Nigeria's Debt Creation Office! (1)
As if on cue, both the Federal Executive and Legislature sang the same song on the emerging national debt profile recently. In the Guardian lead story of 15/10/2010 titled 'National Assembly to Curb Borrowing and Drawing from Excess Crude Account', the lower House resolved to investigate whether the Excess Crude Accounts were properly disbursed and used judiciously, while the Senate debated a 'bill for an Act to Repeal the Debt Management Office Act 2005 and plug all loopholes in external borrowing'. Meanwhile, the Punch reported in its Business Page of 14/10/2010 that President Jonathan has directed the National Economic Management team to come up with updated guidelines on the approval of external borrowings by the Federal and State governments. Interestingly, these developments have evolved at a time the government is preparing to float a $500m Eurobond.
Incidentally, both the IMF and its surrogates agree that our external loan balance, which is less than $4bn does not really give cause for alarm, but they have remained mute on the abnormally high cost of servicing this supposedly concessional loan at a rate of about 20% in the last four years (see our article ' External Debt : at what Cost?)
However, our domestic loan portfolio has risen multiple fold from less than $6bn four years ago to about $26bn by October 2010! In spite of these rapidly rising debt profile, which will provide an income of about N600bn to our domestic creditors (mainly commercial banks) in 2010, there is nothing on the ground to show how these billions were spent! Besides, it seems a contradiction that these creditors are the same beneficiaries of government's serial bailout packages.
Indeed, these contradictions and warnings have often been amplified in this column; (see ' National Assembly Fiddles as Debt Burden Cripples ', May 2008; 'Increasing National Debt: NASS Beware! ', January 2009; External Debt: at What Cost?', February 2009; 'Budget 2010: Mugu Smiles Back into Debt Trap! ', December 2009. The text of one such articles ' Nigeria 's Debt Creation Office 1&2', was first published August 2009; the first part which follows hereafter is an invitation to recognise that domestic debt will remain a destabilizing component of monetary policy as long as the CBN's monopoly of distributable dollar revenue remains intact. (For texts of articles in reference, please see www.lesleba.com ) Please read on.
'A culture of propaganda is generally adopted by autocratic and despotic states and institutions to becloud a putrid underlying malaise. In modern times, the regime of Hitler, the German demagogue provides a fine example of the practice of propaganda as a cover up for unspeakable atrocities of heinous crimes against humanity. Indeed, long after the fall of the German Reich, and the sordid revelations of the Nuremberg trial, significant pockets of the German population still remained under the spell from the deep and thorough brainwashing of Hitler's despotic regime. A truly democratic regime should have no place for propaganda, but any critical observer of our current body polity will be amazed that this art of deception has been warmly embraced by the organs of state, including ministries, parastatals and other such public agencies.
'Our public institutions have now become so adept at soothing our anxieties and our pains while they are busy deliberately inflicting untold hardship on our people. For example, the availability of public power supply has remained illusory in spite of trillions of naira voted for this sector over the years, but our leaders continue to proclaim their 'sincere' commitment and endlessly encourage us to be patient! This same scenario exists in the areas of health, education, employment, etc; meanwhile, public servants and their political associates wallow in inexplicable obscene wealth while we celebrate their success and good fortunes!! The situation is best described by a colleague who observes that our public officers demand our gratitude for every injury they inflict on us!
'Lately, my attention has been drawn to the exhibition of this character trait in our National Debt Management Office (DMO), which was created under former President Obasanjo to ensure judicious sourcing and application of our national debt! The success of this government agency's efforts in managing our debts is evident in a steady rise of our domestic debt from less than N1 trillion to over N3 trillion in less than five years, and yet, most Nigerians will agree that the steady debt accumulation has brought little or nothing to the quality of their lives! Indeed, those Nigerians who rightly expected that increased borrowing would address our abysmal infrastructural deficit or create job opportunities unfortunately did not read the fine print content of the DMO's offer circulars, which were primarily related to the 'intangible objectives of deepening our nation's debt market and setting benchmark prices for domestic debts and the control of CBN's unyielding self-inflicted excess liquidity. ' Indeed, these objectives were explicitly spellt out in the prospectus and promotional adverts taken out with public funds on the commencement of DMO's activities four years or so ago! I observe that this column was strident in its criticism of these banal objectives as motivation for debt accumulation and it did not come as a surprise that the purposes of additional debt auctions were subsequently quietly omitted from the respective prospectus till date. The emphasis on the DMO offer circulars was simply shifted to the importance of holding or investing in federal government bonds as a secure and profitable instrument and not on the purpose!
'It was never a surprise that the bond issues and indeed, the treasury bills sold by the Central Bank (read as CBN borrowings) were generally oversubscribed because of their relative mouthwatering yields which were not in consonance with the modest cost of 2 - 4% for sovereign debt in focused economies. Indeed, it was attractive for 'foreign investors' to borrow with very low interest charges from abroad and reap bountiful profits from our government's debt instruments! Nothing, of course, is wrong with this if these debts were applied to the improvement of the lives of our people, but a whole lot is wrong if the funds are applied for the intangible purposes indicated in the offer circulars of the DMO and the CBN!
'The whole business, in fact, becomes a blasphemous charade when it becomes evident that both agencies of government are, in fact borrowing back government's money with such oppressive costs! 'How does the government borrow back its own money?' you may ask! Well, the truth is that the amount of cash that is available in the system is largely dependent on the size of the monthly allocations paid into the bank accounts of constitutional beneficiaries of the federation pool. The size of allocation invariably also increases the credit creation capacity of the banks and this provides the main source from which funds are expended on government treasury bills and bonds, for which the 2009 budget has set aside almost N300bn for such debt servicing! As if to add salt to injury, the DMO, in spite of such profligacy still embarks on self adulation and demands our appreciation for excellent debt management as evidenced in a series of adverts published at public expense and titled 'Good Investor, Good Citizen'.
'Our observations in this article are unexpectedly corroborated by the text of these adverts, which read as follows: 'In November 2008, in spite of the global financial crisis which was battering rich and poor countries alike, the Federal Government through the DMO successfully introduced the 20-year FGN Bond in the domestic capital market .
'This breakthrough, which was confirmed by creditable results in subsequent monthly auctions, was a follow-up to the introduction and sustained issuances of Bonds of 3, 5, and 10 years maturities between 2003 and 2008. 'The successful issuance of the 20-year Bond constitutes a manifestation of the Emerging Nigerian Spirit to surmount all obstacles and achieve lofty goals. INVEST IN FGN Bonds!'
'The reader will notice the total absence of any verifiable essential or tangible impact of debt accumulation, in spite of DMO claims to success and its self adulation for providing an acceptable government debt instrument .
'In a macabre twist of logic, our Debt Creation Office even defends the increase of our nation's debt with the need to fund budget deficits during over four years when we earned more revenue than we could spend, and we resorted to a constitutional aberration called excess crude account. The question is, 'why borrow at a higher cost to cover budget deficits , when you have idle deposits which attract minimum interest?' Indeed, what stops the beneficiary banks of your idle deposits to turn round and lend you part or all of the money?
'The almost $500m diverted by the former CBN Governor into the African Finance Corporation (AFC) is a case in point. The erstwhile CEO of AFC, Austin Ometoruwa revealed under investigation that the same government funds were round-tripped back to Nigeria to enjoy the juicy returns from government debt instruments ! In the same manner, the 14 Nigerian banks which have benefited from the $7,000m deposits they received as idle deposits for successful consolidation most probably saw the same opportunities as the AFC management and took the commercially sensible decision to reap from the excellent returns of the Nigerian government's debt instruments. Such funds would invariably be round-tripped to Nigeria as foreign direct investment, changed into naira and loaned to the Nigerian people at great cost, not minding that the money belonged to Nigerians in the first place! Till date, there is no plausible official explanation of why we continue to borrow from the sources that are the repository of both our foreign exchange and our domestic deposits. Meanwhile, the exponents of this game plan are celebrated by the Nigerian press and feted with national and international awards, while hapless Nigerian citizens continue to suffer deep pain and smile silently to early graves! There could be no better product or result of the art of deception called propaganda!!
'A few weeks ago, I published an article titled ' External Debt : at What Cost?' in this column. In that piece, we drew the attention of the National Assembly to gross inconsistencies in the cost of servicing our external debts , which consisted of multilateral debts, which would normally attract minimal rates of interest. The Punch edition of 5 th August 2009, pg 70 - 71 carried a public information advertorial titled 'Nigeria's External Debt - the True Position' by the DMO. I do not know if this publication was in response to my article under reference, but what is clear is that what the DMO labeled as 'public information' may best be described as public disinformation with the subtle edges of propaganda benevolently laced in. I will comment on that particular advertorial of the DMO next week!'
SAVE THE NAIRA, SAVE NIGERIANS!
By Les Leba