Former Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo, has said that the country’s infrastructure deficit could be addressed with debt financing.
Nwankwo, who was the guest speaker at the 3rd Just Friends Club of Nigeria (JFCN) Annual Lecture in Abuja, yesterday, admitted that the conclusion that public debt should be used to finance Nigeria’s massive infrastructure needs is a paradox because of the existing precarious public debt profile.
He contended that the resolution of that paradox lies in a creative unbundling of the concept of debt sustainability. In the context of financing infrastructure for the structural transformation of the economy, he explained that distinction should be made between conventional debt sustainability, which is static, and structural debt sustainability, which is based on a forward-looking view of the economy.
Nwankwo noted that assessment of debt sustainability in the latter case should focus on whether and how the additional debt would be effectively applied to the development of infrastructure, to pull the economy out of backwardness; how it would enable the economy establish a growth trajectory that would make it regain or enhance debt sustainability and more stable growth by a set timeline.
According to him, “the secret is that it is feasible to articulate a bold plan for the transformation of the economy, the transformation plan, financed with new debt towards one that is more diversified, more competitive, more export-capable and less vulnerable to external shocks.
“Specifically, the new debt will generate adequate output and cash-flow to cover its servicing and amortisation and create surplus, while avoiding, by design, foreign exchange risk. The net impact of the new debt on debt sustainability, therefore, is that by creating added value, it helps to reduce the pre-programmed debt burden, rather than exacerbate it.”
Nwankwo, who spoke on “Realism and Paradox in Financing Nigeria’s Huge Infrastructure Needs”, argued that such plan is a condition precedent to effective debt financing of infrastructure. “A robust macroeconomic model with detailed financial programming is perhaps the most important component of the plan documents; it will elicit the trajectory of transformation, breakthrough and self-sustaining growth that would result from the capital injection in big infrastructure development. It will demonstrate how exchange rate risk will be neutralised,” he pointed out.
He explained that the design of infrastructure development will mainstream the real sector and its objectives – diversification, encouragement of small and medium enterprises and export drive, among others.
To him, it will specify the major channels or sources of stimulus for the economy derivable from a plausible transformation plan that supports massive debt-financed infrastructure investment.
The former DMO boss explained that despite the country’s problematic debt profile, a plan-based, project-tied, output-driven, and commercially-modelled and private-sector-managed debt programme remains a “robust option (arguably the most robust option) for financing Nigeria’s infrastructure development. It is a solution that can be intelligently structured to produce a transformed and self-sustaining economy without worsening debt sustainability.”
According to him, a major issue, which has to be addressed while using debt financing for infrastructure is the impact of exchange rate risk since substantial portion of the debt is obligated in foreign currency.
“Concerns about exchange rate risk and, generally, concerns about the ability of a country that is a weak player in the global market, to meet its external debt obligations are quite relevant. So how could one justifiably propose more foreign currency denominated borrowing under this condition?” he said.
“The answer lies in the Turnaround Plan (TP). The essence of the financial and structural programming contained in the TP is that within five to seven years, the implementation of the plan will have produced a sustainable and continuously strengthening economic progress, and that from about year eight to year 10, the economy will start generating adequate public revenue, including in foreign exchange with which the external debt will be serviced and repaid. That is why the external borrowing for the purpose of achieving the turnaround will be at favourable terms including, particularly, a moratorium period and a long tenor.”
Nwankwo also pointed out that infrastructure development investment must be undertaken, not in the hope of, but in conjunction with, real sector development; hence, the imperative of planning and executing it closely with the private sector. “In addition, the business model for investment in infrastructure should be such that, as much as possible, infrastructure services are provided on fee-paying and cost-recovering bases and there should be no illusion of heaping the entire funding burden on the public treasury,” the former DMO boss added.
“In the last analysis, therefore, debt-financed infrastructure investment could be significantly de-risked with financing founded on broad-based funding.”