President Muhammadu Buhari recently re-submitted a request to the Senate seeking the approval of $29.96 billion external loan. Buhari had in a letter to the Senate President Ahmad Lawan, stated that the renewal of the loan request was because of its rejection by the last Senate in November last year on account of not having a borrowing plan. He also stated what the loan would be used for if approved.
We recall that the loan is a carryover of the 2016-2018 external borrowing. The president explained that the loan would ensure prompt implementation of projects under the borrowing plan with special emphasis on infrastructure, agriculture, health, education, water supply, growth and employment generation. It would also be used in poverty reduction through social safety net programmes, governance and financial management reforms, among others. The loan has become necessary considering the fact that earnings from oil are no longer sufficient to meet national needs.
The loan request came a day after the International Monetary Fund (IMF) warned Nigeria against rising debts. Also, figures from the Debt Management Office (DMO) revealed that Nigeria’s total debt profile rose to N25.7 trillion as at June 2019. Of this amount, external borrowing accounted for about 32 per cent, while 68 per cent was domestic loans. This means that within a period of two years, Nigeria’s total debt rose by N6trillion, while budgetary provisions for debt servicing could have risen to N3trillion or a yearly average of N290billion. Domestic indebtedness of the 36 states and the Federal Capital Territory (FCT) as at the end of March 2019 was N3.972trillion. The government has mapped out N2.45trillion for debt servicing in the 2020 budget.
This is expected to take care of interest payments of $83.88billion worth of obligations. Notwithstanding the fact that Nigeria’s current debt-to-GDP ratio is still within the acceptable international threshold of 56 per cent, we advise that care should be taken to avoid a deeper debt crisis. In the 2019 budget, for instance, debt service provision was N2trillion, whereas the total capital budget was N2.9trillion. This implies that the debt service component was 70 per cent of capital budget allocation, while debt-to-revenue ratio was about 30 per cent.
We believe that there is nothing wrong with borrowing, especially if it is tied to critical infrastructure that will uplift the well-being of Nigerians and stimulate the economy. However, we caution against poor management of the loans.
That has also been the concern of many stakeholders and international financial institutions such as the World Bank and the IMF. The government must resist the temptation of excessive borrowing. It should adhere strictly to Sections 44, 45 and 46 of the Fiscal Responsibility Act. The Act, among others, 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 low interest rate and with a reasonable long amortization (repayment) period.
With increasing national debt and declining foreign reserves, revenue earnings and foreign direct investment, borrowing should be well streamlined, while projects earmarked for such loan must be monitored. Considering the level of borrowing so far by this administration, the government needs to involve the private sector in executing some of the projects using different Public-Private Partnership (PPP) financing models.
Equity financing can be a major source of funding, provided there is good regulatory environment. Besides, it has become necessary to review the spending structure of government and the cost of governance. Unless the government can assure Nigerians that the $29.6billion loan request comes at very low single digit interest rate, the government may be plunging the economy into another recession with tougher implications than the previous one.
While we are not opposed to borrowing, we are worried that the government would spend more money on debt servicing. Therefore, government should broaden the sources of revenue for budget and programme funding. A situation where government’s appetite for borrowing has crowded out the private sector investment is not good for the economy. The economic consequences of debt overhang should not be lost on the present administration.