External loans and domestic alternative

Written by the Editorial Board of The Guardian Newspaper

President Muhammadu Buhari’s submission of a request to the National Assembly for US$29.96 billion worth of external loans under the 2016-18 External Borrowing (Rolling) Plan, has been raising some curiosities about possibility of yet another debt burden. The burden was lifted in 2006 when the Olusegun Obasanjo administration got some $18 billion worth of relief and Nigeria exited with a payment of $20 billion to Paris Club.

There was some relief that the loan request was not promptly considered by the Senate as scheduled in early November for want of supporting details, which the presidency has agreed to provide. Generally, where such loans are used to implement development projects, they enhance domestic output and economic growth as well as facilitate their subsequent repayment. However, previous external loans up to year 2000 were mostly used to finance social infrastructure, utilities projects and public enterprises. Nonetheless, a number of the projects could not be traced to any sites while many were not completed. Most completed and partially completed projects were mismanaged. And the projects invariably did not generate income streams for direct liquidation of specific loans. They worsened the national debt burden and subjected government to conditionalities that impaired the country’s sovereign right to freedom of action. These fears should be uppermost in our minds as reports indicate that the external borrowing plan involves a whopping $11.294 billion for unspecified projects and programmes, another $10.686 for unidentified special national infrastructure projects, Eurobonds of $4.5 billion for undisclosed purposes and $3.5 billion for Federal Government budget support. The Nigerian people have the right to know the terms and conditionalities pertaining to the proposed loans.

In any case, do the planned external loans have any advantages over local ones? Considering government’s lean purse and the multitudinous infrastructure needs of the economy, the FG would be well-advised to expand the cover of any loans by implementing measures that facilitate the use of domestic loans and make it possible to employ local funds to part finance public/majority equity private partnerships for projects and programmes that have substantial commercial potential. The preceding option is imperative in view of the fact that credit provided by the financial sector relative to GDP in 2014 was a minuscule 22per cent in spite of the country’s high population while the indicator was many times higher for Nigeria’s erstwhile peer group countries in Southeast Asia. For example, the indicator was 126 per cent for Singapore with about five million population.

The Debt Management Office (DMO) has reportedly indicated that deploying the loans to transportation and power infrastructure, for instance, would “in the long run” bring down inflation to prod the CBN to lower its monetary policy rate with resulting low lending rates and reduced cost of production in the economy. In fact, and in reverse sequence, the CBN has tools for keeping inflation low and making lending rates affordable in order to encourage investment in infrastructure, production and other economic activities.

The DMO also canvassed the point that most of the loans would be concessionary and would attract low average interest rate of 1.5 per cent. (Does the Eurobond not go for 7-8 per cent?). By contrast, Nigeria possesses unlimited supplies of cost-free foreign exchange for development provided available forex is correctly infused into the Naira-economic system and subject to the adoption of a political structure that guarantees peace. In fact, the proposed external loans do not have interest-cost advantage over locally generated forex earnings, which are interest-free.

And so, instead of hankering after external loans, the FG as a priority should take immediate steps to unfurl conducive production environment infrastructure (CPEI) that entails low inflation (0-3 per cent), low lending rates (5-7 per cent) and a realistic and stable exchange rate. The CPEI equates macroeconomic stability, which was falsely claimed to have been achieved at paragraph 9 of Buhari’s 2016 budget address. The CPEI evolves where fiscal deficits are kept within three per cent of GDP, and should higher fiscal deficit levels occur, they should be at par with realised rate of economic growth. Unlike the DMO’s “in the long run” template, the CPEI fosters in the near term competitive domestic production as well as facilitates simultaneous incremental accumulation of requisite infrastructure in tune with the expanding financial resources that accrue from national economic growth. That makes possible credit to the economy by the domestic financial sector relative to GDP to rise steadily and reach upwards of 100 per cent as witnessed in focused economies thereby rendering external borrowing merely supplemental.

Ruefully, the above benefits have remained elusive because the Federal Government breaches the deficit levels every year. To keep fiscal deficits within the safe levels which appear consistently in the budget proposals, Federation Account dollar allocations should be disbursed to beneficiaries in a secure or abuse-proof form for conversion as and when desired to Naira amounts via a single forex market, which has not been operated in Nigeria till date. And in order for the Naira exchange rate to be realistic and stable, Nigeria’s decades-long currency dualism should cease. The retention of the currency dualism 18 months into the Buhari administration is a matter for absolute regret. The reasons is that the Vice President and Chairman of the National Economic Council, Professor Yemi Osinbajo, knows that the Federal Government has the exclusive responsibility to guarantee and protect at all times our Naira-denominated economy.

The CBN Act 2007 is the relevant manifestation. This NEC Chairman also knows that the alien US dollar, which asphyxiates the Nigerian economy, was given unconstitutional berth in the financial system through the Foreign Exchange (Monitoring and Miscellaneous) Act 1995. It is unclear whether the mandatory Naira legal tender currency provision was suspended in 1995. For the sake of the national economic good health, the National Economic Council should advise the President to abrogate forthwith through an executive order all provisions of the above law (it was a decree at inception) which conflict with the ascendancy of the constitutionally mandated national currency. Such provisions include the operation of domiciliary dollar accounts and similar financial contraptions. That action will pave the way for the country to produce and work its way out of the economic recession.

In the meantime, given the insolvency of most state governments, funds in the excess crude account, a case that impinges on the paradox of thrift, should be fully released to federal allocation beneficiaries for conversion to Naira revenue in the manner prescribed earlier. This newspaper, in previous editorials, showed how to generate beneficial forex savings in the form of FG-owned external reserves. The economy should be managed and guided by economic principles rather than sentiments.