Nigeria And Debt Burden

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Amidst conflicting claims that Nigeria’s external debt has bloated up again after the country’s exit from Paris Club, the House of Representatives summoned the Minister of  Finance, Alhaji Mansur Mukhtar to appear before its Ad-hoc Committee on Foreign loans on 16th February, 2010 to clarify issues pertaining to Nigeria’s external debts.

Nigeria’s exit from the Paris Club debt in 2005/2006,dropped from what it used to be before the exit process commenced, the external debt profile then stood at about $35.94billion by the end of December, 2004.

Murhktar urged the House committee to disregard insinuation about the increase in the country’s debt asserting emphatically that the debt stock dropped dramatically and substantially after the country’s exit from Paris  Club (in 2005/2006) He said, “By end -December 2006, the stock was a much lower.

Amount of USB 3.54 billion. The debt stock figure by end-December ,2007 was USD 3.65 billion, by end-December, 2008 it was USD 3.72, and by end-December, 2009, it was USD 3.97 billion.”

It is  worthy to note that …. the constitution of the federal Republic of Nigeria did not specifically make provision on borrowing .However under the second schedule, section 4, item 7, of the exclusive legislative list, the National Assembly is conferred with the powers to make laws in respect of borrowing of money within or outside Nigeria. for the purpose of the federation or a state.

In pursuant to this power, the National Assembly has enacted the debt management Act, 2003 and the Fiscal Responsibility Act, 2007.

 In particular, section 19 (1)and(2) of the DMO Act requires that the borrowing programme for every succeeding year be approved by the National Assembly . In compliance with this requirement, the borrowing programme for fiscal 2010 has been included as part of the 2010 appropriation bill.

 The finance minister clarifies that state governments are not allowed to borrow directly from external source. And that a state government or its agency can obtain external loans only through the federal Government. (Fiscal Responsibility Act, Section 47 (3). In accessing external loans, a government or its agency has to comply with the relevant guidelines and requirements which derives from Responsibility Act and the DMO Act. These include: the national debt management framework, the external borrowing guidelines and the sub-national borrowing guidelines. External borrowing by the federal and state governments within the borrowing programme included in the budget are still subjected to these guidelines by the Debt Management Office under the authority of the minister of finance. In essence, there is effective control to ensure compliance with the provisions of the constitution and other external laws

In line with the current national borrowing guidelines, Nigeria’s external borrowing since the exit from the Paris Club and London Club debts has been limited to concessional sources. These credits, essentially from the International Dev-elopment Association (IDA) and African Development Fund (ADF) windows , of the World Bank and the ADS, respectively, have a 40-year repayment period including a 10 -year grace period. Murkhtar said Although several loans were considered, negotiated and processed between 2007 and 2009, only $1,831.60 billion became effective during the period. The total amount drawn down between 2007 and 2009 was $1,318.22 billion, which was made up of $880.89 million (disbursements on old loans contracted before 2007 ), and $437.33 million (disbursements on loans contracted between 2007 and 2009).

Part of the reason for the misunderstanding of Nigeria’s external debts , He said ,is the non- recognition that when Nigeria paid off its Paris Club and London Club debts, it did not payoff its multilateral debts, as this was neither necessary nor desirable. Only the problematic and the odious component of the external debt was cleared off.

Much of the external debts remaining after the exit from the Paris and London Club debts are loans from multilateral financial institution (World Bank, African Development Bank, International Fund for Agricultural Development, etc). The loans from this source constitute about 85% of the country’s external debt stock as at March 31, 2009. It is pertinent to note that about 83% of the interest charges: service charge of 0. 75%p.a and long repayment periods of 40 years and above, including a grace period of 10 years.

In view of their long tenors, implying gradual installment payments, it is obvious that some of the outstanding loans were contracted more than 20 years ago and cannot be contributed to the last few years. Indeed, some of the loans were contracted in the 1960s, 1970s and 1980s for various infrastructural and social development projects. . It is because their payments were scheduled to be gradual so as not to put serious burden of Fiscal resources, that part of them are still outstanding.

That the loans have a long repayment period is beneficial, given the nature of the projects and services they financed – projects and services like basic education, health and rural water supply, as well as roads whose revenue-generating impact is at the best slow, small and indirect. More importantly, it should be noted that much of the loans were applied to the provision of social and infrastructural services over the years. There is no doubt that some of the infrastructure funded in the 1960s, 1970s and 1980s are still useful assets to the people.

While the Post-Paris Club external debt stock has remained sufficiently restrained, it does vary up and down within reasonable limits even if no new loans have been incurred. This is because old loans could still be disbursed while, at the same time, repayments of principal amounts due could be taking place. The direction of the swing in the outstanding debt stock, therefore, depends on the net result of disbursements and repayments.

Nevertheless, the Finance minister assured that government is committed to ensuring debt sustainability and to avoid the pre-Paris Club debt exit situation. In line with this posture, the Debt Management Office has developed a National Debt Management Framework (NDMF) to guide the policy and strategy for external and domestic borrowing by the Federal and States Governments, as well as their agencies.

The DMF contain specific guidelines for borrowing, designed not only to limit borrowings to sustainable levels but also to ensure that there is a value for money and that the use of funds leads to the growth, employment and poverty reduction. Further, the DMO working closely with the Ministry of Finance, the CBN, the National Planning Commission and other agencies conducts annually, a debt Sustainability Analysis (ASA) to keep track of the static and dynamics of the public debt sustainability under changing local and external scenarios.

For the same reason, the DMO he said “is making significant progress in implementing the Template foe helping every of the 36 states of the Federation to establish its own Debt Management Department (DMD)”. Mukhtar said: “Although the country desires massive resource inflows in order to fund the closing of its huge infrastructure deficit, it will continue to limit the extent of its dependence on external debt financing, while encouraging the inflow of non-debt resources, such as foreign direct investments. In addition, the country is making progress in the development of the domestic debt market, to encourage domestic savings and its mobilisation, as an alternative source of funding public and private sector projects”.

In this regard, it is noteworthy that the DMO working with.”, other government agencies (the CBN, the Ministry of Finance, the Securities and Exchange Commission) and the private sector capital market players has transformed the psychology and practice of the domestic debt market from a short-time to a long-term one. The tenor of FGN Debt instruments has been extended progressively over the last few years from 91 days to 20 years. Hence, a dependable substitute for external debt funding is being developed. However, the Minister said “the goal is not to achieve a 100% substitution: rather, the goal is to operate within a dynamic-optimal range of external-domestic debt mix.”

 

Justus Awaji, Abuja