Real Time Analytics

Recession: Offshore Borrowing To The Rescue


The Federal Government has approved external borrowing from offshore lenders. The loans, expected from the World Bank, African Development Bank (AfDB), Japan International Cooperation Agency (JICA) and Export-Import Bank of China, will be facilitated by the Debt Management Office (DMO). The loans are to be disbursed on infrastructure and other developmental projects. If well managed, experts say the facilities help the economy wriggle out of recession, reports COLLINS NWEZE.

THE Federal Government is eager to steer the economy out of recession waters. Borrowing from offshore banks under the supervision of the Debt Management Office (DMO) may be the way out of the economic quagmire for the Buhari Administration.

The administration has assured Nigerians that its economic team is back at the drawing board not only to avert depression but to ease the pains of the recession on the country.

It is no longer news that the economy is not at its best following the second quarter report of National Bureau of Statistics (NBS), in which it confirmed that the has sailed into recession.

As expected, economic output declined for the second consecutive quarter as Gross Domestic Product (GDP) contracted further by 2.1 per cent year-on-year in the second quarter from 0.4 per cent in the first quarter.

But as disturbing as the figures are, the Federal Government has seen the opportunities in them. It is considering borrowing from international financial institutions to save the economy from further drifts.

To jumpstart economic recovery, the Buhari administration last week approved plans for external borrowing. The loans are to be sourced from the World Bank, African Development Bank (AfDB), Japan International Cooperation Agency and Export-Import Bank of China. The DMO is to facilitate access to the funds from the multinational agencies.

The move came on the heels an approval for a three-year external borrowing rolling plan billed to be transmitted to the National Assembly for consideration after its resumption on September 19.

President Buhari announced a N6.1 trillion spending plan for this year to stimulate the economy. According to him, the government has a plan to raise about $5 billion from Eurobond market and multinational and bilateral lenders.

The DMO last month urged interested banks to bids by September 19 for the management of a $1 billion Eurobond sale. Earlier in June, Finance Minister, Mrs. Kemi Adeosun, had told bond investors in London that Nigeria was close to securing about $3 billion facility from World Bank and AfDB.

According to Mrs. Adeosun, the loans will come from the World Bank, AfDB, China Exim Bank, and other development agencies like the Japanese International Cooperation Agency (JICA). She said the plan to borrow externally was in line with government’s strategy to focus on concessional debts, low-cost loans, particularly from multinational agencies.

The loans are to come with average interest rates of 1.25 per cent, between four to seven year moratorium and 20-year repayment schedule. The minister said the loans will be disbursed on the development of strategic sectors which government believes will help to revive the economy.

She listed power and agriculture as the sectors that will get significant chunks of the loans to take care of projects, especially those militating against efficient power generation, citing transmission.

She restated government’s resolve to diversify the economy from oil as the way out of the economic crisis.

Her words: “It is the worst possible time for us. Are we confused? Absolutely not! How are we going to get ourselves out of this recession? One, we must make sure that we diversify our economy.

“There are too many of us to keep on relying on oil. We can all see what happened at the output data of the oil and gas sector. What’s happening in the Niger Delta has dragged down the Gross Domestic Product (GDP) of the entire economy. We’re too dependent on oil.”

The DMO Director-General, Dr. Abraham Nwankwo, said the country’s low debt to GDP ratio has cleared the road for the country to borrow more to fund its budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry. A data obtained from DMO shows that Nigeria’s domestic and external debt stocks stood at about N12.60 trillion in December 31, 2015, which also puts the country in a good stead to seek more loans.

Regarding foreign debt, the strategy is to borrow on non-concessionary terms for projects with self-paying capacity, and/or job creation potential, and on concessionary terms and grants for social sector projects.

The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, agreed with Dr. Nwankwo, explaining that budgetary allocations alone may be inadequate to finance the infrastructure deficit with dwindling oil revenue.

Prof. Ekpo described the debt option as the most viable, pointing out that Nigeria’s rebased GDP economy has given it the leeway to borrow more to bridge infrastructure gap.

To him, the DMO had in the past, demonstrated good negotiation skills in dealing with the country’s debt matters, either with internal or external creditors, saying that it will not be out of order for the government to borrow from the World Bank or the AfDB to fund the key developmental projects.

Government can also borrow internally to achieve the feat, he said, even as he disclosed that internal borrowing is always short-term while external borrowing has longer tenor.

Ekpo said the DMO has the capacity and constitutional role to advise the government on the available choices. “The World Bank rates are cheaper with longer repayment term. The DMO can also leverage on the Nigeria Trust Fund with the AfDB to get a better deal on the loans needed to fund developmental projects” , he said.

Between falling oil prices and borrowing

Nigeria has been grappling with economic crisis since crude oil prices dropped by about 43 per cent from an average of $100.35 throughout 2014 to an average of $57.20 for the first six months of last year. It closed at $49.29 per barrel at the weekend.

Specifically, the drastic fall in the prices of crude oil, which constitutes the largest component of the forex reserves has cut dollar earnings from about $3.2 billion monthly to about a billion dollar for the same period.

Analysts believe that with the fall in crude oil prices, the government needs to borrow to support economic development.

Head of Macroeconomic & Fixed Income Research, FBNQuest, Gregory Kronsten, hinted that crude oil price will end the year on a low note. He said although the oil price has picked up from its recent floor in January and the budget assumption of $38/barrel has started to look conservative, but the global supply/demand balance for crude is set to remain low until late next year.

The thinking is that despite the marginal recovery in crude oil prices, borrowing is still needed because oil will remain low for a long time and may even crash below $40 in the face of production politics.

A Currencies Analyst with Ecobank Nigeria, Olakunle Ezun, said the DMO works closely with the Federal Government to manage the national debts. He said although funds from the domestic bond market are more expensive than the international bond market, investing in the local bond market is also in the best interest of the economy.

The FGN Bonds, he added, helps the government in the funding of its deficits in a non-inflationary manner while providing benchmark yield-curve for pricing other securities/bonds. It also engenders rational management of government’s fiscal and monetary operations. He said that if the debts are well spent, they will help to boost liquidity in the economy and investment in key sectors like agriculture and mining, among others.

Borrowing guidelines

When it reconvenes next week Monday, the National Assembly will be expected to grant prior authorisation in the appropriation or other Act or Law for the purpose for which the borrowing is to be utilised.

“The Federal Government may borrow from the capital market, subject to National Assembly’s approval. Government at all tiers shall only borrow for capital expenditure and human development on concessional terms,” the debt guidelines said.

Any government, or its agencies, can only obtain external loans through the Federal Government and such loans must be supported by Federal Government guarantee. “No state, local government or federal agency shall, on its own, borrow externally. State governments and their agencies wishing to obtain external loans shall obtain Federal Government’s approval-in-principle from the Federal Ministry of Finance,” it said.

However, the borrowing proposal must be submitted to the Ministry of Finance and the DMO for consideration, and must state the purpose for which the borrowing is intended and its link to the development agenda of government.

It must also state the cost-benefit analysis showing the economic and social benefits to which the intended borrowing is to be applied; cash-flow statements of the Ministries, Departments and Agencies (MDAs), to ascertain their viability and sustainability. There must also be copies of the state’s Executive Council’s approval and the resolution of the State House of Assembly.

Also, all banks and financial institutions requiring lending money to the federal, state and local government areas or their agencies shall obtain the prior approval of the minister of Finance and shall state the purpose of the borrowing and tenor.

States’ debt

support programme

Although the Federal Government is not willing to give out fresh bailout funds to states struggling to pay salaries, the DMO’s previous efforts in restructuring of banks’ loans to states into Federal Government of Nigeria (FGN) bonds was strategic.

The DMO had last year, put forward a proposal to restructure the states’ short-term bank loans into long-term FGN Bonds. The purpose was to reduce the debt-service outflow of states and free resources for meeting other obligations, particularly, clearance of arrears of salaries and pensions.

The debt office said a total of 23 states had submitted requests for the bank loan-to-FGN bond restructuring. Phase I consisted of eleven states which had completed and submitted all necessary documentations, including the submission of jointly authenticated balances with banks.

These states had their bank loans restructured into 20-year FGN bonds effective August 17, last year. Phase II of the restructuring consisted of 12 states whose bank loans were restructured into 20-year FGN bonds effective September 16, 2015.

It disclosed that the second phase, which concludes the restructuring exercise, showed that 14 banks were involved in phase I debt restructuring operation and their total loans to the 11 states which were restructured amounted to N322.788 billion.

Also, 12 banks were involved in Phase II of the restructuring plan and the loans restructured for the 12 states amounted to N252.728 billion bringing the total restructured amount for the 23 states to N575.516 billion.

The debt office said the government attached high priority to addressing the fiscal imbalance faced by most states of the federation. The immediate cause of the fiscal imbalance was the structural drop in oil prices at the international market and the resultant drop in the revenue allocation from the distributable pool for the three tiers of government and the Federal Capital City (FCT).

Diversification as the answer

As worrisome as the economic indicators may be, Nwankwo described them as temporary setbacks that will be overcome when the government’s policy on diversification of the economy begins to crystalise.

At an interactive session with reporters in Lagos, Nwankwo said the government’s efforts at revitalising other sectors of the economy, such as agriculture, solid minerals and manufacturing, among others, will impact on the economy in the next three to five years.

According to him, after diversification, the country’s growth will no longer be determined by the prices of crude oil. The DMO chief said the country has been unable to exploit up to 25 per cent of opportunities in agriculture.

Nwankwo said: “We need to achieve internal food security and have the opportunity to export agro-based products in processed form. Imagine the variety of food stuff from savannah to the deserts, all the various legumes, roots and others that can be grown from these environments.

“If we effectively exploit agriculture, if and as we are making progress in agriculture, firstly, the major consumer of our forex like agro-based raw materials, rice, fish, poultry, wheat, will be taken care of and government will save billions of dollars from these imports.

“We have the capacity to produce these products and even export to other countries. Based on the pronouncements of the agriculture minister based on the vision of President Buhari, in three to four years, we will be self-sufficient in poultry, rice production.

“We are on the right path to be self-sufficient in food, and enormous forex will be saved from agriculture production alone. Reserves will rise, and the local currency will be stronger. That is the essence of the growing economy”.

With the drop in oil prices, Nwankwo said that the government has no choice than to diversify the economy.

“There is still a broad resources base for diversifying and industrialising the economy. With appropriately structured financing, Nigeria should be able to programme a trajectory of long-term fiscal stability and self-sustaining growth”, he said.

He said the DMO has been helping to effectively manage the country’s debt. For instance, it commenced the implementation of the strategic objective of assisting the states of the federation to develop debt management institutions and capabilities since the last quarter of 2007, as part of its five-year strategic plan.

The goal, he explained, was to forestall a relapse into debt un-sustainability, as was experienced by the country before its successful exit from the Paris and London Club debts over-hang. The strategy was to redress the very weak debt management institutions, structures and practices at the state levels towards a more effective coordination of public debt management.

The DMO has also established Domestic Debt Data of the 36 states, with a framework in place for regular updates. The debt office has also helped in the passage by some states within the federation, the Fiscal Responsibility/Public Debt Management Laws to govern debt management and engender fiscal discipline.


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