What are our States or even the Federal Government borrowing for?
The other was reading the newspapers and there was this item about Nigerian states borrowing about $2 billion from abroad.
It threw me back to somewhere around 2005. It was the days when Nigeria’s President Obasanjo was ramping up pressure on his friends in the western countries and their Paris and London Clubs, asking for debt forgiveness. In his words those days (and with a thick rumbling Yoruba accent); “we borrowed $18 billion, we paid $30 billion, and we are still owing $35 billion”, ah aaahhhhh?”
Later on, the so-called Paris and London Clubs would actually listen to us – or so it seemed. That was in 2006. I was then studying a lot in International Finance, and there is this book we used at Masters Level, written by Prof Keith Pilbeam of City University, London. In it was detailed the stupidities of African countries which led them into the Debt Trap.
In 2006, Nigeria was not treated as a wretched country. We were declassified from being extremely poor, and asked to pay $12 billion cash to the Paris Club (those who lent money to us at Fixed Rates), in order to get a write-off of another $18 billion. In that manner, $30 billion disappeared from our debt book (funny how we are now seeking $30 billion under one administration today).
It’s important to clarify that the Paris and London Clubs have no offices anywhere. They don’t exist as entities. They are just a grouping ACCORDING TO THE TYPE OF LENDING THEY GAVE TO… WELL, MOSTLY AFRICAN COUNTRIES. The London Club on the other hand, is therefore the group of Lenders who lent money to these poor countries, ON VARIABLE/FLOATING RATES… meaning the rates could move at any time – based on the London interbank Offered Rates (LIBOR).
A lady who retired as Director at DMO once told us of how in the pre-DMO days, the mostly-African borrowing countries would be invited to Zurich or Geneva by these London and Paris Clubs, and all of them will be herded inside a fairly large room, in those days when African countries were stuck, using 50% of their annual budgets to service gbese and complaining to the world how the debt burden could no longer afford us any space for real development. A freckle-faced intern will come in from time to time and announce your country to the hearing of other fellow wretched countries: “Nigeria! Nigeria!”. “Yes”, you will stand on your feet and await his verdict. All of you were seeking debt forgiveness so no shame among the profligate. ‘Frecklie’ here will then deliver the decision of the ‘Paris Club’ of Lenders to you and seek your immediate response. “Please tell them we cannot repay for now, we want to renegotiate the rates. Please tell them we want to organize debt buyback blah blah blah”, you offer in your labored English. Frecklie saunters away, to come back in two hours with another decision… this time for Gabon, or Cameroon, or Congo, or Guinea Bissau. That was the Paris Club… that intern. Imagine the humiliation of countries!
As an aside, another retired Director at CBN who was involved in those negotiations, once told me how they used to make the mistake of lodging in the best hotels in Zurich and Geneva, and rode to these meetings in Limos, with the politicians among their teams in flowing agbada/babbariga and long princely hats. Until they were advised to keep a low profile, because the creditors felt it was amusing that they who were lenders rode to the venue in bicycles or took the trains. He also spoke about how after Nigeria had exited the debts in 2006, the multilateral agencies’ operatives would call frantically to be given invites into Nigeria. They had been used to walking in at any time they chose, and had destablised many of the plans of our monetary authorities while we owed them.
Meanwhile, in 2006, precisely all African countries – with the exception of South Africa – got full debt forgiveness from the Paris Club. Only Nigeria was asked to pay that huge sum because we were a middle income country. That sum was an equivalent of N1.44trillion or thereabouts (at an exchange rate then of N120 to the Dollar). Today, $12billion will be at least N3.6trillion, the Naira having tumbled three times over. Yet we haven’t learnt not to play with debts.
Anyway, back to the states and what they do with these debts.
Sometimes in 2005, The Punch published a list of the debts that Nigeria was liable to pay the Paris and London Clubs, state by state. I kept that cutout for a long time. It was a simply amazing list of fraud. The debt of $35 billion – which we reduced to $5 billion after paying $12 billion and being forgiven $18 billion – was made up of all sorts of fantasies. States had borrowed to install underground rail systems. Many had borrowed for ultramodern airports. Some must even have borrowed to send whole communities to the moon after they must have built their own spaceships. It was a free-for-all. Even Local Governments had got involved in the looting by contracting their own loans for projects that never happened. Nobody warned the Africans then that it was stupid to go on borrowing binges. But we are being warned today, by even the lenders, because the situation today is worse than before. Economics has become a lot more complex and decisions need to be better nuanced.
I must offer another piece of information at this point: Whatever the level of government that borrows from abroad, the Federal Government pays in the event of default. Even if a private entity (say Dangote) defaults on a foreign loan, the Federal Government pays, because for a country like Nigeria, all borrowings are guaranteed by a sovereign cover else no transactions will go through. That is the law in international finance. Also, there is a priority list of who gets paid first and next, and last. The first parties that MUST be settled when a country is under pressure to repay, are the multilateral agencies, namely World Bank, IMF etc. The others come later. Hence, even if their rates are low, and moratoria is on offer, when the World Bank and IMF, as well as other powerful agencies show up to collect their money, there is nothing like ‘sorry sir, come tomorrow’. They take no prisoners.