Can Nigeria Borrow Its Way Out Of Recession?

Finance Minister, Mrs. Kemi Adeosun

By Our Reporters

It is no longer news that Nigeria is currently in the grip of the worst recession to hit the country in about three or four decades. It is also no longer news that the National Assembly has passed the biggest budget outlay in Nigeria’s history, which came in at N7.44 trillion , or $24 billion.
The 2017 budget, upon which the country’s hope of pulling out of the recession rests, projects a deficit of N2.21 trillion, implying a deficit equivalent to 2.18 per cent of Nigeria’s Gross Domestic Product (GDP). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt, according to Wikipedia. Also The World Bank and the IMF hold that “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.”
With the price crude oil, which is the country’s main foreign exchange earner, languishing between the $40 and $50 range, as well as the unrest in the Niger Delta which makes crude export as projected in the budget an uncertain proposition, how to fund the 2017 Appropriation is a major headache for the Federal Government.
What is clear, however, is that the President Muhammadu Buhari-led administration rests its hope of funding a substantial chunk of the 2017 budget with big borrowing plans at both the foreign and domestic loan markets in order to plug a $7.5 billion funding hole in the 2017 budget expenditure.
According to Director-General, Budget Office, Ben Akabueze, Nigeria plans to raise $3.5 billion in foreign loans, including from the World Bank and from international debt markets, to help fund the 2017 budget. Approximately $2 billion of these foreign borrowings would come from concessionary loans, with the balance of $1.5 billion projected to come from commercial markets including the Eurobond market.
Akabueze, who laid these out at a media event in Abuja recently, also disclosed that the Federal Government will raise $4 billion from the local debt market. He explained that the 2017 budget provided a debt service amount of N1.8 trillion, which would be used to pay off maturing bonds and interest on extant domestic and foreign loans.
According to current figures, Nigeria’s local-currency debt shot up to N13.88 trillion last year – from N8.83 trillion in 2015 – and is set to rise further, which, according to experts, could send interest rates higher at home and choke the real economy.
Last August, Nigeria approved a three-year plan to borrow more from abroad so that 40 per cent of its loans would come from offshore, compared with the previous 16 per cent, and to extend its debt maturity profile. In all the country planned to borrow as much as $10 billion from debt markets, with about half of that coming from abroad.

‘Nigeria Has Not Borrowed Internationally Since 2013’

According to the Minister of Finance, Mrs. Kemi Adeosun, the projected borrowings would be applied to building direly needed infrastructure in order to stimulate economic activities, which in turn would pull the country out of the current recession. In a recent facebook engagement with the public, Adeosun stated: “it is a difficult time for the country and it’s quite a miserable moment to be a Nigerian. Our main source of revenue (is) really eroded, creating a very painful adjustment into the economy which we are working through.
“The good news is that we are working through the issues one by one and we are trying to ensure that as we rebuild the economy… We are working assiduously to build an economy when price is high or low, there will be a sustainable growth for all Nigerians. To do that we need to adopt a change of focus, invest in infrastructure that is needed to get the Nigeria economy going. Nigerians have various barriers in growing their businesses such as provision of good water, great roads, power generation and having a good transport network.
Investing in infrastructure will break barriers Nigerians are facing in their businesses.
“What the government is doing is to adjust those barriers holding us back, get those infrastructure in place so that businesses can thrive. We are trying to change their paradigm for Nigeria businesses to be competitive, so that they can create jobs and enabling environment for everybody.”
In addressing the funding challenges to implementing this ambitious vision, the Finance Minister said: “Nigeria has no enough money to place her infrastructure the way she wants it. In other words, she needs to borrow money to invest. Since Nigeria has poor road network, one of our initiatives is to help and build a good rail way that will link all the South East zones and give them all they need to improve their businesses. This is going to cost over N1 trillion. Perhaps a huge sum of money needs to be borrowed either from China or any concessional lenders and other countries that have good international relationship with Nigeria. Nigeria has not borrowed internationally since 2013 and the need to borrow is here to implement her important infrastructure and enabling environment for her citizen”.

How feasible are the borrowing plans?

However, going by a combination of the country’s current debt load, its history of poor fiscal policy implementation, political and economic upheaval around the world, the uncertainty surrounding President Buhari’s health and the strains this puts on both the Presidency and local political permutations, not a few economic experts doubt the feasibility of Nigeria raising the projected $7.5 billion badly needed to fund the 2017 budget.
Also of equal importance, if not more critical, is the worry that the government budget Mandarins may have hatched a highly shaky plan to borrow and borrow and borrow from wherever they could in order to pull Nigeria out of recession, which borrowing proposition could in actual plan turn out to be a drunken walk into a deep debt trap. There is also the worry that the whole borrowing plan is a kneejerk reaction by an increasingly harangued Federal Government which has dropped the ball in stemming a recession threatening to slide into depression.
Interestingly, leading the charge against the Federal Government’s borrowing plans is the government’s banker itself – the Central Bank of Nigeria (CBN). At its Monetary Policy Committee (MPC) held on Wednesday May, 24, 2017, the CBN expressed concern over the borrowing activities of the Federal Government, saying the pace of government’s borrowing has exceeded the target for the 2017 fiscal year.
Commenting on the concern express by the CBN on the level of federal borrowings, Head of Research, Vetiva Capital Management Limited, Mr. Pabina Yinkere said: “The high pace of government borrowing is as a result of government revenue undershooting the budget expectation, hence the need for government to borrow more to cover up for the shortfall in revenue.”
Yinkere observed: “The impact on the economy is first, increase in interest rates and government crowding out the private sector. People see government as the safest borrower so they will prefer to give their money to government, while the private sector will be getting less money. But I don’t expect the pace of government borrowing to continue through the year. The government itself is aware of the impact of its borrowing and hence the decision to consider borrowing from external sources. Instead, the government is looking at Eurobond issuance, and borrowing from external DFIs.”
Also, at its recently held Bi-annual Economic Update in Abuja, the World Bank faulted the federal government’s optimism about the nation’s recovery from economic recession, saying Nigeria’s economic recovery remains fragile with a high degree of risk.
The Bank said that while it maintained its forecast that Nigeria could return to positive economic growth in 2017, the recovery is fragile due to risk associated with the nation’s oil sector.
It stated: “Growth is forecast to return into positive territory in 2017, largely on the back of recovery in the oil sector as the government intensifies efforts to restore peace and stability in the Niger Delta, improve its Joint Venture (JV) relationships with international oil companies while strong growth in the agricultural sector continues.
“However, given the risks associated with the oil sector, recovery is fraught with a high degree of fragility and risks; notably from future shocks to the oil price or further unrest in the Niger Delta, which is not yet fully stabilized, as well as from the incomplete implementation of new JV cash call arrangements.”
The Bank however pointed out that: “Nigeria can build on the oil-driven economic recovery anticipated for it in 2017 by strengthening its macroeconomic policy framework and implementing the structural reforms needed to diversify the economy and break out of a boom and bust cycle.”
The World Bank economic update on Nigeria also noted that “over the last four decades, Nigeria’s GDP growth rate has failed to keep pace with those of more developed economies, an experience common among commodity exporters. More so, oil has continued to dominate its growth pattern but the volatility of oil-dependent growth imposes welfare costs, which impede progress in social and economic development, as was very clear over the last year. A cross-country analysis of the determinants of growth carried out for the report underscores the importance of sound macroeconomic management and stability for growth,” cautioning that “inflation, government consumption, and currency misalignment (over-valuation) are negatively correlated with growth.

Is the Economic Recovery and Growth Plan (ERGP) the Magic Wand?

It appears, however, that the Buhari Administration pins its hope of getting the Nigerian economy back on tract on the recently launched Economic Recovery and Growth Plan (ERGP).
At the launch of the ERGP in the confines of Aso Rock Villa last month, President Buhari declared that the three-year plan (2017-2020) would “change Nigeria from an import-dependent country to a producing nation. We must become a nation where we grow what we eat and consume what we produce. We must strive to have a strong naira and productive economy”,
According to the ERPG Policy Document obtained by The Dream Daily, the principles of the ERPG include “focus on tackling constraints to growth”, leveraging “the poer of the private sector”, promoting national cohesion and social inclusion, allowing markets to function and upholding “core values.”

Minister of Budget and National Planning, Sen. Udo Udoma: Is the ERGP Nigeria’s silver bullet to ‘kill’ the recession?

The broad objectives of the ERPG are “restoring growth, investing in the (Nigerian) people”, job creation and youth empowerment, improve human capital, building a globally competitive economy, investing in infrastructure, improving the business environment and promoting digital-led growth”.
Minister of Budget and National Planning, Sen. Udoma Udo Udoma, whose ministry is the driving force behind ERPG, said 60 interventions have been identified for execution in the next four years to achieve the ERPG objectives.
Udoma Said: “Our aim is to create a culture where Nigeria continuously seek ways to add value to the resources we have been blessed with. In short, our aim is to change Nigeria, and change for good.
“To achieve this, the plan articulates up to 60 interventions and initiatives, that must be executed and/or completed within the next four years to tackle, and to remove, impediments to growth; to make markets function better; and to leverage the power of the private sector.
“However, this growth is to be archived without compromising the core values of this nation such as discipline, integrity, social justice, self-reliance and patriotism.
“And, of course, all the initiatives in the Plan will be implemented in such a manner as to continue to strengthen and promote national cohesion and social inclusion.”
Also speaking on the ERGP, the World Bank Country Director for Nigeria, Rachid Benmessaoud, stated: “The ERGP, if implemented successfully, would lead to expanded transportation infrastructure, the increased reliability of supply of power by restoring financial viability to the power sector, an improved business environment, improved educational attainment, strengthened public institutions, and improved transparency and anti-corruption.”
However, a few days after President Buhari launched the ERPG, the Emir of Kano and former Governor of the CBN, Muhammadu Sanusi ll, took an inventory of the Nigerian economy in Kaduna passed a gloomy verdict on it.
Sanusi said: “The Federal Government of Nigeria is spending 66 per cent of its revenues on interests on debts, which means only 34 per cent of revenues is available for capital and recurrent expenditures. The model cannot work.”
Turning his attention to the 2017 budget, Sanusi expressed serious concern about the current fixation with borrowings, saying: “In the 2017 budget presented by the federal government, the amount earmarked for debt servicing is in excess of the entire non-oil revenue of the federal government, but that is not the problem. The problem is that it is even going for more debts.”
In a caveat which speaks volume of the ability of the Nigerian economic managers to walk the talk, former governor of Anambra State, Mr Peter Obi, said he was not against the Muhammadu Buhari government’s plan to borrow, but was against borrowing without a plan.
Obi cautioned that the debt burden which borrowing without implementing a clear-cut plan to stimulate the economy or poor execution of the ERPG would only increase “the mess. We cannot afford to increase it by going to borrow without a clear road map on what we would use it for.”
In a similar submission after President Buhari launched the ERPG, another former CBN Governor, Prof. Charles Soludo, stated: “The plan envisages to continue the practice of the last government of borrowing to finance recurrent expenditure. The deficit will continue to exceed the capital budget, meaning that every penny of capital expenditure will continue to be borrowed as done by the last government. So, what has changed?”
Likewise, a former Deputy Governor of the CBN, Dr. Obadiah Mailafia, said: “I don’t think the objective of the Plan is structural diversification of the economy. It was never really part of the plan. What they have is a fire fighting framework to get the country out of recession.”
Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, faulted the domestic borrowing plan, saying: “Government’s borrowing has become a major problem for investors; government is borrowing at 18 per cent, 20 per cent; zero risks, how can the private sector compete? And that is why all funds in the economy now are going into treasury bills, they are going into federal government wallet, so that has made it very difficult for the private sector to play its role in the economy in terms of this rescue mission.
“As it is now, there is no way you can compete with government in the financial market, even the banks, they would rather buy treasury bills and bonds than to give money to manufacturers. That is the kind of investments disincentives or structure that the policy has created.”
Despite its best efforts to explain its economic policies to the nation at every given opportunity, it appears, therefore that the dominant view among the informed on the Federal Government’s plan to borrow trillions of naira in order to fund the 2017 Fiscal Appropriation is bleak. Also, it seems that very few in the country, especially among those who should know, are optimistic about any grand, positive effect the 2017 budget would have on the country and the masses. Certainly, not many citizens are comfortable with the government’s borrowing plans as outline in the 2017 Budget.
It would therefore not be out of place for the government to revisit its borrowing plans as delineated in the 2017 Budget, with a view to generating innovative ideas to raise money to implement the fiscal appropriation, which would not add more to Nigeria’s current heavy debt stock.

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