How FGN’s Preference For Commercial Debts Incurred Additional N127bn Interest
Over the past few months, concerns have been raised on the sustainability of the bourgeoning debt profile of the Federal Government, with the International Monetary Fund (IMF) stressing the need to cut down on excessive borrowing.
In November, the Senate approved President Buhari’s request to issue $2.8bn worth of foreign currency denominated paper to help finance the 2018 budget and the Federal Government had since raised the amount in Eurobond.
At the end of the first half of 2018, FGN debt stock stood at $73.2bn, with foreign debt accounting for 30 per cent ($22.4bn) of the total.
A breakdown of the Nigeria external debt of $22bn shows that multilateral loans account for $10.883bn, which translates to 49.28 per cent. Bilateral loans account for $2.399bn, while the commercial loan, which is largely Eurobond, amounts to $8.8bn, which amounts to 39.89 per cent.
When the number is viewed in terms of debt service-to-revenue ratio, as at 2017, FGN’s total debt service amounted to N1.82trn.
The country paid N51.1bn to service $10bn multilateral loan, translating into 25.26 per cent of the total debt service amount. The Federal Government paid N114.4bn to service $8.8bn of commercial loan, amounting to 56.5 per cent of debt service within the said period.
Regarding bilateral loans, the Federal Government paid N16bn to service $2.4bn, translating into 7.92 per cent of total debt service.
A further analysis showed that, by year end, the Federal Government would have paid about N101bn in principal and interest repayment for $10bn multilataral loans. At the same time, it would have to cough out N228.9bn as interest repayment for $8.8bn in commercial loans. The amount represents N127bn difference, which represents 55.5 per cent increase.
Despite accounting for less than 40 per cent of total foreign loans, non-concessional loans constitute over 56 per cent of external debt service obligations. The recent $2.8bn raised by the government will further push up these numbers.
N127bn would be better appreciated when one considers that in the 2018 budget, the Ministry of Water Resources was allocated N155bn, Office of the National Security Adviser, N123bn, Ministry of Industry, Trade and Investment, N118bn, and Ministry of Youth and Sports Development, N116bn. But for that each of these ministries would have been reasonably funded.
Experts have wondered why the country continues to go after expensive commercial debts as against cheap multilateral debts which offer longer repayment periods
A Professor of Economics and Director General of the West African Institute of Financial Management (WAIFEM), Akpan Horgan Ekpo, said, “The excuse that the World Bank or the IMF give too many conditions is not germane for taking very expensive commercial loans. We met those conditions in the past with Dr. Ngozi Okonjo Iweala, and we can still do same.”
Prof. Ekpo argued that studies had shown that the preference for fast commercial loans also created the risk of not deploying these loans in the projects they were meant for because there were not strict preconditions for borrowing and therefore left room for poor accountability.
Professor of Capital Market, Uche Uwaleke, said, “The rising interest rates in the US and the appreciation of the dollar also have implications for Nigeria’s growing external debts profile.
“The risk is heightened by the growing proportion of commercial debts relative to concessional loans”
The result of the 2017 Debt Sustainability Assessment (DSA) exercise by the Debt Management Office (DMO) showed that Nigeria’s risk of debt distress remained moderate, indicating a breach of the threshold by just one of the Debt Portfolio Indicators (Total Public Debt Service to Revenue), when the portfolio is subjected to shocks (stress tests). It further highlighted the vulnerability of the debt portfolio to shocks in revenue and exports, as well as substantial currency devaluation.
Analyst at Cordros Capital, however, argued that they were less concerned about domestic debts as they did not see any circumstance that was huge enough to occasion domestic debt default and the country’s debt profile was largely denominated in local currency “hence, we do not think possible currency depreciation could drive servicing cost higher.”
They noted that of the total amount earmarked to service debts in 2017, only 9.9 per cent of the total was channelled into servicing foreign debt obligations, hence the need to substitute expensive domestic borrowing for cheaper foreign loans. More importantly, as a percentage of FGN’s foreign currency earnings, external debt service only sipped 6.2 per cent in 2017.
They also think foreign borrowing, at this time, will serve as a buffer to the depleting foreign reserve following the recent foreign sell-offs of naira assets.
“Though inorganic in nature, we believe an inflow of $2.8bn, together with higher inflows from rising crude prices, will give the CBN extra legroom to boost dollar supply across all segments, and thus, keep the naira relatively range-bound,” they added.
They were quick to add that fiscal authority needed to address Nigeria’s revenue challenges with the actual revenues consistently underperforming budget.
In the view of the experts, Cordros, despite growing concerns around debt sustainability, “We believe the benefits outweigh the cost. Overall, we do not see full-blown crisis, at least, in the near term.”