That quest for a $30 billion external loan
The year 2017 will mark an important watershed in the annals of Nigeria’s economic history. Pundits predict it will be a make-or-break year for Nigeria; the country either gets its economic house in order, or risks an economic implosion reminiscent of what happened in Zimbabwe about a decade ago, and Ghana in the late 1970s and early 1980s. More than any other year in the country’s history, the new year will unleash a myriad of economic challenges that include an excruciating recession, very high unemployment rate, rising prices, infrastructural problems, insecurity, and a very volatile foreign exchange market.
The good news, however, is that there is no shortage of ideas about how to address these challenges. Unlike the Zimbabwean situation, there is no lack of determination by the Buhari administration to solve these problems. The issue remains how to finance the administration’s proposed projects and programmes for revitalising the economy. This is why I believe that the debate about whether President Buhari should seek a $30 billion external loan will not dissipate in 2017. Short of a dramatic improvement in the global oil market, or a radical scaling back of the administration’s proposed projects, it would be very difficult for Buhari and his team to finance the plethora of projects they have lined up.
Much of the debate on the issue of external loans has been predicated on sheer sentiments, and sometimes unnecessary folly. There are a number of technical questions that must be posed in order to ascertain whether a country should use debt to finance its development. The first question is whether there exists in the country what development economists refer to as a “dual-gap” problem. A dual-gap problem exists when a country’s level of saving is lower than its desired level of investment, and when available foreign exchange is insufficient to support its foreign exchange obligations. Based on this definition, one does not have to be an economist to know that Nigeria, indeed, suffers from the dual-gap problem. The fact that the average lending rate by Nigerian banks exceeds 20 per cent is an unassailable manifestation of the wide gap between available savings and desired level of investment. Businesses, both large and small, across Nigeria complain of acute liquidity crunch and lack of access to funds for financing innovative business ideas.
The foreign exchange gap is even worse, with the Naira experiencing unprecedented pressures never seen before in the country’s history. By June of 2016, the outstanding demand for US dollars within commercial banks in Nigeria was about $4 billion. That demand remained unfulfilled until late December, when the Central Bank of Nigeria (CBN) auctioned off $1 billion to clear some of the backlog. In trying to clear this huge backlog, the CBN directed banks to prioritise airlines, the manufacturing sector, petroleum products importers and the agricultural sector in the allocation of acutely scarce foreign exchange. This is all well and good, but the CBN lacks the institutional and regulatory capacity to ensure that its directives are strictly followed. Many Nigerians believe that the $1 billion purportedly “auctioned” by the CBN will either find its way into the black market (through round tripping and other opaque transactions), or in the hands of money launderers.
It is predicted that $1 would exchange for about N500 at the parallel market by the end of 2016, compared with about N160 just two years ago. At this rate of depreciation, and given current level of demand for foreign exchange, it will not be surprising if $1 exchanges for 1000 Naira by the end of 2017- unless the global oil market improves, or there is a major policy shift by the CBN. It is now obvious that the foreign exchange policy announced by the CBN in June 2016 has been an utter failure; so disastrous that the CBN is supposedly thinking of “abolishing” the black market for foreign exchange. I shall defer the question of whether a black market can, in practical terms, be “abolished” to another day. It would suffice, for now, to say that the notion of “abolishing” a black market is not only a heresy, but also economically ludicrous.
Having demonstrated the existence of the dual-gap problem, the next question is whether there are ways of closing the gap, other than debt? One way of closing the gap is by attracting foreign investors who would fill the void created by low saving, and who may also infuse the economy with new inflows of foreign exchange. But the use of foreign investment to close the dual gap is very difficult and unpredictable. Wary of the uncertainties in the Nigerian economy, foreign investors may not bring their own capital into the economy, preferring instead to raise capital domestically. This depletes available domestic savings, raises the interest rate and exacerbates the dual gap. Apart from uncertainties, other structural problems that may deter foreign investment include poor infrastructures, insecurity, and bureaucratic red tape.
Some countries resort to foreign aid, rather than foreign investment, as a way of closing the dual gap. Half of the Republic of Niger’s budget, for instance, is financed by foreign aid. Almost 40 percent of Tanzania’s annual budget is underwritten by foreign donors. Same goes for Malawi and Burundi, where foreign donors finance over half of the annual budget. But the use of foreign aid to support a significant portion of Nigeria’s budget, or finance its development projects, is not a very feasible option. As a resource-rich country, Nigeria is not qualified for many types of foreign aid. In fact, many expect Nigeria to be an aid donor, rather than a recipient. Oil-rich countries in the Middle East all have negative net debts, suggesting that they are lenders and aid donors to other countries. Nigeria’s longstanding image as a country plagued by massive corruption would also hamper any attempt to rely on aid and grants as modes of development finance.
Steve Onyeiwu is the Andrew Wells Robertson Professor and Chair of the Department of Economics, Allegheny College, Meadville, Pennsylvania, USA