To borrow or not to borrow?

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President Muhammadu Buhari proposes to spend over N6n in the 2016 Appropriation Bill, even though government “reasonably” expects to earn about N3.8tn as revenue. Consequently, according to the budget proposals, N984bn will be borrowed from personal and corporate holders of surplus naira to partly fund the shortfall, while $4.5bn (N900bn) will also be borrowed from multilateral and commercial lenders in the international market at the current exchange rate of about N200=$1. Alarmingly however, a further drop in oil prices below the $38/barrel benchmark may invariably still push the 2016 projected deficit well above N2tn and worsen Nigeria’s debt burden.

In practice, a ready market for government borrowing is clearly a demonstration of investors’ confidence in the resilience of an economy and the ability to pay back their loans. Nonetheless, some critics may recall that we were once beguiled into an oppressive debt trap, by the popular refrain of international financial experts, that Nigeria was grossly under-borrowed. The effusive flattery worked and government rapidly liberalised external borrowings until repayment became a challenge and the Nigerian government was subsequently “bullied” to ultimately part with about $18bn to obtain partial debt forgiveness from creditors in 2006.

Sadly, our national debt is, unexpectedly, presently more than double the controversial $32bn value, which was considered dangerously high with unsustainable related service charges, just 10 years ago. Incidentally, if the Central Bank of Nigeria’s Treasury bill borrowings are included, the present proposal to borrow $9bn will propel Nigeria’s debt burden closer to $100bn. Furthermore, the unfortunate history of poor implementation and rampant corrupt practices may not inspire public confidence that another N2tn loan will be judiciously applied, despite Buhari’s renowned integrity factor, if the legislators, and their civil service counterparts, do not wean themselves of the gluttonous appetite that comes from the pervading mindset of “it is our time to chop”! Regrettably, so far, there is not much to suggest that the unusually bloated N6tn 2016 presumed austerity budget was not strategically padded beyond the 2015 N4.5tn plan just to support the profligacy and treasury looting that usually characterise budget execution.

Clearly, the 30 per cent plus deliberate increase in projected total expenditure, despite the dismal reality of dwindling revenue, does not suggest best practice or responsible financial management which advises that, you “cut your coat according to your cloth”. Thus, it is more appropriate to adopt a balanced budget in austere times rather than a heavy commitment to further borrowing just to fund a spending spree which will not generate additional revenue for government, but will inevitably further compound and spike debt obligations and related service charges beyond an already precarious level.

Although the 2016 capital allocation of 30 per cent has been celebrated as appropriate, there are real concerns that the increase may not, as usual, be applied to critical infrastructural projects that will touch the lives of more Nigerians. Furthermore, financial waste will become grossly magnified, if the Buhari administration commits to fresh projects with long gestations, without first carefully identifying, auditing and completing those viable and socially supportive, ongoing projects that were inherited from previous administrations.

However, cynics may suggest that such a responsible fiscal plan that rightly reflects austerity would diminish the “beef” in contract awards and the provision of jobs for the boys. After all, not all politicians were as lucky as Buhari, who did not have to sell property or obtain loans to contest elections to win a “lucrative stint” in public office. Unfortunately, not even a contrite Buhari, who has already confessed to being shackled by the Judiciary in his anti-corruption crusade, may be able to stop desperate political buccaneers from their “harvest” of closer access to easy public funds.

Thus, despite the significant contraction in our major source of revenue, our political and civil service elite would have celebrated the initial N8tn budget estimate earlier canvassed by Vice-President Yemi Osibanjo, even though the resultant 60 per cent budget deficit and an additional N4tn loan would have clearly compounded our national debt well beyond N100bn, with increasingly oppressive related service charges that would inevitably remain troublesome for this generation and Nigerians yet unborn.

Although some experts have suggested that, Nigeria’s current debt to GDP ratio of barely 12.5 per cent, presents no cause for alarm, it will clearly be suicidal, nonetheless, if, as recently observed by the International Monetary Fund’s Christine Lagarde, over 35 per cent of projected annual revenue is simply dedicated to debt service. Such a horrid imbalance will invariably lead us, ultimately, into another death trap with possible loss of financial sovereignty, to our historical saber-rattling shylock creditors. Ironically however, Buhari’s plan to borrow almost N2tn to fund the 2016 deficit is also totally in contrast to Lagarde’s observation, during her visit, that, based on present potential, “Nigeria does not need to borrow”, and her affirmation, also that the IMF was not currently in any talk regarding loan support to Nigeria.

Inexplicably, however, barely a month later, the Finance minister, Kemi Adeosun, elatedly announced that the IMF would fund $2.5bn of an external loan component in the 2016 deficit, while the African Development Bank would fund another $1b. Apparently, a balance of $1bn will be sourced at higher commercial rates of interest, which could be, between seven and 10 per cent. Nonetheless, it is hardly contentious that with interest rates usually below three per cent, and the extended moratorium and generous payment terms, the IMF and the ADB loans should be welcome, provided the proceeds are strictly dedicated to specific, visible, critical social infrastructure projects such as comprehensive networks of road, rail, gas and fuel pipelines or indeed, the East-West Road and the Second Niger Bridge, as examples.

However, even if the IMF/ADB loans appear friendly, we may be well-advised to avoid non-multilateral commercial loans which are usually subject to international cash flow volatility, which could be injurious to our stock market and naira exchange rate, and could also trigger destabilising consequences for the economy and our ability to repay our external debts.

Conversely, the N984bn naira domestic loan is less risky, even though it attracts much higher average interest rates around 15 per cent. Sadly, such rates are invariably also inappropriate for risk-free sovereign debts such as ours.

It is advisable, in view of the preceding fiscal dilemma, to interrogate why our own CBN cannot advance $1bn from its $28b reserves rather than the government’s preferred option of a more risky external commercial loan.

Similarly, we must also question the need to borrow N984bn domestically when the CBN, in fact, persistently sits comfortably on trillions of idle excess naira, on which it pays double digit interest rates to mop up. Furthermore, we must also interrogate why domestic loans are so high, despite the CBN’s persistent challenge with excess liquidity; surely no commodity becomes more expensive when there is a market surplus!

Nonetheless, the critical question, for now, is whether or not the proposed N2.2tn projected deficit is a responsible response to the collapse in revenue from our major traditional source of income. Thus, with no end in sight for low crude prices, the budget will again inevitably accommodate higher deficits in 2017 and further instigate additional loans that may soon require the dedication of over 50 Kobo out of every naira government earns to service annually.

Presently, only the National Assembly can redeem us from this oppressive predicament. There is clearly an urgent need for patriotic and socially sensitive parliamentarians to demand a thorough overhaul of the 2016 budget to produce a more sensible and responsible balanced fiscal plan, that is in tune with the current austere times. Such patriots should resolutely oppose reckless debt accumulation, which will mortgage our future.

source: http://www.punchng.com/to-borrow-or-not-to-borrow/

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