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Buhari’s Gargantuan External Loan Gamble


Dec. 03, 2019

The rulers of Nigeria are adamant about the acquisition of debts. No one in the federal government wants to listen to the Babel of voices warning that Nigeria’s economy is creaking under the crushing weight of its unsustainable mountain of debts.
Last week, as the International Monetary Fund (IMF) warned yet again that Nigeria’s debts profile was becoming unsustainable, President Muhammadu Buhari rebuffed the Breton Woods Institution and re-sent the 2016-2018 external loans request of $29.96 billion to the senate and pleaded with the lawmakers to re-consider and approve the request for the gargantuan external loan to fund the rehabilitation of decaying infrastructure.
The 9th senate of the Federal Republic of Nigeria is studded with friends of the executive. That is the reverse of the 8th senate where wolves in sheep skin who belonged to the ruling party by day time and switched to the opposition party at night, usurped leadership of the National Assembly and terrorised the executive for four years.
The 8th senate rejected the request for the jumbo foreign loan in November 2016 on grounds that the federal government failed to furnish the legislature with details of the projects to be funded by the loan. The excuse was interpreted in Aso Rock as the hostile lawmakers’ response to the prosecution of the senate president, Bukola Saraki, for allegedly collecting salaries as senator and governor of Kwara state at the same time and alleged false asset declaration.
All that is history now. We have a senate that is led by a friend of the men in Aso Rock. What happens to the request for the jumbo loan might be informed more by the unalloyed loyalty of the senate leadership to the men in Aso Rock rather than worries about the ability of Nigeria’s one-handed economy to sustain the debt.
At the moment, Buhari might enter the Guinness Book of Records as the Nigerian president who incurred the highest debts in its history. Buhari met an external debt profile of $10 billion in 2015. In the last four years, he has singlehandedly pushed it to $22 billion. The increase in domestic debt is phenomenal.
If the senate approves the jumbo loan request forwarded to it last week, Buhari would have succeeded in pushing Nigeria perilously close to the debt profile of chronic debtors like Greece. The Greeks sent shock waves down the spines of Euro zone economic planners through massive debt default that rocked the whole of Europe to its economic foundation.
If the senate is docile enough to approve Buhari’s debt request, Nigeria’s foreign debt profile would be sailing perilously close to $55 billion. That would be a major landmark in the nation’s history.
The IMF is particularly worried about three economic factors in Nigeria. The first is Nigeria’s ballooning debt profile. IMF’s repeated warnings on the issue now sounds like a broken record.
The United States of America (USA), the world’s largest economy, is the world’s largest debtor. Ironically the IMF is not worried about America’s intimidating debt burden because the U.S. economy is deep and is founded on solid and diversified sources of revenue. Besides, America has no problem servicing its debts because as a practically risk-free borrower it borrows at anything from 1.5 per cent. Nigeria, on the other hand as a high risk borrower and one-handed economy, incurs debts at 300 times the rate America borrows. That puts a big question mark on Nigeria’s ability to service its debts.
The IMF is equally worried about Nigeria’s senseless consumption subsidy. While America subsidises production particularly in the Agriculture sector, Nigeria flushes trillions of naira annually into consumption subsidies like petrol which does not in any way encourage production.
The third factor that is of concern to the IMF is import tariff. The IMF is worried that the rulers of Nigeria have turned deaf ears to the World Bank argument that high import tariffs encourage smuggling.
The dollar value of Nigeria’s import duties revenue has plummeted precipitously. The drop is partially caused by the unacceptably high tariff on rice and new vehicles imposed by the federal government.
Ironically, it is the low revenue instigated by the drastic drop in import duty revenue, weak tax base and an alarmingly high cost of governance that pushes the federal government into endless borrowing.
The low revenue escalated in the 2020 Appropriation Bill into a yawning deficit of N2.1 trillion which has to be funded with massive internal and external borrowings. The move to obtain the jumbo foreign loan is a clear indication that the federal government can no longer fund the rehabilitation of decaying infrastructure from its dwindling revenue. It is a clear evidence of how broke the federal government has become.
Ironically, the path of debt for rehabilitation of infrastructure is a dangerous one for Nigeria. Even as foreign loans are cheaper than the ones from domestic money market, the cost of servicing an external debt of $55 billion could crush the economy. At seven per cent lending rate, Nigeria would service its foreign debts alone with N1.2 trillion if the senate approves the president’s jumbo loan request. When the cost of servicing domestic debts is added, Nigeria might have to service its debts with about N4 trillion annually. The estimated revenue for the 2020 Appropriation Bill is a paltry N8.6 trillion. If the jumbo foreign loan is approved and debt servicing gulps down N4 trillion out of the N8.6 trillion expected, the federal government would only use the balance to pay the salaries of its unwieldy civil service workforce and politicians. Nothing would be left for capital projects. The scenario is dangerous because it is something that could happen in the next one year.
The most troubling part of the request for approval of the jumbo foreign loan is that by the time the request is approved, Buhari would have perhaps a scant three years to execute the projects the loan is meant to fund. Given the president’s genetically slow pace of making crucial decisions, there are fears that his administration would not have enough time to manage the funds to be raised. He may end up raising the jumbo loan for another administration to manage. That could be disastrous for the economy.
Rehabilitation of the Lagos-Ibadan rail line which was a component of the gargantuan external loans request has lumbered along for three years. The April 2020 completion deadline looks increasingly unrealistic. Projects from the expected loans cannot move faster.
Besides, while everyone trusts Buhari as a man of integrity when it comes to handling public funds, few of the men around him could be trusted with such enormous public funds. There are fears that Nigeria’s future could be mortgaged with the jumbo foreign loan only for a chunk of the money to be diverted into private pockets.
The federal government can avert the disaster of excessive borrowing if it cuts its outrageous cost of governance and resorts to funding of infrastructure rehabilitation through private sector participation. It is crystal clear that the federal government can no longer fund investments in capital projects like railways and road construction. Government had, in the last 10 years, been borrowing to fund these projects and the cost of servicing those loans is eating too deep into government’s dwindling revenue.
The way out of the quagmire is for government to work out an attractive way of getting private investors to fund key infrastructure projects and toll them appropriately to recover their investments.
The private sector participation in infrastructure development should not be a policy decision. It should be an act of parliament that would be difficult for successive governments to reverse.
That is the only way to protect investors against policy somersault, reduce deficit budgeting and free the money market to lend to the private sector. The only option to that is the debt trap that the federal government is setting for itself with the request for the jumbo foreign loan.
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