the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), said there is a need to clarify the place of the planned loan in relation to the 2020 budget and the 2020 -2022 medium-term expenditure framework.

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He cautioned that borrowing should strictly be in line with section 41 of the Fiscal Responsibility Act 2007 which stipulates that ‘government at all tiers shall only borrow for capital expenditure and human development, provided that, such borrowing shall be on concessional terms with a low-interest rate and with a reasonable long amortization period.

Yusuf said: “The growing national debt is a cause for concern as the debt profile grew from N12.6 trillion in 2015 to N25.7 trillion in 2019 second quarter, an increase of 104 percent.

“There is also a bigger worry about the capacity to service the debt. For instance, the debt service provision in the 2019 budget was N2 trillion; whereas the total capital budget was N2.9 trillion; this implies that the debt service commitment was 70 percent of capital budget allocation.”

He lamented that the debt to revenue ratio is about 30 percent, which is a high side for a tottering economy like Nigeria’s

Reviewing the 2020 budget, Yusuf said debt service commitment and recurrent spending were beginning to crowd out capital expenditure.

According to him, this trajectory is inconsistent with our national aspiration to build infrastructure and a competitive economy.

The LCCI chief said the debt service of N2.45 trillion is more than the capital budget of N2.14 trillion in the 2020 budget that translates to 114 percent of capital budget.

He said: “We should be looking more in the direction of equity financing.  But for this to happen, the policy and regulatory environment must be right.

“It is important to review the spending structure of government and the cost of governance.  The ballooning recurrent expenditure, in the face of declining revenue, is a cause for concern.”

It is against this background that the new request for $30 billion is troubling.  Care should be taken to avoid a full-blown debt crisis, he added.

Yusuf maintained that the opportunity cost of high debt service commitment for the economy and its citizens was very high and something to worry about.

Adding that there is exchange rate risk inherent in exposure to mounting foreign debt, he warned that as the currency depreciates, the burden of servicing foreign debt would intensify and will pose a major problem with an increasing stock of foreign debt.

Yusuf canvassed the need for appropriate policy choices to attract domestic and foreign private-sector capital for infrastructure financing.   He also advised the government on the need to look beyond tax credit in its quest for more complementary funding sources for infrastructure.

”There is absolutely nothing wrong in borrowing money for national development but in doing that, you must have the capacity to pay back. Many developing nations such as Thailand, Indonesia, India, and Taiwan relied on foreign loans at some point,” Prof. Chibundu, a former World Bank consultant, said.

Chibundu, a former director of the Nigerian Institute of Social and Economic Research (NISER), said the planned  $30 billion should be tied to specific projects, such as infrastructure, health, Micro- Small and Medium Enterprises (MSMEs), which are the engines of growth.

He explained that tying such loan to specific projects would make it easier for the government to achieve the fundamental objectives of taking it (loan) in the first instance, while also avoiding its being misused by corrupt government officials.

Chibundu, who chairs the Consultancy Committee of the Nigerian Association of Small and Medium Enterprises (NASME), added that monitoring mechanisms for the loan must be put in place by the Federal Government.

According to him, such mechanisms will, among others, “help ensure that the right amount was brought, ensure the repayment of the loan, and also ensure that  it is utilized for specific key sectors of the economy.”

He suggested that  the  mechanisms could be in the form of an inter-ministerial committee that will be a watchdog “because experience has shown that in many countries of the world, foreign loans are often misused by corrupt government officials who  leave the debt for the future generations.”

Chibundu also made a case for the NEEDS Assessment and Disbursement Strategy. He said while the needs assessment would clearly specify what the $30 billion loans is needed for, the disbursement strategy will explain how the loan would be shared or disbursed to meet set objectives.

The Professor of Economics added that there should be a repayment schedule, because, according to him, where there is no repayment schedule, the foreign loan instead of helping the economy will become a disaster.

He also said since one of the projects listed by the Federal Government for seeking the $30 billion was road construction, there is nothing wrong with tolling roads built with the money and using the proceed to repay the loan.

Unegbu, a former president, Chartered Institute of Bankers’ of Nigeria (CIBN), said there was nothing wrong with borrowing but expressed concern that Nigeria was already saddled with huge debt overhang.

Unegbu argued that since “Nigeria does not have the revenue to service its debt,” additional loan would compound the problems at hand.

He pointed out that Nigeria has nothing to show for the funds it borrowed in the past and that there was no guarantee that a change would occur if the $30 billion loans are injected into the economy.

Agreeing that Nigeria’s debts to Gross Domestic Product (GDP) ratio are low at around 20 percent, he pointed out that the resources being used to service the debts remain enormous.

“For Nigeria to get itself suffocated by such huge debt servicing profile and wanting to take a new loan without adequate plan on where it will be spent, does not make economic sense,” he said, adding, “there was the urgent need for the country to expand the scope of its resources through diversification of the economy and deepening  the tax net.”

Obire, who is a former executive director at Keystone Bank, said when it comes to debt, what is important is not the figure, but the developmental projects that the borrowed funds are used to finance.

He said in this case with Nigeria, the government had no reason to borrow because its revenue stream was still weak.

”There is no plan to show that government has the capacity to repay the loans,” Obire said, warning that the measure could end up as an economic landmine for future governments and generations.

He said: “I am not concerned about the size of the debt, but do such debts have the capacity for repayment? Also important is whether the debt is cash-flow friendly and if it is relatively low pricing. The problem with Nigeria’s debts is that when you look around, you will be searching for what the funds were used to do.”

The former banker stated that at this level of borrowing, road and electricity infrastructure, airport infrastructure, social infrastructure like health and education, and even broadband infrastructure should be visible for all to see where the funds have been channeled to.

Obire added: “The problem with this high debt is that you cannot really justify the high borrowing. We need to channel the loans to productive sectors of the economy.

”Government has to explain where the funds had gone to. Have you seen any new university, health care centre.  I have not seen something dramatic. Overall, I have nothing against borrowing, but the funds must be channeled to good uses.

A former Vice-President, FCMB Investment Banking Group and Lecturer, Lagos Business School (LBS), Bayo Rotimi, said in theory, there is nothing wrong with borrowing.

“Globally, people borrow to meet revenue shortfalls. In the case of Nigeria, the challenge is the country’s ability to service the debt as 25 to 30 percent of its budget is used for debt servicing, a practice that is unsustainable,” Rotimi warned.

He said it does not make sense to spend more on debt servicing than on infrastructure development.

“Again, what is the direct impact of what was borrowed before on the economy, and in the case of the current borrowing plan, what is the direct result of the borrowing plan in terms of the targeted project the fund will be used for,” he queried?”

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