The $30 Billion Loan Debate: Who Wins?

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The debate over whether or not the federal government should take the proposed $30 billion loan continues to rage as there is not yet a clear indication from government how the loan will be utilised as requested by the Senate when the application for an approval first surfaced

By Olu Ojewale  |  Dec 19, 2016 @ 01:00 GMT  |

THE faith of the proposed $30 billion external loan by the federal government seems to be hanging in the balance. Since the Senate, on October 25, rejected the federal government’s request to approve external loan of $$29.960 billion to fund projects across the country between 2016 and 2018, there has been no let up in controversy over the propriety or impropriety of the obtaining the loan.

Given the current debate on the issue, the government seems to be taking its time in forwarding a new application to National Assembly for approval of the loan. Besides, the Presidency would need to properly articulate in detail how the loan would be deployed in various projects across the country as requested by the Senate.

Nevertheless, the debate on whether the external borrowing would be the saving grace to bail out the country out its current economic crisis remains on the front burner. In fact, opposition against the loan appears to be growing by the day.

Lamido Sanusi, a former governor of Central Bank of Nigeria, CBN, and now emir of Kano, added his voice to the debate on Friday, December 2, when he warned President Muhammadu Buahri against taking the foreign loan. It was the second time in three months that Sanusi would be criticising Buhari’s economic policy. In August, he sternly criticised the president’s economic policy, saying his government may end up like that of the former President Goodluck Jonathan.

In any case, Sanusi, who spoke at a policy dialogue forum organised by Savannah Centre for Diplomacy, Democracy and Development in Abuja, said it would be difficult for the loan to be granted because Nigeria has five exchange rates.

Sanusi said: “I can tell you for free, if the Senate today approves that we can borrow $30 billion, honestly, no one will lend us. It should be approved and I will like to see how you will go to the international market with an economy that has five exchange rates.

“There is one rate for petroleum marketers; there is interbank rate; there is another for money market operators such as western union money gram; there is bureau de change rate and there is a special rate you get when you call the CBN for a transaction.

“So, who will lend you when they don’t know your exact reserve and exchange rate? I want to see who will lend you money when the Niger Delta bombing of oil is there ‎when the main source of the loan repayment is oil.”

In the alternative, Sanusi said the federal government should embrace private sector investments as a way out of the recession. “The Senate should support tax incentives and other benefits to encourage the private sector,” he said.

A similar clarion call against the proposed loan was made earlier by former President Olusegun Obasanjo.  In a keynote address, “Nigeria yesterday, Today, and Tomorrow: Governance and Accountability”, which he delivered at the First Akintola Williams Annual Lecture, in Lagos, on Wednesday, November 23, Obasanjo said that some of the projects it would be expended on would not be self-sustaining as claimed by the government.

He warned: “If we borrow some $30 billion in less than three years, we would have mortgaged the future of Nigeria for well over 30 years to come…. We immediately need loans to stabilise our foreign reserve and embark on some infrastructure development but surely not $30 billion over a period of less than three years.

“That was about the magnitude of cumulative debt of Nigeria which we worked and wiped out 10 years ago. Before that debt relief, we were spending almost $3 billion to service our debt annually and the quantum of the debt was not going down. Rather, if we defaulted, we paid penalty, which was added on.”

He said the projects listed for borrowing are necessary in the medium and long-run for the nation’s economy, but that government must prioritise. Citing the railway and the Mambilla hydro projects as examples, Obasanjo said they are necessary but cannot pay themselves.

“The argument of concessional, mixed with commercial, does not hold water. When the concessional and the non-concessional borrowings are put together, interests alone will be in the region of three to four percent. The bunching of debt service will be a problem to confront other administrations in future,” he said.

Obasanjo
Obasanjo

Besides, he argued further: “Telling us that those projects will pay themselves cannot be the whole truth. We were told there was rainy day when we lavished our reserve and excess crude on frivolities. When we now have the rains beating us, there is no umbrella over our heads. Again, now, we are being told the projects will pay themselves when we know damn well they will not. If we borrow some $30 billion in less than three years, we would have mortgaged the future of Nigeria for well over 30 years to come.”

To get out of the woods, he said other alternatives should be considered. “We must not be unmindful of internal borrowing either. It impacts somewhat differently on the economy but it must not be allowed to crowd out the ability of the private sector to borrow to grow the real economy which is to lead us out of the recession,” he said.

Also worried about the burden of the nation’s foreign debt is Henry Boyo, an economist and industrialist. Boyo said there is nothing wrong to borrow in order to improve the nation’s social welfare and infrastructure. “But it is worrying if you have to borrow at the same time that you are already owing so much money such that you are using about 40 percent or more of the real income you earn to service your debt. In other words, you are already paying about N40 out of every N100 that you earn to service your debt. On an individual level, if you earn N1 million a year after deductions and you find that you have to immediately take N400, 000 to service your debt, the balance of N600, 000 will not be enough for you to pay your rent, transportation, cater for your children and things like that. So, it is critical that you do not borrow beyond your capacity to pay. So, that means that I’m not against borrowing but I’m saying that borrowing should not be done when the parameters of income and expenditure don’t advise that you borrow.”

For Pat Utomi, a professor of Political Economy, the problem with the Buhari administration is not so much about the loan, but the absence of a clear economic strategy to rescue the country from recession. “First and foremost, I think the issue is not so much about whether to take or not to take a loan. The issue is where is Nigeria going? What will it take to get it out of where it is and move it in a particular direction? There is general talk about how you get out of recession. Part of that general talk says there are more or less two typical ways that you get out of recession. One is you essentially produce your way out of recession. The other one says you can stimulate economic activities by spending your way out of recession; spending is stimulating production and then production will essentially lead to output growth that will take you out of a recession,” Utomi said.

Besides, he said that another way a nation could get out recession is through reduction in taxes, which could also be a form of an incentive to invest and get more investment, more production, greater output to get out recession. “But you must bear in mind that you provide tax incentives where the tax burden is the reason people are not investing. If you are in an economy where people don’t pay much tax such that a tax rebate will not serve as an incentive to stimulate production, going that track will be meaningless,” he said.

Getting a loan, according to Utomi, is supposed to be another means of getting money to spend in order to get out of recession. “But just getting the loan on its own does not mean that you are going to be able to stimulate production. You can get the loan and spend it in such a way that the money just enters the system, gets cornered by some champions and eventually taken out of the economy. So, you can in fact deepen the recession with that spend. But if you were to borrow the money and truly apply it to the most critical parts of the economy where output can be increased within the context of a clear direction agreed as the growth track for the country, then you are spending your way out of recession,” he said in an interview.

He, therefore, would want the federal government to convince ordinary Nigerian citizens as well as their representatives in the National Assembly on how it planned to apply the loan to have a positive impact on the economy. The professor blamed the lack of confidence that the money would actually be used for the intended projects on the widespread corruption and failure of leadership in the country. He said: “So, there is such a failure of leadership in this country that is so shameful that when you hear that $30 billion has been pumped into the economy, you know that a good percentage of it did not get to its intended destination; $12 billion or more will go into a few pockets. Forget the nonsense about corruption being fought or not fought. It makes one to wonder why we are not scared that we are increasing the debt burden on the next generation without getting the benefit of it for them.”

Sanusi
Sanusi

Similarly, Abiola Awosika-Fapetu, a professor of Business, who is currently the founder and rector of Olawoyin Awosika School of Innovative Studies, OASIS, Lagos, in an interview, said it would be difficult for Nigeria to get out of the current situation without borrowing. “When the spending happens in Nigeria, more Nigerians get to work and when they work, the multiplier effect takes place. So, the most important thing that Nigerians should be asking the federal government is what would this money be spent on? Now, if they spend it on recurrent expenditure we are doomed, but if they spend it on capital expenditure which will create jobs or on infrastructure like building roads which means the construction companies can keep hiring labourers and the services of people who work for these labourers and engineers are now needed, then that will be growth for the economy. But if they are going to borrow the money to pay salaries of workers, then we are in trouble,” Awosika-Fapetu said.

Besides, she said the government must be very careful to understand clearly the terms of the loan. If it is such that what we need to service the loan would weigh us down, then there is trouble. There is somebody borrowing at three percent and somebody borrowing at 31 percent. Now, if you borrow at 31 percent, it is going to kill you. But if someone gives you a loan at three percent, it is not going to be too difficult for you to meet the obligations. So, if the terms are good and we borrow and put the money to good use, Nigeria will build its foreign reserve and would be able to do what (former President Olusegun) Obasanjo did in his first term when with Ngozi Okonjo-Iweala and the rest of them paid down our debt and built up our foreign reserve. So, firstly, we must make sure that the terms are ideal.

“We have to be careful to read the small prints on the loan agreement because a lot of times, there are tiny little words at the bottom of a contract that most people don’t read because it is not telling them what they want to hear. But the lenders hide those clauses that would come back to haunt you in those small prints. So, if we read the small prints carefully to know that this is not going to come back to haunt us, then we may go ahead. It, therefore, boils down to what we are borrowing for and the terms of the loan. If the terms are easy on us and we borrow for capital expenditure that will encourage people that are going to export so that we can earn foreign exchange, then it is a good plan,” she said further.

Notwithstanding all the arguments, John Odigie-Oyegun, national chairman of the All Progressives Congress, APC, said the President Buhari administration has been left with no option than to borrow to revive Nigeria’s ailing economy. Speaking after receiving a lifetime achievement award from the Warri Choral Society at the Muson Centre in Lagos, Odigie-Oyegun said Nigeria needed to borrow in order to invest in infrastructure and grow the economy. He said: “If you read the newspapers, you hear the President being advised to pump money into the economy. So, the question is, where is the money coming from? Simple, it has to come from somewhere including borrowing – both internal and external.”

President Buhari had written the National Assembly on October 20, this year, seeking for approval to borrow $29.960 externally over a three-year period. Buhari had explained in his letter that $11.274 billion out of the loan would be spent on special infrastructure projects while the sum of $10.686 billion is for Euro bonds of $4.5 billion and Federal Government Budget Support of $3.5 billion.

Other projects listed in the borrowing plan included $75 million for community and social development projects; $125 million for Nigeria states Health Programme Investment Project; $100 million for Nigeria Youth Employment and Social Support Project and $50 million for FADAMA III project, respectively.

The Debt Management Office, DMO, believes that the loan would be of great benefit to Nigeria. Abraham Nwankwo, director general of the DMO, in an interview, explained that the loans would help in addressing the biting infrastructure deficit in the country.

Nwankwo said: “When you are in this kind of economic situation, you have to decide where you want to start addressing the problem. You then come to the conclusion that the most critical point to start is to deal with infrastructure problem. If you deal with infrastructure problem, the cost of power will be lower, the cost of transportation will be lower, and the cost of most other services will be lower.”

Besides, he said one of the features of the proposed loan is the low concessionary nature of the interest rate, which is fixed at 1.5 percent, which makes it different from previous loan arrangements with the Paris Club of creditors, which came with floating interest rates as high as 18 percent.

UtomiAccording to him, the loan facility will help revive infrastructure like railways which will smoothen movement of heavy goods across the country. He argued: “That impacts the economy by bringing down the general price level, (they call it the consumer price index, which is a classical measure of the price level and the rate of inflation.) When you do this, the Central Bank of Nigeria will set the monetary policy rate low, because all over the world, the central bank knows it has to put the monetary policy rate high enough to catch up with inflation rate, otherwise we will be talking of negative real rate of interest which destroys the economy. So the way to go about it is that you have adequate infrastructure, power road, transportation ICT.

“All these make the cost of production in the economy much lower and when this happens, the cost of goods and services will be lower and then inflation will start coming down. And if inflation comes down, the monetary policy rate will be lower and this will translate to a lower lending rate. That is the sequence,” Nwankwo said.

Besides, he said that it would not be difficult for the country to pay back the loan because it would be repaid in 20-30 years time.

Although the President’s request was rejected through a popular voice vote at the Senate, government has been unrelenting in its bid to get the Upper Chamber to approve the acquisition of the loan. Lai Mohammed, minister of Information and Culture, and Ita Enang, senior special assistant, SSA, to the president on National Assembly Matters (Senate), also maintained that President Buhari would reapply for the approval of National Assembly for the loan, stressing that it was rejected on technical grounds.

Be that as it may, the government does not only need the National Assembly to convince about the importance of getting the foreign loan, it needs to convince the whole country if its request is expected to receive a smooth passage.

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