By Simbo Olorunfemi
Easy to see that there are not many fresh ideas out there about a magical fix for the exchange rate. But obviously, that won’t stop those who want to politicise or weaponise what those who know know runs deep down, with the root embedded in the distorted economic structure and our orientation as a people.
But I found an intervention by an expert on one of the pages here, making the exchange rate conundrum simply about overborrowing on the part of the current government and the attendant burden of debt servicing that comes with it.
Of course, we all know the relationship between debt burden, servicing obligations and the effects that could have on the exchange rate. But I thought to look at the data to situate this in context, especially as there is a lot of talk out there now about overborrowing. Also, there are increasing concerns about the Debt to Revenue Ratio, which is said to be already in the unsustainable region, with the argument being made that the Debt to GDP ratio might be leading us into a position of false comfort.
Indeed, according to experts, Nigeria’s Debt to GDP ratio, for many years, at an average of 20% compares favourably with the “Public Debt to GDP threshold of 55 percent for countries in Nigeria’s peer-group, as well as the West African Monetary Zone (WAMZ) Convergence Threshold of 70 percent of the GDP”. The concern is with the Debt to Revenue Ratio, which is put at about 80%. But I found, looking only at recent data, that as high as that is, it is not quite an historical high, as it was 162.8% in 2016.
On Debt Service to Revenue ratio, which I think the gentleman I made reference to was more concerned with, whereas the recommendation by the World Bank is put at 22.6%, Nigeria’s own is over 60%. As a matter of fact, depending on which newspaper report you are reading, the figures for the first quarter of 2021 was put as high as 97.7%.
Usually, when I see worrisome information, I ask myself a number of questions- Is that so? Why is that so? What is being done to address this? What can be possibly done differently? So, looking at these figures, troubling as as they are, I was of the mind that merely looking at them in isolation, without finding out what the make-up is can be misleading and lead to erroneous assumptions or conclusions.
In fact, when you historicise the data, you get to see the trajectory and the folly in unduly politicising these figures. But it also helps to put into better perspective what is being done, leaving one wondering about the availability of other choices or solutions.
Indeed, Nigeria’s external debt stock has risen to @US$33 Billion as at March, 2021, almost at the 2004 level of $35.9 Billion, of which nearly US$30.4 billion of it was due to the Paris Club with high debt servicing costs, which placed a significant strain on Government resources, resulting in a build-up of US$6.4 billion in arrears by 2005.
“In 1982, when oil prices crashed, Nigeria was unable to pay off the loans it borrowed. Interest payments spiked, penalties rose, the crisis had begun. This pattern continued well into the military regimes of 1985-1993 and 1993-1998, when Nigeria stopped paying its debts to the Paris Club altogether, after the Paris Club refused to substantially reduce Nigeria’s debt.”
Noteworthy is the fact that original loans from the Paris Club, as at 1985 was approximately US$8 billion, but by 1990, it had increased to US$16.7 billion. Thse debts were “loans insured through Export Credit Agencies of creditor governments or their appropriate institutions, extended to the Federal Government of Nigeria (FGN), the States and other public entities and which are covered by the guarantee of the Federal Government of Nigeria”. Also included were commercial credits or trade arrears incurred by private entities deemed to have been verified by the FGN.
One distinguishing feature between the situation in 2005 and now is that unlike then, when over 85% of Nigeria’s exposure was to 14 member-nations of the Paris Club, the bulk of exposure at the moment, is to multilateral institutions, with over 50% of Nigeria’s external debt due to IMF, World Bank Group, AfDB and other Development Banks. The nature of debt, creditor and terms definitely have an impact on the level of risk involved.
Of note also is that contrary to the claims by some that Nigeria has been sold off to China on account of high exposure from loans obtained, the Chinese component in the debt is about 11% of the total stock. To be noted also is that the loans from China come at 2.5% interest rate, with 20-year tenor, 7-year grace period and tied to specific infrastructure projects that are easily identifiable.
Now, the impression that has been created is that the current government is spending so much servicing debt, having incurred so much external debt. But that is an erroneous impression, as that is not the case. Indeed, the loans that have been obtained from China come with a 7-year moratorium, so the question of servicing them right now does not arise. Also, some of these loans have not been disbursed, some only partially. The bulk of the loans from China that have been fully disbursed are those obtained between 2010 and 2013, before this administration came to power.
From the March 2020 figures I saw, only two projects have received any form of disbursement : Lagos-Ibadan rail project (59.95%) and Abuja-Keffi-Makurdi road (17.5%). Interesting that at the moment, interest payments are already being made on these two projects. However, the bulk of the debt service payments to China, over 80% of it, was for loans obtained by the previous administration between 2010 and 2015, including that for the controversial “national public security community security project” that was to see to the installation of CCTV in public places.
Indeed, as had been previously noted, there was real concern about the debt servicing costs for Q1-2021. I am not sure it has crossed the mind of those who have been running with the figures, that 76% of the payments made was for Eurobond, with the 500 million Bond of 2011 due for redemption in 2021 and the One Billion bond obtained in 2013, partially redeemed in 2018, due for final redemption in 2023, and provisions already being made for it, as well as those for 2032 and 2049.
Of course, the current administration has issued more bonds, with one for this September. However, the point of this is to establish a tapestry which runs from the past to the present with evident implications for the future. The current administration, in a way, is meeting up with obligations entered into in the past, with the mind of laying the foundation for tomorrow with loans, which will be repaid over time. But without a doubt, there is no direct connection between the loans that have been obtained by the current administration, especially from China, with increase in debt service obligations.
The argument that should be on the table is that of the propriety of obtaining more loans at this time. I doubt that anyone will validly query us meeting our debt servicing obligations, which is why the figures being put out now ought to be interrogated more in the direction of projection into the future, to establish if it is truly sustainable.
It is difficult to make the argument that the current administration should pull back from his own vision and agenda, especially with the bulk of the external loans being directed towards the development of essential infrastructure that can only help the production and revenue base of the country, going forward.
Indeed, expert analysis about the problem argue that it is more of a revenue problem more than a debt problem or anything else. The Final Risk Rating from the outcome of the 2019 DSA submits that “Nigeria’s External Debt remains at a Moderate Risk of Debt distress with some space to accommodate shocks, while Nigeria’s Total Public Debt remains sustainable, but subject to Revenue shocks”. It argues that, “for the Total Public Debt Sustainability Analysis, the ratio of Public Debt to GDP remains under its benchmark under the baseline scenario, but the revenue-related debt indicators were high 6 under the shock scenario, indicating a revenue challenge”.
I doubt that there is any argument that can be made against the point that we have a revenue challenge, but as some of us concluded with respect to the exchange rate, I am not sure there is a magical fix out there. All the ideas out there, simple as they appear, are beginning to sound suspiciously abstract, tired and clichéd. How do we address the challenge? Chairman of the Presidential Economic Advisory Council, Dr Doyin Salami, says: Block leakages; unlock potentials at state level; improve tax efficiency and coverage; and this ‘NEW’ one – sell off dead assets (estimated at $900 billion).
In reality, you find yourself asking, if it is that simple – Why not? But in another breath, you find yourself asking – How is it to be done? How is it that it has not been successfully done all the while? We know the problems are largely historical – fiscal deficit, revenue problem, low tax base, low domestic production, insufficient investment. All of these with impact on the GDP, exchange rate and everything else! But what do we now do? Stop further borrowing? Stop servicing debts? Simply fold our arms? What do we do, under the circumstance, especially with the massive dislocation and distortions triggered by covid-19?
I wonder if it is right though for Dr Doyin Salami to be laying out the problems in public as he has one. I would have thought that his brief is to work on the proposed solutions with the economic management team from within. I wonder if his argument might be that the Economic team is not pushing enough with implementation, as I dare say, nothing really novel about these ideas, which might be the reason why he is public, which I do not see as that helpful in instilling confidence in foreign investors about the state of the economy.
I wonder too if the lead Manager of the Economy, the Minister of Finance, Budget and National Planning, Zainab Shamsuna Ahmed, should not be showing greater presence, laying out the ideas and measures being pushed to address the challenges, rather than simply putting out figures and data, which anyone can interprete to drive whatever narrative suits him. I think there needs to be more of confident and assertive talk around policy decisions and direction opted for, even as we all can see that there is not much of a leg room around this.
The 2019 Debt Sustainability Analysis projects that the export and revenue-related indicators and borrowing space are expected to improve in the medium to long term. That is some assurance. That is the only way to go.
* 22. 09. 21
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