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Tuesday, May 10, 2011

NIGERIA AND ITS $32 BILLION DEBT


        Public finance, the art of government revenues and spendings, like the discipline of Economics itself was conceived in order to put senses in to countries management of their resources. In Nigeria, Sub-Saharan Africa second largest economy, public finance or elite finance is both the art and science of how government and the elite that control it manage resources. In Nigeria there is little that differentiate government source of revenues and expenditures from that of elite on the helm of affairs, in fact, they are one and the same. Government sources of revenue in Nigeria include (primarily) revenues from oil export, custom duties, taxes especially corporate taxes, and royalties from mining activities. While it expenditures included among other things capital expenditures on infrastructures, day to day government expenses, and financing of government officials loots. Debt is another source of government money, albeit, a different source. In highly democratic and prudent climes, debt money can be an important source of most needed money to bridge the gap between government revenues and expenditures. That is not the case with Nigeria; debt money is use for something else. The current government attempt to borrow another $500 million dollars from external sources, in addition to debt of $32.8 billion it owe both domestic and foreign lenders, is another source of concerned. As of September 2010, Nigeria’s total debt profile stands at $32.8 billion out of which external borrowing is $4.5 billion representing 14 percent, while domestic debt is $28.2 billion representing 86 percent. If you look back three decades before, the 1980s and 1990s were very unique in the history of Nigeria. They were two decades during which Nigeria experienced falling revenues, due to falling price of crude oil and the decline of agriculture as a source of foreign exchange. Throughout that period price of crude oil hardly rise above $20 per barrel. Buhari regime (1984-85) despite the falling revenue of his time, for instance, had tried to repay the debt Nigeria owed foreign creditors. He was removed by Babangida regime (1985-92) that was notorious for its mismanagement of our foreign debt position. Massive corruption was the major factor behind continuing deterioration of our economy at that time, where government foreign earnings and borrowings were put into questionable uses.  The introduction of structural adjustment program (SAP) by the regime with the aim of removing Nigeria from the fiscal mess it found itself did not help matters. 



     The coming of civilian regime coincided with the period of rising price of crude oil in the international market, when crude oil price moved from $18 per barrel to as high as $146.  It is said that the money earned from 1999 to 2007 is more than all the oil money earned from 1960 to 1999. Despite that oil windfall, Nigeria situation did not change. Out of the oil money realized, the civilian regime did indeed secured debt relief for the country in exchange for payment of about $16 billion to our foreign creditors. From then on Nigeria was relieved off it foreign debt obligations. But, here we are going back to where we were. Currently the price of crude oil is high, at around $85 per barrel, and Nigeria daily export of about two million barrel per day is stable. But look at this, Nigeria excess crude account has depleted between the periods of January 2009 to July 2010, from $20 billion to $460 million. Our foreign reserves have drop from $64 billion in August 2008 to $33.71 billion in October 2010. What was the money used for? This is the question one should ask, before looking for the justification for borrowing additional money from abroad. The billions of Dollars Nigeria borrowed in the 80s and 90s were not used to assist Nigeria to realize her aspiration of becoming one of the biggest economies in the world. Instead the money was stolen through award of dubious contracts and execution of white elephant projects. The argument been put forward by the economists in the current administration is that since about 86 percent of the government debt is from domestic borrowing there is no cause for alarm. They argue that the debt can be repaid at ease, because it does not involves any of the major constraints found in external borrowing which account for bulk of government borrowing in the 70s, 80s, and 90s. Another argument is that the combine total of internal and external government borrowing is only about 16 percent of the countries Gross Domestic Products (GDP), which they argued is healthy as it did not exceed the 25 percent limit set by the country. Finance minister Olusegun Aganga, for example, recently argues that the money is needed to finance the execution of much needed infrastructural projects like power generation and so on. Looking at these points from the angle of cost-benefit analysis, one can see that the benefits it is said Nigeria will derived from the loan did not compare to the cost that will come from taking that additional loan. 


    Let review these benefits, financing of the most needed infrastructural projects in the country, this was the same argument put forward by previous regimes when they were borrowing. Take power supply, for instance, the regime of Obasanjo (1999-2007) has spend over $16 billion in the generation of electric power without changing anything in the power supply, if not for buying us darkness. If that regime is to be called to account for the money they cannot do it. China, from last year to this year, has increased her power supply by more than the combine total of all the power generated on the African continent without spending that much. There is no way this regime can convince people by arguing that they are using the money to buy power. The regime of Late Yar’adua had taken a loan facility of over $1 billion from china to finance railway project in the country, where is that money or the rail line mean for it? A single stadium built in Abuja is said to have cost more than what far better stadiums were paid for in South Africa to prepare for the hosting of last world cup. I know of a case where ordinary fridges of not more than N35, 000 were supplied at about N250, 000. These are the reasons why we have failed to improve on the transparency international corruption index despite the anti corruption rhetoric of our civilian regimes. There are costs as well as benefits from borrowing within a country’s own borders. By restricting borrowing to internal sources a country is avoiding the risks that arise with the borrowing in foreign currency, the most important of which is exchange rate risk. For instance, in a situation where Nigeria debt is in Dollars, that means we have to repay back in Dollar, any depreciation in Naira or appreciation in Dollar will increase the cost of repaying the debt. Unlike when you borrow in Naira (like federal government bonds) you repay in Naira without thinking of exchange risk. External borrowing also comes with strings attached. Borrowing from institution like IMF and World Bank come with conditions some of which are not favorable to the borrowing country. And the fact that debt transfer power from borrower to lender make foreign borrowing very tricky, as the debtor country become subservient to external powers mostly Western countries. Then come interest rate risk, the interest risk that goes with borrowing from international lenders is of two kinds, the cost that goes with unfavorable rating from international rating agencies. Nigeria was recently down graded by Fitch, an international rating agency. The implication of that down grading is that Nigeria will now borrow at higher rate than when it received favourable ratings, therefore, making borrowing costly. Then the rate itself, whether it is fixed or variable, a fixed rate means that a country will be paying certain fixed rate no matter the economic circumstances, while variable rate vary with economic environment. In determining the nature of the rate the lender has upper hand, as the saying goes a beggar has no choice. In general, the rate charged by international lenders is not favourable to a developing countries as it is very exploitative. High interest rate was the major cause of third world debt crisis of the 80s when debtor countries mostly in Africa, Latin America and South Asia failed to service their debt.


        Borrowing internally has one major defect “crowding out effect”, which is particularly serious in capital starved economy like that of Nigeria. It can rightly be argued that the massive government domestic borrowing of the last few years has contributed in making capital very expensive in the country. That means CBN reform and global crisis are not the only ones to blame for the scarcity of capital in the country. People prefer the safety of government bonds to the uncertainty of Nigerian equity market and banks. Thus, the argument of not reaching the minimum borrowing limit of 25% do not arises, in as much as borrowing will contribute in reducing private sector growth. It has been shown in many studies that increase accumulation of debts have the tendency to slow the rate of economic growth in a country. And in many cases, countries borrow thinking that favourable economic conditions would allow them to service the debt no matter the rate charged, and it will turn out that their forecasts were wrong ending up with dry sources of revenue. Instead of foreign debt, this government should have concentrated on searching for more sources of revenue generation. Look at the abundant mineral deposit scattered all over this country, from Gold, Iron ore, Coal, limestone, Uranium to Tin; Nigeria is richly endow. Natural mineral resources are the major sources of foreign exchange for countries like Australia, Chile and Norway. In agriculture the potentials are there, why not explore them instead of looking for burden for yet to be born children.  We have Cocoa, Cotton, Groundnut, Rubber, Coffee, Sesame, Gum Arabic, as well as hide and skin; they are all very good sources of revenue. What are we doing with the money we are borrowing? Why not put our house in order and attract foreign direct investment in these areas. These are better alternatives to debt because taking debt did not help us in the past and it will not do now. Simply because debt money is easy money at the time of borrowing does not means we shall always resort to it. My advice to this regime is that it should look beyond self gratification and the attractions that come with having money at the tip of your finger, and, gauge both the immediate and long term implications of taking more debt before making the leap.