How Experts Differ Over FG’s Plan To Continue Borrowing

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The announcement by the federal government over the weekend that it will continue to borrow money, especially from abroad to fund infrastructure, service debt and keep the economy running has divided economists and financial experts in the country along parallel lines.

While some contend that it is not justifiable to borrow at this time the nation is already in huge debt to service outstanding debts and stimulate the economy, others think otherwise.

Addressing a press conference on Sunday at spring meeting in Washington DC, Finance Minister, Kemi Adeosun, had said the federal government will continue to borrow in spite of concerns over Nigeria’s rising debt profile, occasioned by low crude oil revenue, to keep the economy going.

According to recent figures from the Debt Management Office (DMO), the nation’s total foreign and domestic debt is currently at N19.16 trillion from about N17.36 trillion in 2015, a situation the International Monetary Fund (IMF) said is capable of sparking the nation’s indebtedness to 24.1per cent high of its GDP by 2018 and 23.3 per of GDP by end of 2017.

As the federal government awaits the consent of the National Assembly to raise $5.5 billion through Eurobond and syndicated loans, analysts are optimistic that the country will be able to raise the desired amount from the market, saying foreign investors will embrace another round of Eurobond from the country.

Analysts who spoke with LEADERSHIP in separate interviews yesterday on the issue were sharply divided over the matter.

Renowned economic analyst, Henry Boyo, argued that acquiring more debts at this moment when the country is already heavily in debt would be inimical to the economy.

Noting that the best option for now is to stop incurring more debts, he said, “If you are already neck deep in debt, the sensible thing to do is to stop borrowing and see how you can redress the requirement you have budgeted for.

“In this kind of situation, you cut down on your expenses – takeaway the frivolities or reduce the amount you need to spend. Secondly, you reduce your borrowing, especially when you are paying 50 per cent of your revenue to service debt.

“If you have to borrow, it means you are compounding your already existing debt and you have not created a link for servicing those debts without further borrowing. At the end of the day, you find out that in spite of your heavy recurrent expenditure, you are actually borrowing to spend for recurrent expenditure”.

Arguing that the federal government cannot justify the plan to further borrow, Mr. Boyo said, “We have been hearing that ghosts workers have been found here and there and that all wastages in the system have been blocked. Despite all that, the recurrent expenditure never falls down! Meanwhile, you are still borrowing to service debt.

“Clearly, it is not sustainable to already pay 50 per cent of your aggregate revenue to service debt. You are going to borrow not to spend on capital but recurrent expenditure. You cannot manage that, especially when you take a step further to enter into the realm of madness by saying you are going to borrow from abroad to service local debt”.

Responding to Adeosun’s claim that suspending government’s borrowing programmes at this time would only lead to loss of jobs, stagnation in infrastructure investments and closure of many businesses, Boyo said it is a mere misconception that government spending drives the economy.

His words: “That is absolute nonsense because it is not government spending that drives the economy. The total budget for this is about N7 trillion. Nigeria needs about $100 billion to fix power alone.

“It is not the budget for the capital expenditure that is really important because that is too small an amount to drive any economy. What drives the economy is in the private sector. The private sector has infinitely elastic amount of credit available”.

Expressing reservation on the role of the Central Bank of Nigeria (CBN) in controlling liquidity in circulation, Boyo said, “The central bank is busy constraining the amount available so as to curtail inflation. So, even if the money in the private sector is infinitely elastic, it will not be meaningful for investors to even access that credit if they have to pay over 20 per cent interest to borrow. That immediately makes them uncompetitive”.

But the managing director, Cowry Asset Management Limited, Mr. Johnson Chukwu, disagreed with Boyo on the ground that the federal government does have revenue shortfall, which they are forced to finance.

He said if the government has to finance local currency debts with dollar-dominated instruments that are cheaper it does not have any choice than to borrow.

According to him, while the key thing is that borrowing is not a sustainable strategy given the weak revenue profile of the government, what government should look into is to involve a financing plan that it can finance infrastructure from the Public Private Partnership (PPP) schemes.

He said, ‘‘Given our weak revenue due to dwindling global prices and tax revenue is low, the concept of short-time borrowing is accepted but in a mid-long term, we must involve a financing structure that will bring in PPP within our delicate financing government revenue shortfall’’.

On his part, former president, Association of Stockbroking Houses of Nigeria (ASHON), Mr. Emeka Madubuike, who agreed that every country does borrow, said Nigeria’s biggest challenge is what federal government would do with the borrowed money.

He said, “If the borrowed money is invested in productive projects, then it will be possible to pay back borrowed funds. There must be discipline, checks and balances if government desires to borrow.

“The most important thing is about utilization of the borrowed funds. Federal government must think on how to invest in productive infrastructure, revamping the agriculture sector and anything aside that, our economy will continue to struggle”.

The Finance minister had earlier mentioned the plan to raise another Eurobond before the end of the year as part of efforts to restructure the country’s debt profile.

Nigeria’s debt profile currently stands at N19.64 trillion as at June 30, 2017 with external debt accounting for 23 per cent at N4.6 trillion.

Adeosun had noted the plan of the government to restructure the debt profile to bring the external debt stock to 40 per cent of total debt.

Also, analysts who spoke with LEADERSHIP noted that the stable outlook and the return to positive growth as well as a projected improvement in the lot of the Nigerian economy is a perk for foreign investors to pick up the Eurobond of the country.

Analyst at FXMT, Lukman Otunuga, explained that the plan of the government to finance infrastructure projects with the fund raised would make it more attractive to investors.

He said, “The intention of the government is to utilise the money to finance the deficit in Nigeria’s 2017 budget. Buhari stated that in addition to covering the deficit, the loan would be used to provide funding for capital projects, including the Mambilla Hydro Project and the construction of a second runway at the International Airport in Abuja.

“Sentiment towards Nigeria is likely to receive a boost on the back of the news that the money will be used for infrastructure development”.

Also, managing director and chief executive of Cowry Assets Management Limited, Johnson Chukwu, noted that the proposed Eurobond would be well received at the foreign debt market. “I think the market will embrace another Eurobond”, he stated.

According to him, in terms of external borrowing by the federal government, Nigeria total external debt is only $15 billion and if it takes another $5 billion it will go to $20 billion, whereas the foreign reserves is currently about $33 billion.

“So, in terms of magnitude, the amount the government wants to borrow is still within a reasonable amount it can afford to pay. I think foreign investors will embrace it. If you look at the last two outings of the federal government in the Eurobond market, they were oversubscribed”, he added.

The International Monetary Fund had last week warned about the sustainability of Nigeria’s foreign borrowings, stressing the need for the country to increase its non-oil revenue collection.

IMF’s assistant director, Fiscal Affairs Department, Mrs. Catherine Pattillo, who stated the support of the fund on how the country channels its borrowings towards infrastructure growth, had cautioned against creating a debt crisis in the future.

Cowry Assets chief executive had also noted the need for the country to source other ways of funding its infrastructure needs.

Stating that the country cannot continue to go on a borrowing spree just because it can, he said, “We need to review our strategy to funding infrastructure and the reality of the matter is that the government cannot sustain funding of infrastructure through borrowing because we already have a huge interest burden.

“If you look at the budget, the debt service projection for this year is N1.66 trillion. If you look at the 2017 federal government budget the debt service alone, payment of interest charges is about 32.7 per cent of expenditure. If you take that as a percentage of total revenue it is about 45 per cent.

“So, government’s continuous borrowing is leaving the government with little resources to do infrastructure. If you consider the capital expenditure for this year, it is N2.42 trillion, whereas debt servicing alone is N1.66 trillion, which means debt service is almost at par with capital expenditure.

“Unfortunately, even the capital expenditure becomes discretionary because you have to service your debts. You have to pay your interest charges to avoid default before you go into capital expenditure. So, the situation with the federal government today is so difficult because you must borrow but borrowing is a very expensive option”.

 

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