Another Useless Debt burden

debtsIn her maiden address to journalists on Wednesday, 24/08/2011, the Coordinating Minister of the Economy and Minister for Finance, Dr. Ngozi Okonjo-Iweala, alerted Nigerians that Nigeria’s domestic debt was about N5.2 trillion ($33bn), while external component is about $5.3bn. In other words, at today’s exchange rate of N152=$1, Nigeria’s total debt is over $39bn; that is about $4bn above ‘crisis’ level of $35bn in 2006, when we were stampeded to part with almost $18bn from a healthy reserve base of over $50bn. As at August 2011, our current debt burden exceeds our ‘paltry’ reserve base of about $33bn,

but surprisingly, our ex-IMF President assures us that “Nigeria is in good shape, as the debt profile is only 20% of Gross Domestic Product”.

The fear of curious analysts that we may need to once again part with substantial part of our paltry reserves to clean the debt slate as in 2006, when debt profile was about the same as 2011 was allayed by Dr. Iweala’s observation that current debt is “extremely low and all are concessional with reasonable interest rate.” However, those familiar with structure of sovereign debts will agree that concessionary multilateral debts should not attract much more than 3% for those countries with good credit rating, and evident abilities to pay. In this regard, this column notes that prior to the most recent $500m Eurobond at 7%, government’s annual budget provision for external debt service has often exceeded 12%! Indeed, this column had drawn attention to this anomaly in such articles as “External Debt, at What Cost?” (http://www.lesleba.com/020209.doc) and “Increasing National Debt: NASS Beware” (http://www.lesleba.com/260109.doc).

Besides, current domestic debt of $29.7bn consists primarily of government borrowings with Treasury bills and bonds with interest rates at anything from about 8% – 14%! Thus, Ngozi may have given a very liberal interpretation to our national debt burden when she describes them as concessionary with low interest rates! Incidentally, as in the past, there is nothing on ground to show effective utilization of borrowed funds. Indeed, this much is clear from any Debt Management Office loan prospectus, which consistently declares that the prime purpose of its borrowing is to ‘deepen’ the market for long term loans, while CBN on their side have publicly admitted that monies borrowed oftentimes at cost above 7% were not designated for any infrastructural enhancement, but were obtained and kept sterile in order to reduce the amount of excess cash in the system!! Indeed, the rapid debt accumulation of DMO since inception has attracted the attention of this column and our articles, “Nigeria’s Debt Creation Office 1 & 2” (http://www.lesleba.com/25102010.doc and http://www.lesleba.com/01112010.doc) urged the government and the National Assembly to call the DMO to order!

Not surprisingly though belatedly, last week, (1/9/2011), President Jonathan inaugurated a governing Board for DMO; in other words, DMO had, under its Director General, unilaterally incurred over N4 trillion of meaningless debt without the approval of any governing body! Talk about failure of best practice and accountability!! The new Board has Vice President Sambo as Chairman and also enjoys the effervescent presence of, you know who, Dr. Okonjo Iweala and several members of the Economic Management Team; well, at least we know who will be calling the shots!

The following is text of an article “Another Useless Debt Burden” (http://www.lesleba.com/271106.doc), first published in November 2006. Have a fine day!

Nigeria prosecuted the civil war without incurring one kobo of external debt. Indeed, when General Obasanjo handed over to the civilian government of the Second Republic in 1979, the federal treasury was endowed with a buoyant reserve base. The sharks and kleptomaniacs in Shagari’s government wasted no time in feeding fat and looting the balance of what they could not consume, that, by the time the army came calling again in 1983, Nigeria had become a serious debtor nation with international skepticism on our ability to meet our obligations with such sustained profligacy. The seeds of a debt burden sowed by the civilian administration of the National Party of Nigeria – NPN-blossomed unattended to dizzy heights even as creditor countries in Europe continued to massage our egos with such encouragement that the Nigeria nation was under-borrowed and therefore needed more loans to finance our development and meet existing obligations!

Their suggestions became attractive bait for military governments seeking the favour of western nations, and it was not surprising that we not only accepted more loans, but we carried on as if there was no obligation to settle even the outstanding commitments, inspite of the atrocious and oppressive interest rates and penalties which galloped at a geometric pace in the event of default. It is not surprising that at the end of 2005, the loan burden had ballooned to over $35bn inspite of the reality that the initial capital sum of less than $14bn had been paid together with additional interests and penalties of over $17bn over the years!

The fact that the national treasury does not belong to anyone family made it easy for Nigerians to countenance the fact that no single tangible sustainable project can be traced to the funds borrowed and which eventually became an albatross on our economy and the welfare of our people.

Indeed, in the same manner, a small handful of people with conscience campaigned in European parliaments, particularly in England for abolition of slave trade, a modern day pressure group under the aegis of Jubilee Debt Campaign (JDC) launched a massive worldwide campaign for cancellation of debts owed by the worlds poorest countries. Indeed, it is to credit of JDC that most African countries had 100% of debts owed totally cancelled. In the case of Nigeria, we only got 60% cancellation in spite of the international media posturing odysseys of our Finance Minister and her team across Europe.

Our Senators alone spent a princely $10m for travel expenses and estacodes all in an attempt to duplicate the incisive and effective pressures of JDC on the UK and other European creditors. Incidentally, the JDC under able and sincere leadership of Tricia Rogers has begun an independent campaign to pressurize UK creditors to return their share of $12bn Nigeria paid Paris Club of creditors, as JDC considers it immoral to take away money, which we need to improve the welfare of our poor people. We are not aware that Nigerian authorities have anything to do with this initiative, but President Obasanjo’s recent statement at a conference in Kenya that debt relief to poor countries should not fall short of 100% may be a covert declaration that Nigeria may have been shortchanged in this matter of debt relief, otherwise, why would the same Nigeria celebrate a 60% debt relief, while our President is demanding 100% for other countries which have a better rating than us in poverty index of the world’s poorest?

Inspite of the controversial nature of Paris Club debt relief, Nigerians, nonetheless, may breathe a sigh of relief that one way or other, the oppressive debt (overhang) is over or is it? The current trend of domestic debt burden is certainly worrisome. The domestic debt, of course, is the summation of loans taken by the government of Nigeria from Nigerian banks and other private or indeed public investors. The local debt level has jumped by almost 100% in the last three years.

Mr. President indicated in his budget speech to National Assembly last month that domestic debt burden will approach N2
trillion in 2007! However, the Guardian Newspaper editorial of 2/10/2006 suggests that “the true level of internal debt stock may well be in the region of N4 trillion; at the current rate of exchange, this would translate to over $30bn, de ja vu, you might say! Even if we adopted an average debt figure of N3 trillion, we would still be owing local investors, mainly money market investors, rather than contractors over $23bn in 2007!

This huge local debt has been accumulated within 3-4 years, but once again, what have we got to show for it in terms of local infrastructure? Our power generation capacity continues to record a shortfall of about 7000MW inspite of huge spending amounting to over N1 trillion as per calculations of an eminent member of the Senate; our public schools remain trading places for teachers and playground for students; our hospitals continue to remain as consulting clinics and our mass transit system still remains non-existent, while potable water remains a mirage for over 70% of Nigerians! So, what has most of these borrowed monies been used for? The truth, according to Mr. President and the CBN Governor, is that most of the debts incurred were never meant for any infrastructural upgrading in the first place; the funds were borrowed so as to take away supposedly excess cash from the hands of the bank so that their ability to extend credit to their customers will be constrained and curtail inflation!

The CBN and the Debt Management office sell treasury bills and bonds in the money market so as to mop up excess liquidity and deepen the bond market, (whatever that means!) Indeed, according to CBN Governor, money so borrowed by government is simply sterilized or closeted so that the high level of cash in the money market would not be available for consumption spending. The CBN Governor recently indicated that interest payments for servicing these loans which are obtained at rates of 12-13% and 17% respectively reached N75bn in the first quarter of 2006, while the President in his budget speech reported that interest payments for servicing these loans would approach N250bn in 2007. Please note that this huge amount which would be earned as interest by mainly the brotherhood of banks is enough profit to create another 10 newly capitalized banks with the minimum of N25bn capital base.

It sounds as odd economics to spend an additional sum of N250bn in order to reduce the amount of cash in the money market in any one year! But never mind, the banks have never heard a more intoxicating song as they embark on multiple edifices to hold their branches and pay salaries that are the envy of other sectors, while local industries continue to search for the tunnel that will lead them to Eldorado before they are forced to close shop and throw up more employees into the labour market! If CBN is simple-minded enough to give $7bn of our reserves at 3-4% interest to Nigerian banks which are then allowed to recycle the funds into naira and purchase treasury bills and bonds with returns of between 12 and 17% respectively, then, Nigerians can be certain of holding steadfastly to their lowly marks on the world poverty ratings for many years to come.

PS/ (Over N500bn was allocated for debt service in 2011 budget)

SAVE THE NAIRA, SAVE NIGERIANS!

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