Worries over mounting external debt

[MrVan]

BY UDEME CLEMENT

Barely seven years after the much-talked about     debt cancellation, the issue of debt over-hang is in the news again. Recent statistics released by the Debt Management Office (DMO) showed  that Nigeria 's total debt stock as at March 2012 was N6.8 trillion, which translates to $44 billion. Out of the total amount, N5.96 trillion ($38.3 billion) is said to be domestic debt and N919 billion ($5.9 billion) is external debt.

Some financial experts, who spoke with Sunday Vanguard, said Nigeria's economy may be threatened by yet another rising external debt  notwithstanding the whopping sum paid to the Paris Club of creditors in 2005. The country's total debt  profile of $44 billion,  as analysts explained, is  the highest since 2007 fiscal year, as the percentage difference is $5billion higher than the national debt stock of the previous year. The current debt profile points to the fact that government is borrowing more money and its propensity to borrow is still very high due to the high level of expenditures in the economy.

The statistics obtained by Sunday Business indicted  that,  in 2007, the total debt stock was $22 billion. In 2008,  the figure  rose to $23.228 billion. In 2009,  it was $25.8 billion, $32 billion in 2010 and $39.7 billion in 2011. Judging by the statistical analysis of the debt profile, it means government is spending so much money, even as the economy is growing at approximately 8 per cent without creating jobs to ensure relatively full employment for a population of over 168million. It implies that government needs fiscal discipline in order to curtail excessive spending especially on consumption as the economy requires more investments in capital projects to thrive.

In 2005, the national debt was estimated at $36 billion. Worried by the huge debt stock, the Federal Government paid  the Paris Club $12 billion to secure a debt relief of $18 billion. The debt relief was obtained through the initiative of the then Minister of Finance, Dr. Ngozi Okonjo-Iweala, who is currently the Minister of Finance and the Co-ordinating Minister of the Economy.

Allocation for domestic debt service alone in 2012 appropriation bill is N559.6 billion, which is higher than allocation for power that is the most pressing need in the economy. Also, Nigerians may be looking at the Finance Minister who initiated the previous debt cancellation to give explanation on the rising external debt and the slow pace of development in the economy.

The origin of External Debt:

The issue of external debt can be traced back to government policies formulated during the 1970s oil boom. Consequently, successive governments put more emphasis on heavy investment in public works. The initiative was to build import-substituting industries. In that capacity, public investments were funded with money realised from oil export earnings. That paved the way for external borrowing mostly from multilateral and bilateral sources.

Accordingly, the exchange rate was fixed to contain external inflationary pressures in the economy. As such, agriculture, which is a sector with large employment generating capacity was neglected as government depended so much on imported inputs with oil earnings to run the economy.

Thus, due largely to infrastructure decay and lack of conducive operating environment for industries to thrive, most public projects embarked upon with external debt in the 1980s had gone under. A study carried out by the Federal Ministry of Finance in 1996 on commercial external loans from bilateral and commercial creditors, which amounted to about 70 percent of external debt outstanding in 1996, documented in detail problems encountered by externally financed projects.  For instance, loans were incurred by state governments with federal guarantees, as the lender obtained insurance from an official export credit agency, but the imported goods financed by loans could not be sustained or located to generate revenue for future use.

However, most of Nigeria 's external debt was contracted in the 1980s.  Oil export receipts declined by over 50 percent between 1980 and 1982 (from US$24.9 billion to US$11.9 billion) and then by half again in 1986 (to US$6.4  billion) on account of lower world prices and smaller export volumes.

The majority of Nigeria 's external public debt was accumulated in the 1980 to 1986 when the debt stock increased five-fold from US$5 billion to US$25 billion.  Over this period, the debt service-to-exports ratio increased from 6 percent to 72 percent, and the ratio of external debt to goods exports increased from 17 percent to 320 percent.

The final agreement in 1992 involved a debt-reduction operation in which the Nigerian authorities bought back US$3.4 billion commercial debt at a 60 percent discount (i.e. eliminating US$2.0 billion and paying off US$1.4 billion), exchanged an additional US$2.0 billion at par for collateralized par bonds maturing in 2020 (also known as Brady bonds), paid US$0.4 billion in arrears, and paid US$0.2 billion for principal collateral.

From 1992, Nigeria 's external debt stock stabilised as debt-service payments were broadly equivalent to total interest due.  The authorities limited actual debt-service payments to a ratio of net oil revenues.  As a result, arrears increased sharply in years when oil revenues declined, such as 1994-95.

The authorities limited actual debt-service payments to a ratio of net oil revenues.  As a result, arrears increased sharply in years when oil revenues declined, such as 1994-95. The administration of former President Olusegun Obasanjo, which began in 1999 sought to normalise relations with creditors and that led to the payment of $12 billion to the Paris club creditors to secure a debt relief of $18 billion in 2005. Two financial analysts spoke to Sunday Vanguard on the mounting debts.

Government must reduce its propensity to borrow- Mr. Silas Igwe, a Small and Medium Enterprise (SME) operator in Lagos: Government should reduce its propensity to borrow and manage public funds prudently to ensure economic growth and development. Excessive borrowing will hinder tangible economic prosperity because government will still spend so much money to service the debt.

Also it may slow down the  influx of Foreign Direct Investments (FDI).  For instance, some foreign investors may be discouraged from putting their money in an economy characterised by a  huge debt stock.  Also, government should invest more in SMEs in order to create jobs for the citizens, especially youths. For instance, we have Bank of Industry (BOI) as well as the intervention fund from the Central Bank of Nigeria (CBN), yet we can not feel the impact. Realistically speaking, local manufacturers can not compete favourably with their foreign counterparts because of high cost of production, lack of infrastructure and other challenges in our economic environment.

Government should reduce its over head and restructure governance- The national co-ordinator, Centre for Societal Values and Development, also a Legal practitioner, Mr. Silas Udoh: Rising external debt is not good for a growing economy like Nigeria's.

President Goodluck Jonathan should reduce the overhead in government and restructure governance to ensure that available resources are adequately utilised to grow the economy. This implies that the three tiers of government must work in synergy to enhance outputs optimisation in the economy. Aside from curtailing excessive spending, the recent move by government to get $7.9billion foreign loan must be jettisoned.

Government should diversify the economy into other areas like agriculture, commerce and industry to boost internal revenue generation. This is the time for government to look inward in order to harness un-tapped resources in other sectors of the economy, instead of running a mono-cultural economy with so much emphasis in oil and gas.

There must be accountability and transparency in governance if we must move forward as a nation. Seeking more foreign loans means government will spend so much money to service the loans until it is finally paid. Instead of seeking foreign loans, let government ensure prudent utilisation of our resources to embark on capital projects that will enhance economic develop now and in the long-run.

Nigeria's debt stock:

Year                                         Debt

2007                                   $22billion

2008                                  $23.228 billion

2009                                  $25.8 billion

2010                                  $32 billion

2011                                  $39.7 billion

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