By Omoniyi Salaudeen
Nigeria’s rising debt profile has inadvertently created public distrust towards the Federal Government. So much so that a mere mention of a borrowing plan has thrown the nation into a fit of mass hysteria.
This is understandably so as successive past military and civilian governments had taken the country through the tortuous path before former President Olusegun Obsanjo took the initiative to launch an aggressive campaign for debt forgiveness that secured for Nigeria a relief burden worth $18 billion and an overall reduction of the nation’s debt stock by $30 billion from the Paris Club between 2005 and 2006.
At that time, the creditor nations magnanimous reduced Nigeria’s external debt from $28.04 billion to $2.11 billion to consolidate the nation’s fledgling democracy.
That debt relief enabled Nigeria to focus on development projects and improve its economic prospects.
However, as the Federal Government continues to pile up fresh loans, anyone contemplating such a benevolence gesture may be said to be living in a fool’s paradise because circumstances are no longer the same. Things have changed significantly.
So, unless caution is applied to the Federal Government’s growing appetite for borrowing, Nigeria may soon walk its way back to the same debt trap.
This concern has made it imperative for the populace, including eminent professionals, economists and financial experts to cry out for caution, emphasizing the need for responsible borrowing practices and prudent debt management to avoid burdening the future generations with another avoidable debt traps.
As defined by experts, a debt trap is a situation where an individual, organization, or country becomes overwhelmed by debt and struggles to pay it back. This can happen when borrowing becomes excessive, and the cost of servicing the debt (interest payments) becomes unsustainable.
Debt traps can be caused by various factors, including taking on too much debt, often due to poor financial planning, borrowing at high interest rates, which can make it difficult to service the debt, failing to create a realistic plan for repaying the debt, leading to a cycle of borrowing and debt accumulation or economic shocks, such as recessions or global financial crises that can reduce income and make it harder to service debts.
The consequences of a debt trap are quite severe indeed. Apart from financial stress and damaging credit scores, making it harder to access credit in the future, a debt trap can contribute to economic instability, both at the individual and national levels, by reducing investment, consumption, and economic growth.
To avoid debt traps, experts caution, it’s essential for the government to practice responsible borrowing, create realistic repayment plans, and maintain a disciplined approach to debt management.
From the record of borrowing in recent times, the Federal Government under President Bola Ahmed Tinubu appears to be complicit in sustaining the old culture of reckless borrowing without adequate measures for tracking the performance of loans taken vis-a-vis the capacity for repayment.
On Tuesday, the Senate received yet another letter from the presidency, seeking approval for more than $21.5 billion in foreign borrowing for its 2025-26 borrowing plan to plug financial shortfalls to boost growth.
Going by the projections contained in the letter, the loan will address critical sectors of the economy like power, security, road and rail infrastructure.
“These projects cut across critical sectors of the economy, including power grids and transmission lines, irrigation for improving food security, fibre optics network across the country, fighter jets for security, and rail and road infrastructure,” the ministry of finance said in a statement.
The latest borrowing plan is coming at a time when the Federal Government is celebrating the repayment of $3.4 billion emergency loan it secured from the IMF during the COVID-19 pandemic, giving the country a clean bill.
For the fresh loan, however, there are critical issues that are raising public concerns, including debt to GDP ratio, debt repayment and the declining oil and gas revenue.
According to experts, with Nigeria’s current debt stock of about $94 billion, taking another loan will raise debt to GDP ratio to well over 60 per cent, which will be difficult for the government to pay back.
Although the Ministry of Finance has clarified that the loans will not add to the country’s debt burden, as it plans to tap its development partners, people are skeptical about this assurance because there is no cost benefit analysis of the proposed borrowing to enable experts to make objective comments on the capacity for repayment. A lot of questions, they said, are left unanswered.
An eminent Prof of Economics at Babcock University, Ilisan, Ogun State, and one-time President of the Chartered Institute of Bankers of Nigeria (CIBN), Segun Ajibola, expressed deep concern about the borrowing spree, which is raising critical questions on the need for the new loan.
He said: “What is the relationship between the proposed borrowing and the 2025 budget? The budget has a deficit of 13 trillion, which gap is yet to be met by borrowing – domestic borrowing and offshore borrowing. If you look at the total borrowing being proposed, it is about N34-35 trillion. One thing that is still not clear is the component of this proposed loan. I read a statement from the Presidency that says it is a total borrowing that is being envisaged over the next three years. The questions are: What is the breakdown of this $21.5 billion? What are the payment terms? If it is for the national and sub-national tiers of government, what are the components? Which tier is taking what?
“So, there are still unanswered questions about this borrowing. They should give us the full details, especially considering the sensitive nature of public debt. The public is not aware of what exactly constitutes the request.
“Therefore, we can only make some general comments. General comments in terms of the purpose and specific projects it is tried to. We need to know the amount attached to specific sector. It is very important. Borrowing generally is not a terrible thing provided you can define the purpose. It has been said a long time ago, countries like Nigeria should borrow for the purposes of building capacity for national output not for consumption. We should not be borrowing to convert it into another source of importation of rice, sugar and co. It should be borrowing that will go into specific sector to enhance productive capacity of those sectors – Agriculture, manufacturing, oil and gas. There should also be template to monitor the performance of those loans to determine the contribution to domestic economy. We should be able to measure the performance of specific projects being financed through the loan to be able to gauge the multiplier effects of such loans to the performance of the overall economy over a period of time. These are things that are essential in making comment on the new loan request. The request as it is, the information available to the members of the public as of today is not sufficient to make any objective analysis of this loan request.
These are the details they should present to the National Assembly committee looking into this loan request to be able to take an informed decision. For now, it is difficult to make any objective comment and scientific evaluation of the request. As a professional economist, I read details to be able to make quality of comments on sensitive subject matters as this. I assume that those who have primary responsibility to decide this loan request must have done some thorough homework. We need specific details, we need specific commitment, we need clear understanding of what will happen to this economy if we take the loan. Without those details, we will just be groping in the dark or making generic comments that may be far from the reality.
“So, let somebody somewhere; either Debt Management Office (DMO) or Ministry of Finance, tell us the breakdown of the components and the possible projections. Let them demonstrate to us how we can free this economy from importing small, small items from China. We need facts that we can interrogate and refer to in one year’s time when we will be presenting the scorecard. Without these details, we will just be lamenting.
“Those who have responsibility to present these details should tell Nigerians what we need the loan for and the projections over the period of three years. In five year’s time, where will Nigeria’s economy be with that $21 billion? Can the use of this loan in various sectors guarantee repayment?”
MD/CEO, Cowries Asset Management, Johnson Chukwu, in a telephone discussion with Sunday Sun, outrightly declared the loan as unnecessary, suggesting the involvement of private sector in infrastructure development as an alternative to borrowing which would plunge the country into another debt burden.
His words: “For me, taking a loan of $21.5 billion in a single financial year is excessive. Currently, we have a debt figure of about $45 billion as at December 31st last year. If we borrow another $21.5 billion in the same fiscal year, that will be too high.
“The most important question is: What do they want to use the money for? Borrowing should be done in such a way that whatever you have put the money into will give you returns higher than the cost of borrowing. If you borrow and deploy the money in such a way that you are not getting returns, you are creating a debt trap. And that is my greatest concern. If they want to borrow to build infrastructure, the truth is that infrastructure can be built by private sector if they concession it. Private sector will build it without government borrowing. They can even build it faster than government and at a cheaper cost because they don’t have the level of corruption as we have in public procurement department. So, government needs to be more circumspect in borrowing.
If they want to borrow, they must borrow for specific projects similar to what they have for Sukuk where they borrow for infrastructure that can be measured. Borrowing $21 billion in a single fiscal year looks very high. Subsidy removal should have free resources for the government. We need to interrogate further the purpose of borrowing, the usage of the money they want to borrow, the timeline for repayment and at what cost. Those are the details we need to take definitive position on. At this point, the Civil Society Groups and the Nigerian public should interrogate the government.”
Another Economic Policy Analyst and CEO, Flame Academy & Consulting Limited, Orji Udemezue, blamed the plight of the current economy on deficit budgeting arising from reckless spending by the government.
While admitting the necessity of borrowing to finance the 2025 budget deficit, he urged the government to deploy available resources towards productive capacity.
“There is nothing new again about the Federal Government borrowing more money because that is the only way we can finance our budget. We are in a deficit budgeting situation and it is not getting any better.
“The worst thing is that the government is not stepping down in its careless spending. We are not prioritizing our budget in a way that will create productivity in the economy. What we see is a lifestyle spending and white elephant projects. Nigeria is on a downward spiral spending and we don’t know what will be the way out of this.
“A country that has never made up to N15 trillion as revenue is planning to spend N50-something trillions. So, the only way we can make up is through borrowing until we get to the point of another debt trap where we cannot service our debt. They keep saying we still have more room to borrow because our debt to GDP ratio is still below 40 to 50 per cent. But how productive is the economy? I learnt that the GDP has even slowed down. So, debt ratio has worsened.
“We need efficient and prudent management of the economy to be able to rein in this continuing borrowing. The government’s spending on recurrent expenditure is still heavy, leaving little or nothing for projects that can promote the economy.
“Unfortunately, international organizations like IMF are not helping in curtailing this wasteful spending. We continue to go through this vicious circle until we find competent and prudent manager of economy of this country,” he posited.