Fake debt and investable bank credit…

Nigeria’s external debt stock stood at US$11.3 billion in June 2016. The Government’s domestic debt stock was N10.6 trillion then. In relation to the GDP, both are adjudged to be well below the international debt threshold. Ruefully, an unrecognized but gratuitous national local debt stock that arises from improper handling of Federation Account dollar accruals, runs into multiples of the GDP, stands above the debt threshold and manifests itself through the perennially frail economy. No wonder a little over 10 years after it exited external debt trap, that consisted largely of spurious foreign claims on IMF-endorsed harrowing terms of an extortionate payoff of $12 billion and use of injurious methods to disburse FA dollar allocations wrongly withheld by the apex bank, the FG is facing debt service costs between 30% and 40% of revenue being realized under the 2016 Federal Budget. This is unacceptable.

This time, government bemoans the high interest rates being attracted by the domestic debt stock. The high debt service/revenue ratio that became acute owing to military-induced reduction in crude oil export receipts merely whetted policy makers’ long expressed preference for low interest external loans. As a result, the FG has embarked on a binge to accumulate afresh heavy foreign debts by arranging a currency swap with China and contracting multilateral loans with promises to take additional foreign bilateral, Eurobond and World Bank/IMF loans.

This is unfortunate. It must be emphasized that, that course of action is ill-advised because the appropriate response to the increasingly unbearable debt service/revenue ratio should be to scruntinise the whys and wherefores of the unsatisfactory state of affairs. And an extra reason to do so surfaced recently. On October 12, the Ministry of Budget and National Planning (MBNP) and the organized private sector’s think tank, the Nigerian Economic Summit Group, agreed to actively promote patronage of quality and competitive made-in-Nigeria products, which should include competitive Nigerian bank loans. That constitutes a direct challenge to the MBNP.

The FG exercises exclusive monetary responsibility through the apex bank while the MBNP hosts the secretariat of the National Economic Council. That makes the MBNP/midwife who should diligently coordinate the economic activities and actions of the Federal Ministry of Finance and the CBN to bring about internationally competitive interest rates. Such an end-product is a part of FG’s required contribution to unfurl local production of competitive and diversified exports as well as make government to preferentially consume domestic financial products.

To return to the national domestic debt (NDD), it should be noted first, that its initial components may be gleaned from the reports of the CBN and the Debt Management Office (DMO). The NDD is made up of mopped but sterilized (not spent or invested) excess liquidity funds to the tune of over 90%. The coupon rates are therefore arbitrary freebies for deposit money banks. The NDD’s classification into some 40 FGN Bonds, Nigerian Treasury Bills and various Treasury Bonds is a deceptive sheen. Proceeds from third-party subscribers to the instruments go to the initial DMB subscribers and the CBN rather than the national treasury. The NDD enjoys first-line charge on FG budget revenue, which is rape of the federal treasury. The National Assembly should therefore urgently dissect the NDD and expunge this fake debt from the national budget.

Second, the earlier noted excess liquidity arises when the apex bank routinely withholds FA dollar allocations and proceeds to wrongly substitute apex bank deficit financing of the budget of FA beneficiaries proportionately to the withheld allocations as part of the unrecognized national local debt. To appreciate the impact of the CBN’s wrong action, we recall that despite the usual budget proposals, which include deficit spending below three per cent of GDP, the federal budgets have year in year out been heavily under-implemented and suffer huge leakages through embezzlement. Thus, as economics teaches, given implicit actual budgetary spending that is well within revenue receipts and acceptable deficit limits and the fact that net inflow of forex is relatively small, a low (0-3%) inflation level should be in place just as 5-7per cent lending rates would be positive in real terms and prevail.

In effect, the CBN would not assume a tight monetary policy stance aimed at fighting inflation. But alas, the economy persistently experiences the converse. The high inflation regime, the ever-depreciating naira exchange rate and very high lending rates evidence excessive fiscal deficit spending that is out of tune with the budgetary revenue and expenditure outcomes. The improper handling of the FA dollar allocations is the bane of the economy.

Third, in addition to the inhospitable production environment, the fake but ever-growing NDD and very high annual debt service costs which in 2016 have been estimated at N1.3 trillion, the price paid by the country for the mishandling of FA dollar allocations includes the N5.7 trillion AMCON funds provided for mounting bank non-performing loans for which high interest rates are the main predisposing factor.

Fourth, one may even deduce another unduly high cost inflicted by the unceasing hostile economic environment. According to the World Bank’s 2016 World Development Indicators, in the following selected countries, domestic credit provided by the financial sector as a percentage of 2014 GDP was China (169), Japan (374), Malaysia (140), Singapore (126), South Korea (162), South Africa (186), USA (253) AND Nigeria (22). Japan where the Central Bank interest rate stood at 0.1 per cent for some years (it was negative recently) takes the lead. But of greater interest are the scores of Malaysia, Singapore and South Korea, which were our erstwhile economic peers. Based on Singapore’s score of 126% and Nigeria’s 2014 GDP of N90 trillion, the country’s score of 22% shows the domestic credit provided was N20 trillion while (Singapore’s score) the possible bank credit level was N113 trillion. The unutilized bank credit potential of N93 trillion was 15 times the size of the 2016 Federal Budget.

While there exists today private depositors’ funds to support such loan volume, access to the much sought-after bank credit is blocked by high interest rates. Clearly, Nigeria is paying too high a price in missed opportunities because of the improper handling of FA oil proceeds.

Therefore, the Federal Government should redirect its focus from external loans to ensuring proper management of the country’s humongous resources. In any case, unless the causes of the unyielding debilitating state of the economy are removed along the lines repeatedly recommended in our previous editorials, any foreign loans applied to the economy will not produce the desired results.