The $30bn loan: The logic of elected officials and why the National Assembly must act
The federal government made a request to the National Assembly for permission to borrow about $30bn. The plan is to use the funds to execute “key infrastructure projects” between 2016 and 2018. The amount requested is staggering. To put it in context, Nigeria’s total external debt as at July 31st was just over $11bn. Nigeria’s total public debt, including those of states was anywhere from $43bn to $58bn depending on the exchange rate. From this perspective, $30bn is a big number. If you throw in the fact that the federal government is already spending over 35 percent of its revenue servicing current debt, then you must wonder. It does appear that the federal government is determined to walk back into the debt crisis of the 1990s.
These numbers are not difficult to calculate. On the face of it you might ask yourself, doesn’t the federal government see these facts? If they do, then why do they continue as if there are no risks? To understand why, we have to take a journey into the reality of democratic politics and debt.
Nigeria is democracy. Every four years we elect some officials to run government on our behalf. They have a four-year mandate to deliver on promises and then, either get kicked out or re-elected. At least we like to think that’s how it works. However, because of this four-year cycle, elected officials tend to think only of the next election. Almost every project is judged on its ability to deliver for the next election. Anything after that can be worried about later.
We have seen this kind of short-term thinking in various policy actions. The most notable is the decision made by the Goodluck Jonathan government to virtually double all salaries before the elections in 2011. Of course, labour greeted the salary increase with aplomb, but the decision went on to haunt the regime after the elections. The salary burden, combined with fuel subsidy payments, were a big part of why that regime could not spend enough on necessary infrastructure.
The country is once again faced with the same scenario. The Federal Government wants to take on a humongous amount of extra debt. Debt that will almost surely lead to an unsustainable debt burden soon, although probably not before the next elections. The federal government is opting to spend large today, and leave future problems for future governments.
Ironically, we have been here before. In the late 1970s, Nigeria was suffering from the consequences of an oil price collapse. In 1978, due to strains on government finances and external reserves, the government resorted to international debt markets to finance itself. Between 1978 and 1982, a couple of “jumbo loans” were negotiated with international financiers. The logic seemed sound at the time. Establishment of a steel industry here. Industrial expansion there. And so on. In 1977, Nigeria’s external debt stood at around $684m. By 1983 it had risen to $23.4bn. Of course, we know how the story goes. The steel plant didn’t quite work out. The industrial plans even less so. Soon the government couldn’t even service the debt leading to accumulated arrears and then a full-blown debt crisis. The debt went on to hobble government finances for almost two decades with a major share of government revenue going to just servicing the debt. The federal government only got out of the debt problems in 2005 when the country was able to negotiate a debt cancellation combined with a lump sum payment. In summary, the federal government in 1979, faced with an oil price crash-induced cash crunch, took on humongous debt which went on to hobble the activities of future governments for decades.
We have come a long way as a country since the 1980’s. We now supposedly have institutions that are supposed to consider the long-term implications of any policy. The proposal to raise $30bn in external debt has the potential to cause longer term damage to the federal government’s finances. The national assembly must act to make sure the damage doesn’t happen.
I am not here to argue against external borrowing. We have huge infrastructure challenges which must be addressed (Although I do not think the government can finance that on its own but more on that in another article). Given those challenges there is always a case to for external borrowing. However, the risks should be considered. In my opinion the national assembly must require three things before any approval is given.
First, the federal government must do a proper debt sustainability analysis, taking different scenarios into account. The difficult questions must be answered. What happens to government finances if the revenue projections do not materialize? What happens if the currency continues to depreciate? What happens if the price of crude oil never recovers?
Second, the national assembly must ensure that safeguards are put in place so that every single cent borrowed goes directly into infrastructure projects. The details of the proposed spending plan, which are still very vague, already has things like “budget support”, code for paying salaries and random spending. That cannot be allowed to stand.
Finally, the federal government must commit to a plan to get its spending under control. The federal government is notorious for reckless spending and that must change. The executive arm must commit to a specific plan to rebalance non-debt spending away from recurrent expenditure.
We talk a lot about how we are a democracy and building strong institutions for a better Nigeria. The National Assembly must now demonstrate that it can do its job of safeguarding the future for Nigerians.
Nonso Obikili is director of applied economics at the African Heritage Institution and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.