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The economy of loans: The fate awaiting Nigeria

By Chukwuemeka Okechukwu (okeyemmy@gmail.com)

Nigeria is currently facing what has been described as one of the worst economic situations in her history as a nation. Nigerians seem to be victims of blind hope since all happenings around them only point to a bleak future; the economy wallows deeper in the waters of recession and economic confusion by the day. The evidence to the uncertain future as one would vividly recall, became obvious with the tales of the 2016 National Budget. The first was the missing of the annual budget, the next was the padding of the budget and then, the move for loans to fund the budget. All these surprisingly happened in quick successions.  The Federal Government in Nigeria had in 2016 planned to raise a total of N 2.2 trillion through external borrowings from China and other foreign finance institutions to fund the deficit in the 2016 budget. What rationale underlies a plan to spend beyond what one’s means could sponsor?Fast-forward to 2020, the Nigeria Senate approves loan for the federal government for alleged infrastructural development. The catastrophe indeed looms large.

Nigeria’s Senate approved President Muhammadu Buhari’s plan to borrow $22.7 billion from external creditors to finance infrastructure projects, bringing Nigeria’s external debt stock to nearly US$50 billion, amid lawmakers and public’s concerns the approval was without scrutiny. The lawmakers gave their endorsement to the government during Thursday’s proceedings in the capital, Abuja, to seek the funding expected from the Islamic Development Bank, the African Development Bank, the World Bank and creditors in China, Japan and Germany. “The loans will have a positive influence on the GDP of this country,” Senate President Ahmed Lawan said.

The government will use the money to expand the railways, build a new hydro power dam and fund special intervention projects across the West African nation, according to a letter sent to the parliament in November.

The government of Buhari desperately needed the approval as African’s largest economy returns to the international debt market to shake off impacts of recession and finance the budget this year. Particularly, Nigeria’s ambition to close the infrastructural gap, including in power and transportation sectors, depends, largely, on project-tied Chinese loans.About 70 per cent (that is, $17,065,496,773) of the new $22.7 billion loan bid will be coming from China’s EXIM Bank, Nigeria’s biggest bilateral lender in nearly two decades.

Apart from China, the other lending agencies are the World Bank, $2,854,000,000; African Development Bank (ADB), $1,888,950,000; Islamic Development Bank (IDB), $110,000,000; Japan International Cooperation Agency (JlCA), $200,000,000; German Development Bank (KFW) – $200,000,000; China Exim Bank, $17.065.496.773; and the French Development Agency (AFD), $480,000,000.

Already, since 2002, Nigeria had borrowed $6.5 billion from China to fund various infrastructural projects, according to available records to the media in 2019. The certain details of the projects to be funded with the fresh loan from China are slow to emerge. However, it is believed that the Mambilla hydropower project costing nearly $5 billion will top the table. By the end of 2019, talks between Nigeria and China for a loan to finance the 3,050 Mambilla project, in Taraba State, northeastern Nigeria, had reached an advanced stage. It is one of Africa’s biggest dam projects but it has been stalled for over 40 years. Even without the new loan, Nigeria will still be servicing the Asian power’s loan till around 2038, the maturity date for the last loans obtained in 2018. it is unfortunate that already,  over a quarter of Nigeria’s N10.59 trillion ($35 billion) 2020 budget, that is N2.7 trillion, goes to debt servicing, exceeding N2.4 trillion appropriated for capital expenditure.

It is obvious that the loans accumulated over the years spell nothing but impending doom for the Nigerian economy. It is un-businesslike to take loans for consumptive reasons, loans are rather effective when they are meaningfully channeled to investments. Infrastructural development is a good move in a good developmental direction, but embarking on it with loans proves counterproductive since such infrastructural outlay make little or no Returns on Investment (ROI), if they could be adjudged investments in the first place. This accounts for why several Nigerians have also decried the borrowing culture of President Buhari-led administration and its fiscal burden on the country. Paul Alaje, a senior economist, in a two-part analysis, suggested how the Nigerian government can fund infrastructure and growth without going deeper into debt. In his view “domestic debt accumulation discourages private investment level in Nigeria through increased lending rate, inflation rate and scare resources in the financial market which further has a significant impact on the rate of employment and the economic activities of the country.” Similarly, JideOjo, a development expert also stated that “It thus does not make economic sense to just borrow when you can actually block leakages and have sufficient funds to run the economy.”

It is unfortunate that While Nigeria’s outstanding loans amount to about  a quarter of its economic output, Africa’s largest oil producer spends more than half of its revenue servicing debts. The International Monetary Fund has warned that without major revenue reforms, the debts could rise to almost 36% of GDP by 2024, with interest payments taking as much as 75% of government revenue.

There is every need to make efforts that are more effective and practical towards finding solutions to the economic woes that have befallen Nigeria. Being desperate with loans may launch Nigerians into deeper waters of economic woes than it would oversee their smooth swim out of the crunch. Government and individuals alike must work diligently to walk out of recession. It has become very obvious that only the government cannot salvage the situation as the recessive nature of the economy has become more complex with the recent and unbridled quest for loans without commensurate economic plans.

 

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