THE POLITICS OF DEBT: BETWEEN MISCHIEF MAKERS AND DEBT ANALYSTS
THE POLITICS OF DEBT: BETWEEN MISCHIEF MAKERS AND DEBT ANALYSTS
By:
Nurudeen Dauda
April 18, 2016.
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Debt in itself is not a “bad” thing, but what you use it for determines whether it is “bad” or “good”. “Dangote, in 1977, borrowed about N500, 000 from his uncle to trade basic foods: cooking oil, sugar, pasta. Four years later he bought trucks to start a transport firm and within a decade was importing bulk goods…” (Daily Trust: September 12, 2012:P.19). United States of America is the “most indebted” country in the world yet the strongest economy in the world; Alh. Aliko Dangote is the most indebted African yet the richest African! Lagos state is the most indebted state in Nigeria yet the strongest economy among all the 36 states in Nigeria. Only Lagos state can pay salaries without federal allocation! Too bad!
The abolishment of “Trade by Barter” and the introduction of “Money” as a means of payment make borrowing “inevitable” in “Modern economy”. To borrow and “marry” or “remarry” is “reckless” as well as “mindless”, indeed is a bad economics! But to borrow and build a “House” or starts up a viable business is a sound economics. To borrow and pay salaries is a bad economics but it might be humanly considerable. Experience in debt management reveals that what kills borrowers most is needless “investment” or borrowing for “consumption” not investments. If you borrow and increase your daily expenses or engage in “jamboree” it will sooner than later “spell doom” to you. Ideally, all borrowing should be for “capital expenditure”; if you borrow to “invest” you are likely to generate returns and payback with ease; if you borrow for “consumption” is not a sound economics.
“Infrastructural projects such as rail and roads create jobs, generate taxes and stimulate further spending. This is the economic multiplier effect that capital spending brings…At 13% debt to GDP ratio, we campare favourably with the threshold of 30% for developing economies… Borrowing as propose ,will increase debt to GDP to 16% and still leave us significantly lower than our peer group including Ghana at 70% , South Africa at 50% (2015) and Angola at 31%(2014). Appropriate levels of fiscal deficit have been used to grow many of the most successful global economies” -Kemi Adeosu, Finance Minister (Daily Trust: April 7, 2016:P. 44).
What Nigerians should know about is that, the loan that the present government wants to collect is neither from IMF nor World Bank. More so, the loans are for roads, rail lines, housing and bridges and not for payment of “salaries” of “consumption”. And the anti corruption stands of the present government we do not expect “diversion” of the said loans upon collection.
IMF and World Bank loans are what many scholars have frowned at because it comes with harsh conditionality (ies). President Buhari refused to collect the IMF’s loan in the 80s when he was the “Head of States”. The IMF loan conditions then require that:(1) Devaluation of currency, (2) liberalization of trade,(3) Privatization of Public Corporations ,(4) Rationalization of workers, and(5) Removal of Subsidy on essential commodities etc. However, the Government of IBB collected the IMF’s loan of $9billion in 1986 and introduced “Structural Adjustment Programme (SAP) in 1986.
However, in borrowing we have both “Domestic” and “Foreign” sources. The domestic sources are from: Commercial Banks, Stock Exchange Market, and Government bonds etc., for foreign sources are from: Foreign Governments, Foreign Banks, London/Paris Clubs, IMF, World Bank and other corporate bodies etc. For domestic borrowing the effect is on the “individuals” while the foreign borrowing is on the economy. Lenders feel more secured to give government loans than otherwise as such domestic borrowing usually crowds out the local firms from assessing funds for their businesses thereby affecting their productivity; the foreign borrowing on the other hand, is cheaper and available.
Interestingly, even the IMF’s and the World Bank’s loans were once granted to some countries which they used and paid off in good time. Brazil Paid Off IMF Loan earlier than the agreed terms: Brazil received a $41.5 billion IMF-led international support program in November 1998. In a highly unusual move for a Latin American country, Brazil paid off its debt to the International Monetary Fund (IMF) a year ahead of time. Brazil's final payment of $15.46 billion was made in December 2005. The funds came from Brazil's monetary reserves of $66.7 billion.
Beginning in the 1970s, Jamaica and then Guyana obtained assistance from the IMF to address balance of payments imbalances. Since then, Barbados, Trinidad and Tobago, Dominica, Grenada and Belize have accepted IMF stabilization programs as a condition for receiving financing. All these countries suffered periods of contraction but succeeded to various degrees in returning to a path of sustained growth. Fiscal policy proved the most successful in reversing the negative economic growth.
Umar Ardo, Ph.d said: “…of note is Nigeria paying the Paris and London Clubs in 2006 $12billion USD in the name of Debt Relief for an original loan of $9billion USD, with over $32 billion USD already paid as Debt Service so as to forgive an outstanding debt of $36billion USD…”
“… we left $25billion on our Excess Crude Account and Yar’adua raised it to $35billion…we left $40billion on the foreign Reserves and Yar’adua raised it to $67billion… our debt that was about 40billion dollars, that is including debt forgiveness, the remaining debt was not more than $3billion.Our reserves after we had paid off this debt was about $45billion”- President Obasanjo said while hosting South-West Women Leader in Abeokuta, 5th January, 2015.
The debt collected from the IMF was partly written off and partly paid off during President Obasanjo’s time. Wednesday June 29, 2005 has been described as Nigeria’s second independence day” by Dr. Ngozi Okonja –Iweala, the country’s finance minister. On that day, the Paris Club of creditors agreed to consider “debt relief” for Nigeria under some specific agreements among which Nigeria would clear arrears of about US$6 billion out of the US$30 billion Paris Club debt. This would enable the country to enjoy a debt stock reduction on Naples terms and buy back the remaining balance of debt with the Paris Club. (Shala, 2006).
The total package of the relief to be enjoyed by Nigeria 60% of the total debt with the Paris Club of creditors, amounting to about US$18 billion, which compares very favourably with the recent US$40 billion write off of debt for the 18 highly indebted and poor countries of the world by the developed nations. The remaining 40% would be cleared through a buy back system. (Shala, 2006).
At the June 2005 meeting, the Paris Club of creditors acknowledged the reform programmes being implemented by the Obasanjo’s administration since 2003 and willingness of the Nigerian government to take advantage of exceptional revenues to finance an exit process. As the then finance minister puts it, there are debts we are supposed to pay in the next 23 years, but we now have the opportunity to clear it once and for all as soon as we pay the arrears after negotiations and US$18 billion out of US$30billion Paris Club debt is waived. So all the debts both federal government debt and state governments debts would be written off. (Shala, 2006).
British’Chancellor of Exchequer, Gordon Brown, also explained that the debt relief combined with the buy-back would translate into a 100% debt for Nigeria in the next 6 months. (Shala, 2006).
BEBT RELIEF FOR NIGERIA: A DIVIDED OF DEMOCRACY
A special broadcast by President Obasanjo, excerpt:
It is with great joy that I address you today on one of the pillars of success of this Administration. It is the debt relief already announced. I address you on it for several reasons. First, it is important that, as always, I bring to your attention issues of national importance. Second, it has far-reaching implications, in a positive sense, for our reform agenda. Third, we have collectively worked very hard for it and now that the results are evident, we should all savour it and draw strong lessons from the profligacy of the past. Fourth, it vindicates the steadfastness, sacrifices and tenacity of this government in its struggle to win relief from the global community in order to give us the required breathing space to make more progress…this will represent, for the first time, a total exist, if you like, total freedom from Paris Club debt.
The package in final terms that we are to expect would yield debt relief of about 60% on our current Paris Club debt. We shall pay off the 40% balance through a buy back operation. The total write off is close to $20 billion which compares very favourably with the recent $40billion write off of debts for the 18 highly indebted and poor countries of the world by the developed nations.
Fellow Nigerians, how did we get to the point where our debt burden became a challenge to peace, stability, growth and development? Without belabouring the point we can identify political rascality, bad governance, abuse of office and power, criminal corruption, mismanagement and waste, misplaced priorities, fiscal indiscipline, weak control, monitoring and evaluation mechanisms, and a community that was openly tolerant of corruption and other underhand and extra legal methods of primitive accumulation of wealth. (Shala, 2006).
Debt Relief China agreed in 2003 to forgive $1.27 billion (10.5billion Renminbi) in debt to 31 African nations.
Alh. Ahmed Joda, the Chairman Buhari’s Transition Committee-“ We were told at the beginning of the exercise that the government was in deficit of at least N1.3 trillion and by the end people were talking about N7trillion…”(Daily Trust Sunday: June 21,2015: P.6). “Local and international debt stands at $60billion (12.trillion).Our Debt service bill for 2015 is N953.6billion, 21% of our budget” Vice President, Prof. Yemi Osibanjo (Premium times, May 2015).
It is an undeniable fact that for the greater part of the last 16 years crude oil which is the mainstay of our economy was sold at above $100 per barrel but sadly to mention we didn’t save anything for the rainy days. They could not diversify the economy either!
Profession Charles Chukuma Soludo, Former CNB, Governor said: “… President Jonathan’s regime had the worst economic management relative to the resources at its disposal…it should have left more than $100 billion in reserves but left only $30billion… we felt little impact of the global economic crisis of the 2008/2009 because of heavy reserves of over $40billion…Oil has indeed been a curse!”
Former Minister of Finance Dr Ngozi Okonjo- Iweala while speaking recently in George Washington University on a topic “Inequality, growth and resilience said: “World Bank and International Monetary Fund (IMF) must seek means to embed savings in national constitutions devoid of political manipulation. She however, said: “her former boss Former President Goodluck Jonathan was not interested in saving Nigeria’s huge earnings from oil and other sources between 2011 and 2015.The absence of political will to save under Former President Goodluck Jonathan is responsible for the hardship facing the country currently”(Leadership Friday :April 15,2016).
President Buhari said: ”In the first republic, more enduring infrastructure was built with meager resources. But in the past 16 years, we made a lot of money without planning for the rainy day. We showed a lot of indiscipline in managing our economy, and that is why we are where we are today. But this time around, we will do our best” (Leadership Newspapers: April, 12, 2016:p.19).
Ultimately borrowing is not a crime! In view of the deficit financial position as well as the dwindling resources occasion by the fall in the crude oil price in the international market inherited by this government from the previous government ,it needs to borrow in order to restart the economy otherwise things will get worse in the economy. We need to borrow and generate more Electricity, construct Roads, Hospitals, Bridges, Housing and Rail lines etc. The proceeds from those projects will repay the loans. Let’s borrow more but for capital project not recurrent expenditures.
May God save us!