Nigeria's Rising Debt: Lessons From the European Crisis

Dr. Ngozi Okonjo-Iweala has been designated as the Minister of Finance in the government of Nigerian President Goodluck Jonathan. She entered the post in August 2011 after serving for years as an official of the World Bank., a photo by Pan-African News Wire File Photos on Flickr.

Nigeria's Rising Debt: Lessons From the European Crisis

Wednesday, 14 December 2011 00:00
By Femi Adekoya Business Services

IN 1999, former President Olusegun Obasanjo initiated a debt relief plan as part of his administration’s reform agenda, to woo investors and also relieve the nation of over $36 billion debt to the Paris Club.

The then and present Minister of Finance, Dr. Ngozi Okonjo-Iweala and her economic team, anchored the debt relief programme. The scheme achieved its objectives, at least, to an appreciable extent. Not less than $20 billion was written off, leaving the remaining 40 per cent balance, $12 billion to be paid off through a buy back operation.

However, over five years after the debt relief deal, Nigeria presently finds itself in another rising debt profile, with the nation’s debt standing at $47.9 billion (about N7.47 trillion), even as experts continue to raise concerns over the Debt Management Office (DMO) position that the country’s current debt position is still sustainable.

Some of such concerns emanated from the fears expressed by the former president that the nation was getting itself into another debt guagmire. The fears may however, be turning into reality.

According to Obasanjo in his speech, “Debt Relief for Nigeria: A Dividend of Democracy, debt overhang was almost another form of bondage with our feet and hands bound behind us while we are told to run. We also contended that debt repayments and debt servicing obligations take away money from development especially social policies, stifle creativity, deepen the vulnerability of governments and challenge the processes of democratic consolidation.”

“In other words, given that no African nation can fully service, must less repay its debt, development, stability, peace, growth and democracy would not make progress or become consolidated in Africa, Nigeria inclusive,” he added.

Since September 2009, the European Union has been struggling with a slow-moving but unshakable crisis over the enormous debts faced by its weakest economies, such as Greece and Portugal, or those most battered by the global recession, like Ireland.

A series of negotiations, bailouts and austerity packages have failed to stop the slide of investor confidence or to restore the growth needed to give struggling countries a way out of their debt traps. By August 2011 European leaders found themselves scrambling once again to intervene in the markets, this time to protect Italy and Spain, two countries seen as too big to bail out.

The crisis has produced the deepest tensions within the union in memory, as Germany in particular has resisted aid to countries it sees as profligate, and has raised questions about whether the Euro can survive as a multinational currency, since countries like Greece have been unable to boost their exports by devaluing their own currency.

Within the corresponding period of 2009, Nigeria had its fair share of the global economic downturn. Specifically on August 14, 2009, Nigeria’s apex bank wielded its big stick on five erring banks, having being accused of acting in a manner detrimental to the interest of their depositors and creditors due to their high level risk exposure and bad loans.

With the sack of the affected banks’ chiefs, the capital market responded accordingly to effects of the apex bank’s chief’s action, as equities began to decline, while investors’ confidence in the capital market remains on the decline till date.

Already, the recent disclosure by the Senate last month that Nigeria’s public debt profile has risen to an “unsettling” proportion has become a matter of great concern to many.

Specifically, the nation’s debt has climbed to more than a five-year high figure at $47.9 billion (about N7.47 trillion) after it was restructured by former President Olusegun Obasanjo a few years ago.

Expressing optimism on the country’s ability to service its debts, the report of the annual national debt sustainability analysis for 2011 by the Debt Management Office (DMO) noted: “Under the optimistic scenario, designed within the framework and aspirations of Nigeria’s Vision 20:2020, Nigeria could borrow up to $57.4 billion (N8.95 trillion) in 2012 and still remain within sustainable limits.”

Analysts, however, noted that at the present growth rate of the country’s debt profile, government should be more cautious with its level of expenditure. Some decried the rising debt profile and government’s inability to check its propensity to borrow and spend.

“It has become fashionable for government to see nothing wrong with its borrowing pattern on the excuse that it is still within the globally acceptable ceiling of 40 per cent of the GDP,” some added.

For instance, the crisis in Europe has further posed great risks to many of the continent’s banks, which invested heavily in government bonds and forced deep and painful cuts in government spending. This consequently drove up unemployment and put several countries back into deep recessions, leading a growing number of economists to call the austerity policies self-defeating.

The economic crisis gradually became a political one as well, leading to the ouster of governments in Ireland, Portugal, Greece and Italy. Protests by traditional interest groups like public sector unions were joined by crowds of young people, who camped out in Madrid and Athens in imitation of the Arab Spring demonstrations.

Even as European leaders struggled to come up with a new bailout plan for Greece, much larger fears loomed. Interest rates soared for Italy, the continent’s third largest economy, and rose for France, whose banks hold large amounts of Italian government bonds, and where government finances are strained. The continent’s economy was teetering on the brink of a second recession.

Chairman, Senate Committee on Local Government and Foreign Debts, Senator Ehigie Uzamere, who revealed the latest public debt profile at the inauguration of the committee in Abuja, expressed concerns on the increasing debt profile of the country, especially in the last four years. According to her, this “is unsettling and calls for serious concern.”

The current debt profile implies that government has been borrowing so much with little to show for the credit facility obtained.
The figure represents a significant leap of $2 billion over the total debt stock in July.

Furthermore, the latest figure shows a steady rise in Nigeria’s public debt profile for four years now. From $22 billion in 2007, $23.228 billion in 2008, $25.8 billion in 2009 and $32 billion in 2010.

It could be recalled that following Nigeria’s successful Paris Club debt deal and the exit from the London Club debts, the external debt stock dropped to US$3,544.49 million in 2006 from US$35.94 billion in 2004 and stood at $3,654.21 as at December 31, 2007.

On the other hand, domestic debt rose from US$10.314 billion as at December 31 2004 to US$18,575.67 billion by end of December 2007 representing 83.56 per cent of the total public debt stock.

According to the Debt management Office (DMO), “it is pertinent to underscore the reasons for the upward trend in the domestic debt stock over the years. While the US$18.575.67 billion domestic debt stocks may seem a fairly large amount, its size largely reflects the cumulative effects of financing Nigeria’s budget deficits in the past, including public sector capital expenditure needs.”

“The increases are accounted for by different sets of factors, reflecting a shift towards market-based funding of government deficits, borrowing for developmental purposes and on-lending to institutions such as Nigerian Agricultural and Rural Development Bank, Bank of Industry and the Federal Mortgage Bank. The increase in the domestic debt stock was also as a result of the issuing of Special Bonds by the Federal Government to resolve the lingering crises of pension arrears and local contractors’ debt,” it added.

However, market analysts believe that the concern with Nigeria’s rising debt profile is not with the loan itself, rather, when such loans are taken, they are often times not always invested in productive sectors of the economy.

Some noted, “the present concern over the debt profile would not have attracted much hoopla if government has shown, in concrete terms, what it has achieved with previous loans obtained from both local and external creditors. It is obvious that there is no due diligence on the loans the Federal Government has taken in recent years. Worse still, no proper supervision by the creditor institutions”.

“The risks to the economy of not keeping our public debts to acceptable limits is huge. Our fledging democracy may also not be spared the inherent risks because of the huge financial resources needed to run the different tiers of government. One of the immediate implications of the present debt profile is that Nigeria may be sliding back to the years of debt overhang few years after it exited from the London and Paris clubs of creditors,” they added.

Although many state governments have taken to the issuance of bonds as an alternative source of revenue to finance major projects, there are also concerns as regard the effective utilisation of the proceeds of such bonds, especially with many state governors leaving huge debts at the end of their tenure.

On the way forward, a Management Consultant, Dr. Kennedy Izuagbe noted that the challenge the economy faces is a lot more than juggling policy rates by the regulators.

For instance, the apex bank is faced with the task of keeping inflation, rate of foreign exchange and interest rate low all in one fell swoop. It is like asking the CBN to do the impossible especially in an economy fraught with unbridled fiscal indiscipline. The CBN’s decision to hike the monetary policy rate in my own opinion is a better alternative even though this would have immediate adverse implications for the real sector of the economy. There is a need for financial discipline on the part of government.”

Some financial experts also added that one of such steps to address Nigeria’s debt profile should be a deliberate effort to reduce the present high cost of governance at all levels in the country. For instance, the government last year, took a foreign loan of $34 billion, representing 16 per cent of the country’s GDP just to “service governance” at the federal level.

“In order to reduce our public debt profile, government, its officials and agencies must embrace fiscal discipline. That is the essence of the Fiscal Responsibility Act that emphasises accountability and transparency in the management of public finances. This must go hand in hand with a deliberate effort to keep our debts within manageable proportions. The onus is on the DMO to ensure an effective management framework that will address our national debt profile,” the financial experts added.

With the continued level of profligacy and low investors’ confidence in the Nigerian markets, market watchers are already urging government to seek alternative measures to managing the country’s debt profile in order not to be left stranded.

Already, experts have noted that the European debt crisis may force banking regulators to diminish the central role of government bonds in planned rules designed to make the financial system safer.

As they fine-tune the new regulations, scheduled to take effect starting in 2013, the officials face a balancing act between acknowledging investors’ loss of confidence in sovereign debt and the need to avoid undermining governments’ credibility.