Budget 2010: “Mugu” Smiles back into debt trap!

Source: huhuonline.com

“In spite of the effusive enthusiasm of this Administration, some Nigerians refuse to celebrate the recent debt relief conditions granted by our major creditors of the Paris club. “Under the terms of the Paris club deal, Nigeria will see $18bn of its total debt of $30bn cancelled on condition that it pays the remaining $12.4bn between now and March 2006.

Ordinarily, the prospect of a much lighter debt burden that would allow almost $2bn annual debt financing to be channeled into the improvement of decrepit infrastructure and alleviation of acute poverty should be universally welcome! However, popular opinion on the streets is that the common man will not benefit from this 'compassionate gesture' of our creditors; after all there is little to show for the trillions of dollars and other revenue available to government at all levels in the last two decades!”

The above is an excerpt from an article titled “Compassionate Debt Relief or Paris Club 419?”, first published in December 2005. In the same article, we noted that “Nigerians see the deal as a clever way to separate a fool from his money and question the morality in a transaction in which a 'poor beggar neighbour' borrows less than $10bn and yet still owes his affluent master over $30bn after payments of over $17bn! Indeed they claim that in spite of their pariah status our military dictators were seduced by these same international creditors with the notion that Nigeria was 'grossly under-borrowed' in order to offload their idle reserves with rates and conditions that were inapplicable in Europe in those times.”

In spite of these observations the Obasanjo led government, closely prodded by IMF paid Nigerian technocrats who were deeply embedded in our Central Bank, and Finance and Budget Offices went ahead to part with $12.4bn to some of the major stakeholders and 'fat cats', who also exercise considerable influence on the IMF in world finance. Three years down the road, the expected succor from the annual debt service savings of $2bn is yet to manifest, and if anything, there is fairly general consensus that life was more bearable for most Nigerians in 2006 before the debt exit than today!

In view of the gross misadventure in the area of external debt, most Nigerians would have bet against the likelihood of such recurrence in their lifetime. Regrettably, just after three years or so, there is an uncanny feeling of déjà vu, that, we are, once more on the threshold of another inexplicable debt burden as our total debt portfolio (domestic and external) have now rapidly exceeded $30bn, and once again, there is nothing on the ground as evidence that the fresh loans, most of which were incurred in the last three years, have been wisely applied to improve our infrastructural deficit or the social welfare of the masses.

This column has carried a series of commentaries on our debt status in the past five years viz: “$34bn debt, $20bn Reserves, Debt Forgiveness and Slavery” (February 2005); “Now that we have Debt Relief”, July 2005; “Another Useless Debt Burden”, November 2006; “National Assembly Fiddles as Debt Burden Cripples”, May 2008; “Bleeding us to Death with Debt”, October 2008; “Increasing National Debt, NASS Beware”, January 2009; “External Debt: At What Cost?”, February 2009; “Tears for my Country”, February 2009.

The Guardian Newspaper editorial of 4/4/2007 titled “Debt Free, But Still Shackled” is on all fours with the arguments in the articles in this column as indicated from the following excerpts: Nigeria lost out heavily in the deal. “First, creditor countries collected $12 Billion in six months, an amount which under then subsisting debt servicing arrangements would have been spread over 12 years. And so, creditor nations succeeded in extorting $54 Billion altogether from Nigeria as interest payments and penalties on Paris Club loans, which debatably initially totalled $13.5 Billion, before their extinguishment. They are now well placed to recycle a pittance of that loot into strategic investments in Nigeria.”

While the controversial debt we exited in 2006 took well over a decade to accumulate, it seems that we have become much more experienced in this pursuit, as it required just over three years to accumulate a fresh debt burden projected at over $30bn by 2010.

The Director General of the Debt Management Office (DMO), (see www.lesleba.com “Nigeria's Debt creation Office” September 2009) in a report titled “Debt Servicing to Gulp N517bn in 2010” in the Punch Newspapers of 1/12/2009, confirmed that total domestic debt as at October 2009 is about N2.5 trillion naira. The 2009 budget set aside N283bn (8%) for debt service, but this amount has almost doubled to N517bn in the 2010 appropriation Bill currently before the Legislature. Although the N283bn indicated as service charge in 2009 did not distinguish the external and domestic components, Dr. Nwankwo, the DG of DMO, in the Punch report under reference, confirmed that the sum of N38.92bn will be required to service our external debt of $3.7bn while the balance sum of N478.15bn will cover service charges for domestic debt alone. Analysts would assume that the much higher provision for domestic debt service must have become necessary in view of the projected deficit of about N1,500bn in the 2010 Appropriation Bill. In other words, if the whole deficit is financed through borrowing, our total domestic debt will be close to N4000bn (N2,500bn + N1,500bn) or over $27bn at N150=$1.

Thus, the consolidated sum for domestic and external debt would exceed $30bn ($27bn + $3.7bn)!! No, you are not wrong for gasping in amazement! Yes, we have been here before, only three years ago to be precise, and once again, there is nothing on the ground to show that the monies borrowed on our behalf as a nation have been wisely spent!

Indeed, the total provision of N517bn for debt service in 2010 is approximately over 13% of projected federal expenditure, and relegates the budget provisions for infrastructure and education to just about N249bn each or 6% respectively of total expenditure; a sharp contrast from UNESCO's recommendation of 25% of budget provision as the benchmark for those nations in our category of social and economic development, in view of the strategic importance of human capacity development.

It is tragic that in spite of the recklessness of borrowing huge sums of money which bring little or no benefit to our general welfare, the high cost of borrowing these funds cannot also be said to be appropriate. For example, our domestic debt value of N2.5 trillion in 2009 attracts a service charge of N283bn or 12% in 2009. Ordinarily, 12% cost of borrowing is not a consonance with the customary modest rates of 2 – 4% for sovereign debts, especially for countries with steady revenue sources and abundant mineral and human endowment. If we consider 12% as uncharacteristically high for such loans, what then do we say for the provision of N478.16bn or over 13% for the projected domestic debt of N4 trillion by 2010?

It is worrisome that the main beneficiaries of these juicy rates of return for government borrowing may also be the same sectoral group to whom our nation's Central Bank has recently endowed with more than N600bn in bailout packages! We note that the 2010 Appropriation Bill, which increased government spending by just about N1 trillion was dubbed a stimulus budget by Mr. President, but we must wonder at the inequity in the size of these stimulus packages vis-à-vis our estimated population of 150 million and the sectoral needs of just the banking sector alone enjoying N600bn. Indeed, there is still no evidence that the stimulus package to banks will induce them to lend to the real sector, especially with the ready opportunity still existing to lend their funds directly to government, who will inevitably come calling with Treasury Bills and Bonds for sale!

The cost of servicing our external debt of $3.7bn with N38.92bn; i.e. about 6% is also considerably untenable, as our government, itself, maintains that most of these debts are multilateral debts obtained with concessionary, low interest rates, usually between 1 – 2%.

In any case, Nigerians must wonder at the wisdom of borrowing with such oppressive costs when, in fact, we continue to sit on relatively healthy reserves currently estimated at over $44bn in the 2010 budget. It is also worrisome that most of these debts were accumulated as a result of government's mismanagement of its monetary policies rather than the resourceful application of the borrowed funds for social welfare and infrastructural enhancement.

Our CBN has become permanently locked into an endless liquidity mop-up in the money market. The CBN inevitably resorts to Treasury Bill issues with mouth watering yields soon after the disbursement of monthly allocations to constitutional beneficiaries. Indeed, the CBN surprisingly, confidently proclaims that the monies borrowed are not for use in the economy, but for sterilization in CBN closets and accounts records, because the raison d'être of mop up is to remove what is regarded as too much cash in the system, and thereby forestall inflation. Never mind the contradiction in the lamentations of the real sector of unavailability of investment funds from the commercial banks simultaneously with CBN's mopping exercise.

In the same vein, government Bond issues, since the establishment of the DMO has also been targeted at intangible and questionable benefits such as deepening the market for Bonds and setting a benchmark rate for long term borrowing in the system. Indeed, one would expect that the National Assembly would discharge their constitutional responsibilities to ensure that we are not dragged unwillingly into another debt trap in spite of government's assurances that things are getting better.

In conclusion, I only need to reiterate, once again, that the adoption of dollar certificates for payment of dollar derived revenue as allocations to the constitutional beneficiaries will wean us of this tragic debt trap, and spur our economy into rapid recovery with an enabling environment of single digit interest rates to stimulate industrial expansion and increase in employment.

Above article was first published in December last year, soon after the dramatized and clandestine departure of President Yar'Adua to Saudi Arabia for medical attention! Incidentally, the contrived superiority battle between the senate and the House, which supposedly prevented Yar'Adua's personal presentation of the budget has now fizzled away, and Nigerians are now wiser about the true reason for Mr. President's unheralded midnight departure from Abuja last November!

That notwithstanding, the subject of the budget 2010 has been shifted to the back burner and the actual passage of the budget may not become a reality until after the first quarter of 2010, by which time the Debt Management Office and the Central Bank may have added over N500bn more to our national debt burden with nothing to show for it, and without any approval or consent from the National Assembly as required by the Constitution. Our National Assembly fiddles without care or direction, while our debt burden cripples!