Stop Borrowing, Senate, NSIA, Others Warn Buhari

Agency ReporterOctober 18, 2018

0 11 minutes read

Though the Senate eventually approved President Muhammadu Buhari’s request for $2.78 billion Eurobond, it reiterated the concerns of the Bretton Woods institutions over rising public debt in Nigeria.

The World Bank and the International Monetary Fund, IMF, at the just-concluded annual meetings in Indonesia had warned that a trend of rising public debt in developing countries was undermining economic development in the affected countries.

The NSIA also warned that it is suicidal for the nation, the states and some businesses in the country to borrow dollar-denominated funds from the international financial market to finance infrastructure development in the country.

However, the Senate’s approval for the issuance of $2.786 billion from the international capital market was as contained in the 2018 Appropriation Act.

It also approved the issuance of $82.54 million to refinance the balance of $500 million matured Eurobond in the international capital market and advised the Federal Government to do everything possible to reduce or limit its request for more external borrowing and source other means of generating revenue internally.

According to the Senate, this will help avoid a cleverly managed re-conquest of the country through a debt overhang.

Resolutions of the Senate were sequel to the consideration of the report on the new external capital raising presented by Chairman of the Committee on Local and Foreign Debt, Senator Shehu Sani (APC, Kaduna Central).

Presenting the report, Senator Sani said: “That the issuance of both USD2.786 billion and USD 82.54 million from International Capital Market is for the part- financing of 2018 Budget, with particular interest to finance key infrastructure projects proposed in the 2018 Budget.

“The committee also observed that the capital raising of USD2.786 billion will result in a portfolio mix of Domestic Debt- 68 percent and External Debt- 32%, which is an improvement over the ratio of 70:30 as at June 30,2018. This brings the debts portfolio mix closer to the target of 60:40.

“The committee further observed that the issuance of these bonds will contribute to the implementation of the Debt Management Strategy which seeks to reduce the cost of borrowing, lengthen the maturity of the public debt stock, free- up space in the domestic market for other borrowers and help to increase Nigeria’s external reserves.

It would be recalled that President Muhammadu Buhari had written the Senate, seeking the approval of the lawmakers to raise external funding for the 2018 budget.

In the letter dated July 23, and read last week by the Senate President, President Buhari said the sum as approved in the 2018 Appropriation Act, would be used to finance deficits and key infrastructure projects in the 2018 budget.

FEC okays 6 transaction advisers on Eurobond

The Senate approval came as the Federal Executive Council, FEC, presided over by President Muhammadu Buhari, also yesterday approved six transaction parties to advise the federal government on the Eurobonds issuance and other securities at the international capital market.

The transaction parties are Citigroup Global Market Limited and Standard Chartered Bank as joint managers; FSDH Merchant Bank Limited as financial adviser; White And Case LLP, Banwo and Ighodalo as legal advisers and Africa Practice Limited as technical adviser on communication.

Minister of Finance, Zainab Ahmed, while briefing journalists in Abuja, said the transaction parties were expected to advise the government on “the structure and timing, as well as, documentation for the issuance” of the Eurobonds and other securities.

She said the approval was part of government’s commitment to the implementation of the 2018 Appropriation Act, adding that “consistent with government’s policy on development of infrastructure, the proceeds of the euro bond issuance will be deployed to fund critical capital projects in the 2018 Appropriation Act.”

An estimated N849.673 billion ($42.78 billion) is expected to be externally borrowed to finance part of the deficit in the 2018 appropriation Act.

While there are worries over Nigeria’s rising debt profile, which is estimated to have grown by 145 percent in the past three years, the government says there is room for more debt for Nigeria.

Explaining the nation’s debt-to-GDP ratio, Udo Udoma, Minister for Budget and National Planning, said Nigeria had a sustainable debt profile.

“Nigeria has a sustainable debt profile with ample room to borrow more whenever we may require doing so. Nigeria runs no debt risk and the Debt Management Office, DMO, carries out an annual Debt Sustainability Analysis to ensure that we stay that way,” he said.

It’s suicidal to borrow in dollars — NSIA boss

Meanwhile, the Managing Director of Nigeria Sovereign Investment Authority, NSIA, Mr. Uche Orji, yesterday, warned that it was suicidal for Nigeria and some businesses in the country to borrow dollar-denominated funds from the international financial market to finance infrastructure development in the country.

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Speaking at the just concluded Nigerian Gas Association, NGA International Conference and Exhibition in Abuja, Orji disclosed that the NSIA, which is the manager of Nigeria’s Sovereign Wealth Fund, SWF, took that path in the not too recent past and was yet to fully recover from the crisis that the currency mismatch caused the organization.

Orji noted that Nigeria, and, indeed, other African countries, would not develop if they continued to borrow funds in dollars and other major international currencies to finance their infrastructure projects, whereas their revenues were in their local currencies.

He said: “In terms of currency mismatch that necessitated the recent crisis that we are yet to recover from, why can’t you negotiate and price some of these things in local currency?

“It is suicidal to fund infrastructure in dollars when your revenue is in naira. It is not going to work. Africa and Nigeria would not develop paying for all of these things in dollars when your revenue is not only in naira. It is regulated, it is local currency and we have these mismatch situations.”

Orji further rued the NSIA’s first investment in the gas sector, blaming the challenges on currency mismatch and many other challenges in the gas sector.

“It has been very interesting in the last five years, especially when we started getting involved in the gas sector.

‘’The first investment had its challenge. We would not like to do any like that again; we had to restructure.

‘The main reasons that happened, is the issue of the mismatch in currency; there was also the issue of bad debt, payment terms were not adhered to; there were also environmental issues, with damages to pipeline. There were many challenges in the sector.

“However, we believe that the way to fund these projects is not from taking expensive bank loans; it is not from the limited equity that we have; we believe that there should be an opportunity for more private equity participation in the gas sector,’’ he said.

Orji also lamented the rate of gas flaring in the country, while commending the Federal Government for introducing new tariff structure for gas flaring.

He explained further: “It is quite disheartening to watch us flare gas as if it is useless. Every time you do that, it is equivalent to taking bundles of dollars to a stove and burning them.

“You cannot live in a country that is suffering from deforestation, yet we are flaring enough Liquefied Petroleum Gas, LPG, or gas equivalent that can create LPG in the market.”

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Avoid debt burden — NLC

Reacting to the development, President of Nigeria Labour Congress, NLC, Ayuba Wabba, advised the Federal Government to be careful on foreign loans and bonds to avoid unnecessary debt burden or traps.

Wabba said: “Even at our last National Executive Council, NEC, meeting, congress examined this issue of borrowing not only in Nigeria, but also the African continent as a whole. We declared as that in the past six years, Sub Saharan African governments have issued $81 billion in bonds alone to investors hungry for yield.

‘’This is in addition to several loans and bilateral debts. Also, bond yield has now jumped from 6% to 16% interest. Public debt in Sub-Saharan Africa has climbed to 50% of GDP. The case of Zambia with 59% of GDP as debt should be an eye opener to African leaders.

“We added by urging African governments that with the hidden condition and terms of these loans now coming into the open, our leaders should understand that there is no free lunch anywhere, even in Freetown. So, we need to be careful as a country to avoid sinking back into debt trap.”

It’s bad to borrow for consumption — Rewane

Also reacting was corporate Nigeria which kicked against the position of the federal government. Managing Director/Chief Executive, Financial Derivatives Company, Mr. Bismarck Rewane, taking sides with the Senate on the risk of Nigeria’s increasing foreign borrowing, said the warning from the Senate was necessary and welcome, noting that what made Nigeria’s foreign borrowing worrisome is that it is largely for consumption at expensive interest rate.

He said: “It is not the amount of debt that is the problem, it is the use of the proceeds of the debt and the cost of the debt.

“What we are borrowing for is to fund the budget deficit which is mainly recurrent. So in other words we are borrowing for consumption. That is not advisable for a country that is having growth issues.

“We need to borrow for capital expenditure (CAPEX). It is true that our CAPEX has increased from what it was in terms of ratio, which was 80 percent recurrent expenditure and 20 percent CAPEX, and now it is 30 percent CAPEX, but it is still far from where it ought to be. The United Nation Development Programme (UNDP) talk about 60:40 percent ratio in favour of CAPEX. So there is work to be done, plenty of work to be done, no doubt about that.

“Again the caution is necessary and it is welcomed. But the thing is that we have to fund the deficit in the short run. So the structure of the debt, the cost of the debt, it is foreign currency denominated loan. So if we are taking $2.8 billion at 5.2 percent per annum, that is quite expensive. And we are going to use it for consumption. So once we finish spending it, it is gone, it is finished.

“That is why the call for caution is welcomed. But I am sure the federal government and the ministry of finance are aware of the consequences, that is why they are making sure it is been taken with caution.”

FG digging in instead of digging out – Ezekwesili

Responding to the the $2.8 billion euro boned approval,Transperency Internation Boss, Dr.Obi Ezekwesili said, What it portend for the economy is that the Federal Government is digging in when they are suppose to be digging out. Already, the debt service to revenue is so high because it’s 69 percent today. what it’s mean it that 69 percent out of your revenue is use to service debt. that is not a sustainable situation to be in. I see the government quote all the time but that is a blunt quote in an environment when your GDP is not reflective of your productivity”.

“You measure your productivity by the revenue your GDP generate. if you cannot service your debt, you will be considered bankrupt . The Federal government found itself in this situation because they have refuse to engage in any key reform in the economy. According to the report the federal government released in 2017: all of Nigeria’s oil revenue is no longer sufficient to pay public sector salaries. As are 2 million people in the public sector and our Oil revenue cannot sustain them. So we have a situation where we have debt servicing, over head cost .”

It is a fait accompli — Chukwu

In his reaction, Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, while acknowledging that the Senate only re-emphasised the earlier warning issued by the IMF on Nigeria’s debt position, stated that though the country does not have debt crisis as it stands, but caution that there is need to exercise restraints in further debt accumulation.

“The Senate warning is in consonance with the, IMF’s warning. Clearly, we don’t have a debt crisis as it stands today, but we have built up debt at a fast rate that if we continue at that rate, we are going to have a debt crisis. I think that is what IMF had warned about and that is what the Senate is obviously repeating that we need to be cautious of how we are accumulating debt.

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“Interestingly, the borrowing, according to the government, is captured in the 2018 budget, which has been passed into law, so the Senate was constrained because they have passed an enabling law, which allowed that level of borrowing,” he said.

According to him, “given that the country has about 73billion dollar in debt position, which is about 19.4 percent of the GDP ($376 billion US Dollar), it behoves the executive arm of the government to stay away from additional provision for borrowing and should they not do that, the National Assembly should constrain them from factoring such level of borrowing in 2019 budget.

“For now, it is fait accompli and given that situation, the key thing is to prevent a worsening of the debt situation. It also behoves the executive and National Assembly to ensure that in preparing the 2019 budget, we do not have material borrowing captured borrowings into the budget”, he added.

It depends on the purpose – FBN Insurance boss

Reacting to the borrowing decisions Managing Director of FBN General Insurance, Bode Opadokun, said: “l don’t see anything wrong in borrowing, however, at the time you are borrowing, what do you want to use it for and what is the plan of paying back? If it is genuine borrowing that will be used for the purpose it is meant for, then the probability of paying back should not be a challenge.

“But l cannot speak for the government in the sense that we don’t know if what we are meant to understand is the reason for the borrowing is exactly what it is going to be used for. Personally l have done business in the past where l borrowed and paid back and that helped put my business in better position.

“We have seen instances where people borrow and that was the bane of their business, because they did not do their home work well.

“So borrowing is not the issue, but what do you borrow for and how do you want to pack back. The structure must be clear. If the intention is genuine and very clear. l don’t see anything wrong, but once it is the other way, l cannot be in support of that.”

We should be worried by funds usage – Stockbrokers

A Chartered Stockbroker/Managing Director, Sofunix Investment & Communications, Mr. Sola Oni stated: “In any country the issue of debt should be concerned of where the fund being borrowed is channelled to. The US is highly indebted, but the country invests the fund borrowed into productive use. The country invests a lot in infrastructure that helps for further production of goods.

If Nigeria can channel the borrowed money to infrastructure, then we don’t have cause to worry or panic but if it is diverted to other non-productive investment, then that should be our concern. The Senate need not to worry about the foreign borrowing since the federal government said it is cheaper when compared to domestic borrowings. If they don’t borrow bridging the infrastructure gap in the country would be a problem. So if borrowing can turn our industrial development, the better for Nigeria.

The Chairman, Association of Stockbrokers Houses of Nigeria, ASHON, Chief Patrick Ezeagau said: “Yes the International Monetary Fund, IMF has warned the government of the consequences of the excessive borrowing. But then, Nigeria has infrastructure gap that needs to be bridged.

So in my own view I dont think that borrowing is bad provided it is not diverted for consumption and recurrent expenditure. So, government can go ahead to borrow while senate should monitor the use of such money.