Counting the costs and Benefits of Nigeria’s debts

There is absolutely no doubt that Nigeria, like most other developing countries, needs external sources of funds to invest in the economy. Nigeria is a capital-deficit country. It is clear that domestic capital is inadequate to support the level of investment in critical infrastructure required to raise the level of economic activity. That is the […]

There is absolutely no doubt that Nigeria, like most other developing countries, needs external sources of funds to invest in the economy. Nigeria is a capital-deficit country. It is clear that domestic capital is inadequate to support the level of investment in critical infrastructure required to raise the level of economic activity.

That is the point that the Minister of Finance, Budget and National Planning, Zainab Ahmed, reiterated on Monday, as she tried to link the five per cent growth recorded in the second quarter GDP and sustained borrowing for investment. There is no doubt that there is a positive correlation between investment and economic performance.

Nigerians have indeed hailed the progression to a five per cent growth in an economy that just emerged from recession eight months ago. Coming at a time that the country has borrowed and is still borrowing, the turnaround has provided the government with an opportune moment to justify or defend its borrowing spree.

Many Nigerians have criticised the borrowing programme of the government, which explains why the recent growth report is good news for the government’s spokespersons. With what has been seen by some as a sterling performance, the government has a positive result to showcase. Someone could say it’s a case of the attribution theory: people tend to ascribe to themselves the good tidings or results; when the outcome is not so good however, they look for others who must take the responsibility.

Debt or borrowing is good, given its leveraging power. It gives the borrower the power to do now things that he wouldn’t otherwise be able to do, given the current financial constraints. It creates a foundation for expansion in the future. Investments in infrastructure today will definitely positively impact government revenue as firms raise their outputs and revenues, and are able to pay higher taxes. Similarly, the employees of such companies earn higher incomes and therefore rise to higher tax brackets. So everyone is happy, including the government.

But it also has costs. So, every borrowing programme must be subjected to an impartial cost-benefit analysis devoid of political colourations. What is the cost of a given loan programme? And that cost should be evaluated in terms of its impact today and in the years to come.

It matters also what a loan is invested in. If a loan is used to service the running of government ministries, trips by government officials and legislators, that amounts to a pervasion of the principle of financial management.

Governments should not continue to behave as if they operate in a different world, while businesses operate in another. Businesses run largely on debt. But every business management usually embarks on well-managed debt programmes, knowing when to apply the brakes.

A cardinal principle in business financial management is that when debts begin to interfere with business operations, then that is a red signal. In what situation does this happen? When debt obligations such as interest repayment begin to take away so many resources that business operations are impacted negatively, then the level of debt and its costs must be reviewed.

Is Nigeria, at present, far from such a scenario? What are we hearing or reading about interest payments today? Are they taking circa 90 per cent of actual revenue? Is that not close to the danger zone? In fact, is that sustainable? If debt repayment takes this fraction of actual revenue, what is left for investment in the critical areas of the economy.

There are those who believe that if Nigeria continues on the current debt trajectory for the next four years, the country will find itself in a situation where 100 per cent of the actual revenue will be used to SERVICE the debt, not even repayment of the debt itself.

Thus, while borrowing and investing are critical to sustaining the five per cent growth rate, it is imperative that benefits of such investments or the loans that support them must be assessed using the appropriate criteria to ascertain their true benefits to the country.

At every in its history, a country chooses who its foreign partners should be. This is a political, ideological and even economic decision. It is usually a mutually beneficial, symbiotic relationship that should benefit both moment partners. Yet, in truth, some of these relationships are rather marked by their skewed nature, which tend to tilt the benefit in favour of one against the other.

Nigeria today is in bed with China. The present administration has not hidden its attraction to the Asian country, the second-largest economy in the world today. Perhaps the basis of this love for China is its association with socialism: that was its character, in principle and action. That explains Nigeria’s current level of indebtedness to China as a nation.

But that is now anachronism. China has moved on. China perhaps holds the record of the fastest transition by any country from socialism to capitalism. Yes, China of today is a capitalist country and its leadership is not pretentious about it.

As of March 31, 2020, Nigeria’s total borrowing from China was $3.121bn, according to the Debt Management Office. The DMO explained that loans were on concessional interest rates of 2.50 per cent a year, with tenors of 20 years and moratorium) of seven years.

The DMO noted that Nigeria’s total borrowing from China as of that date was 3.94 per cent of Nigeria’s total public debt of $79.303 billion, and 11.28 per cent of the country’s total external debt of $27.67bn on that date.

In terms of significance, the loans represent important funding from a partner in Nigeria’s quest for economic progress. The Chinese loans are tied to 11 infrastructure projects, according to the DMO.

These include Nigerian Railway Modernization Project (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos and Port Harcourt), Nigerian Railway Modernization Project (Lagos-Ibadan section) and Rehabilitation and Upgrading of Abuja-Keffi-Makurdi Road Project.

Despite these clarifications, many Nigerians are wary of Chinese loans. And this cautious attitude is quite understandable, given what China is doing in some other countries, including many in Africa.

In many of these countries, China has tied the repayment of its loans to strategic assets of the debtor nations. These include natural resources and other critical national assets.