Foreign loans: Lesson from the 80s

Published on 26th July 2010

President Goodluck Jonathan has appealed to the G8 member countries to grant 100 per cent debt cancellation to African countries. The call for total debt cancellation is more strident at a time Nigeria itself, which has just been out debts obligation, is getting more foreign loans and consequently increasing its debt profile again. 

What is not clear is whether African leaders intentionally get foreign loans with no specific plan for repayment but with the sole aim of asking for cancellation thereafter, no matter how long it takes to get that accomplished. 

Recently, Ita Enang (Chairman, House Committee on Business and Rules) said most of the foreign loans obtained by Nigeria were hurriedly approved without taking the pains to articulate their terms and conditions. He said the chunk of loans from the World Bank and other financial institutions has, rather than alleviating poverty, perpetuated it. 

The fact that loan papers are not carefully examined may be waved off if the National Assembly members are conducting their personal businesses. But in the present circumstances, where more than $1bn loan had been authorised within the last one year, the future of millions of Nigerians is put on the line as a result of the inability of the federal legislators to properly scrutinize loan paperwork. This in the long run will jeopardize the nation‘s economic growth prospects. 

While experience in Africa has shown that countries that borrowed to finance development ended up being heavily indebted, lending money to inept or corrupt governments is not likely to help such countries develop. Most countries that obtain loans to ginger development are ill advised and reckless. Many countries get into debt repayment problem because a substantial part of the loans is kept in secret accounts overseas and is not spent on the primary purpose for which the loans are meant. 

Despite the shortcomings associated with foreign loans and past experiences, there are fears that Nigeria‘s loan portfolio might be on the rise and consequently put the nation among debtor nations. It is not accidental that the Minister of Finance, Olusegun Aganga, warned of dire consequences for unbridled borrowing in the face of cash crunch. The fiscal deficit right now has risen to an estimated deficit of 10 per cent of GDP in 2009 from a surplus of 3.7 per cent of GDP in 2008. 

Nigeria is gradually on the road to being a highly indebted country. In view of the mounting debt, what is more worrisome is the penchant for increased foreign loans. The external debt stands at $4.3billion. Early this year, domestic debt was $21.3billion. This amount excludes the verified $40 million owed local contractors and $200million unverified amount. 

The Director-General of the Debt Management Office, Abraham Nwankwo, has argued that Nigeria‘s current debt to GDP ratio that is put at 13.88 per cent is one of the lowest in the world. But a mere comparison of debt figures with other countries does not present the whole picture. The main issue is the tangible progress achieved from the loans and the volume. In the past, debts were amassed without deriving any commensurate value. 

It is therefore economic folly for officials to erroneously think Nigeria‘s problems are over with more and more loans as they tend to see foreign loans as easy money. On the contrary, aside from the loan conditionalities which are often in the interest of the creditors, such loans in the end often retard growth and consequently undermine the potential to use the resources for development purposes rather than for debt servicing. In this year‘s budget, a total of $3.3billion is expected to go into debt servicing alone. 

Government functionaries’ statements tend to indicate that Nigeria cannot develop without resorting to loans, whether domestic or foreign. While it is easier to get loans, the hard part relates to accumulations in the principal as well as interest that will later accrue. The effect is that it puts avoidable pressure on interest rate, drives up foreign exchange and inflationary rates, and frustrates long-term economic development. 

The World Bank has said that no nation with aggressive agenda like Nigeria can succeed without massive borrowing. The Bank needs to be reminded that a country with poor debt management and hard-earned resources going into debt servicing will scarcely succeed. 

This route, treaded in the 80s, resulted in economic turmoil and triggered the Structural Adjustment Programme. The bulk of the debts negotiated for cancellation in 2005 were obtained in the 80s. Unfortunately, a large percentage of the loans was expended on projects that had doubtful value and most of which became moribund or abandoned. There is a tendency to mismanage loans in a way that only the leaders, lenders and the privileged few benefit. It does not inspire confidence that any loan will be well spent this time. 

With depleting oil revenue arising from fluctuation in oil prices, one can reasonably infer that government might resort to excessive borrowing to finance its deficit. One danger that this presents is the tendency for government to crowd out private sector. Excessive borrowing from domestic market will no doubt lead to a situation where there won‘t be enough credit left for the private sector. This will stifle the growth of the private sector as well as further enlarge the public sector disproportionately. 

The natural outcome is that it will increase the interest rate and make the few available credits expensive. To forestall this, our economic policy must be geared towards keeping the exchange rate flexible and market-based in order to help spur diversification. It is equally important to also curb the fiscal deficit and keep an eye on debt increases, especially the domestic debt. 

At present, the recurrent spending constitutes a substantial part of the budget. Of the amount budgeted in this year‘s budget, almost 60 per cent is slated for recurrent expenditure at the expense of addressing infrastructure, which is actually needed to spur economic growth. On the contrary, there is a need to invest and upgrade the infrastructure. 

Without such investment, economic growth is a mirage. At the same time, there is a need to discontinue budget practices that create conditions that make debt seem normal. 

Over the years, there has been an increase in the size of government without commensurate rise in revenue. This ordinarily puts pressure on the government finances. The only way to prevent this is to do away with big government. There is no economic justification for duplication of several appointments. For instance, one may ask: what is the need for a minister of state when there is a permanent secretary? 

Already, unspent capital allocations have lately been the object of EFCC’s probe. It is not clear how a ministry or agency that cannot effectively execute project budgeted for in the budget will be able to execute projects being funded by loans in a timely manner. In fact, what is usually the case is that most of the ministries that are unable to utilize previous year‘s budget presents an increase in budget estimate following year. Government should not frivolously seek loans when in actual fact the nation‘s woes arise from unsustainable use of available resources. 

Should loans be an option in the face of dwindling revenue, it will only succeed in achieving one thing: the coming generation will be saddled with repayment burden. 

Spending a substantial part of loan on recurrent expenditure is largely unsustainable. Past experience dictates caution. There is nothing on the ground to suggest that another round of loans will actually spur growth and development. Over the years, the nation‘s resources have been mismanaged and cornered. 

Instead of aggressively seeking loans, policymakers should be more concerned with how to address the present large fiscal deficit, huge depletion of the Excess Crude Account and the rise in domestic and foreign debt. These call for the adoption of a more realistic benchmark and eliminating profligacy. 

By Thompson Ayodele, Executive Director, Initiative for Public Policy Analysis (IPPA) and Olusegun Sotola,  Research Fellow at IPPA.

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