Avoiding another debt debacle

There is absolutely no legal or economic obligation to borrow if one does not have to, and frankly there is no need to go deeper and deeper into debt without cogent reasons.  Heaping huge and unproductive debts on the country would cause havoc on the economy and hardships on the people.

It was not long ago that Nigeria’s public and publically guaranteed debts were un-payable and the country was forced to adopt a so-called Structural Adjustment Plan, which still saw a debt of barely $9billion in 1980 rising to $19billion in 1985. Even after two decades of the imposed hardships of SAP, and after paying out tens of billions of dollars more than the country actually borrowed; and without securing additional loans, Nigeria still ended up by 2005 with a dubious debt burden of $36billion grovelling at the feet of IMF, the World Bank and the Paris Club of official, mostly Western, creditors. Nigeria was forced to cough out some $12billion in raw cash so as to be “forgiven” the dubious balance of $18billion and earn some respite.
Now the country’s debts have crept up again and the government is still planning to borrow more, because of some specious assurance that Nigeria are “under-borrowed”.
According to the Director General of Debt Management Office, Abraham Nwankwo, Nigeria’s public debt (owed by governments at all levels in the country) as at December 2012 stands at $48billion. This is broken down as follows – N6.5 trillion domestic and $6.5billion external borrowings. The debt-to-GDP ratio was about 19.4 per cent, which the DG was quick to reassure that it was “still comfortably below the 40 per cent standard threshold for countries in our peer group.”
 The Minister of Finance, Ngozi Okonjo-Iweala, recently tabled a memo before the weekly meeting of the Federal Executive Council seeking approval for a loan of $300 million(N47 billion) from the African Development Bank. This is in addition to the request last September to borrow $600 million from the Export-Import bank of China. In all, between 2012 and 2014 the government plans to borrow some $7.905 billion from external sources under the Medium-Term Expenditure Framework. The overall plan is to push the country’s foreign debts to $16.8 billion and domestic debts to $8.5 billion by 2015.
These trends are worrisome, because it is critical that Nigeria avoids getting into another debt-trap not long after paying through the nose to get out of the previous one. The argument that countries in Nigeria’s peer group could comfortably borrow up to 40 per cent of their GDP is shallow. For starters, that is just a theoretical marker to raise alarm when a nation gets beyond it, not a recommendation to borrow up to that. What is also critical is the ability to pay back the creditors. For that Nigeria should be comparing the debt burden to government revenue. Right now, the country spends about 25kobo of every naira the government earns on servicing these debts. This proportion will increase with time and could become critical if, and when, oil prices fall.
This reckless accumulation of public debts is also unsustainable in the long run because most of the money goes, not into infrastructure or productive investments, but to finance government recurrent expenditure. The debts may also become unserviceable because a significant proportion gets stolen.
The excuse that most of the debts are now “domestic” is not reassuring either. Government’s massive borrowings “crowd-out” the private sector. It is also safer to lend to governments than to make risky loans to private ventures. The high rates paid by government further pushes the interest charges that bank would demand from private borrowers. Yet, it is this same private sector that needs cheaper and more accessible loans if new jobs and incomes are to be created.
The National Assembly and other stakeholders must sit up and scrutinize these loans more thoroughly, and insist that all new loans be project-tied and self-sustaining. Ultimately, government must tame its penchant for indiscriminate borrowing. When the country spends more to service debts than to provide healthcare and education, the country’s future is likely to be jeopardised.

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