The $2.5b World Bank loan is unnecessary
The disease has over the years manifested variously in, for example, one, failure to recognise and fully put the available revenue resources to productive use; two, reluctance to implement policy measures that conduce towards future bumper revenue harvests; and three, a penchant, nay, mania for accumulating debts for the purpose of frittering away the inadequate revenues being collected for the benefit of unscrupulous vested interests, non-altruistic multilateral agencies, and predatory foreign entities.
The diagnosed FMDD is illustrated by the Federal Government’s quest for another US$2.5 billion loans from the World Bank. The Minister of Finance Budget and National Planning, Zainab Ahmed, has often chorused that the country has no debt problem. Recently she said, “I want to restate that our debt is not too high, what we have is a revenue problem.” The government position has several flaws.
First, the stated attraction of World Bank loans is their low interest and long tenor terms resulting in reduced debt service burden. But the above statement did not benefit from in-house expert advice and readily available facts. The Ministry of Finance Budget and National Planning (MFBNP) is made up of departments and agencies some of which are armed with the tools and possess the skills to both carry out appropriate cost-benefit analysis and build economic growth scenarios that could establish that Nigeria is better off relying on her own resources at no interest cost and zero debt burden.
It is a known fact that up to 40 per cent of World Bank facilities is expended on World Bank-nominated international consultants for services and procurements sourced from abroad but which are available in the borrowing country. On the other hand, to rely on own funds and directly import any items (that may be unavailable in the country) covers much more mileage and retains in the borrowing country all benefits derivable from such government spending.
Second, ordinarily, creditors tend to shun any economy experiencing revenue problems for fear of possible loan default. However, despite Nigeria’s purported revenue problem, there is an irresistible incentive by means of risk-free and high interest-bearing government debt instruments. Thus eager creditors are legion such as, one, foreign creditors enjoy first line charge on the so-called CBN’s external reserves, which are withheld Federation Account dollar allocations.
For instance, the latest IMF Article IV Consultation report indicated that foreign portfolio investors (FPIs) had as at end-December 2018 acquired over $10 billion worth of FGN bonds. The country did not receive a proportionate increase in the level of external revenues because the relevant forex inflows were routed through the Investors’ and Exporters’ (I&E) window and used to fund unproductive activities and imports that could evade various government tariffs.
The FPIs were given guaranteed naira/dollar exchange rates for the transfer of any forex inflows and accrued interest proceeds. Hence FPIs enjoy double-digit coupon rates, the highest dollar convertible bond rates in the world from a country with most people slipping into extreme poverty per day in the world. Needless to note, as a result, domestic production efforts are undermined and become uncompetitive while prospects of attracting collaborative foreign direct investment have been erased.
Two, by virtue of CBN’s multiple segment forex windows, portions of the CBN’s external reserves end up in the hands of some unscrupulous residents who proceed to lend the forex so acquired to FG under the aegis of Eurobonds at international commercial market interest rates, which are way above lending rates in developed countries. It cannot be lost on the relevant arms of the MFBNP that the foregoing schemes represent sluice gates for draining away Federation Account dollar accruals.
Without a doubt, Federation Account dollar proceeds should ordinarily be properly channelled to boost domestic production, enhance future government revenue and promote rapid GDP growth. Three, domestic or naira creditors also gorge themselves on the bonanza realizable from the various FGN debt instruments.
Consequently, it does not pay to attempt to embark on any productive activity. Is there any wonder then that the end product of the prevailing economic framework is a stunted economy? The economy struggled to grow at 1.9 per cent in 2018. With GDP growing at a lower rate than the population growth rate of over 2.6 per cent, increasing numbers of Nigerians are swelling the ranks of people living in extreme poverty.
Third, evidence abounds that the country’s public debt level is over 120 per cent of GDP and unsustainable. The minister of MFBNP presides over the Federation Account Allocation Committee and disburses ways and means advances in place of Federation Account dollar allocations and thereby compounds the public debt every month.
Recall that oil proceeds have accounted for over 50 per cent of the budgets of the tiers of government on paper since 1974. Although the repayment of the ways and means component of the public debt has been neglected in breach of the CBN Act over the period, the resulting excessively high public debt has been exerting adverse economic stimuli. The government should, therefore, stop the impulsive borrowing regardless of the provisions of the Appropriation Act, which are based on the incorrect public debt level of 19 per cent of GDP being claimed by the executive arm of government.
While the Federal Government has remained wedded to the erstwhile military regime-instituted fiscal and monetary procedures responsible for the progressive stunting of the economy, the Bretton Woods institutions no longer overtly support those measures.
In recent years, the IMF/World Bank have uncharacteristically urged the Federal Government to adopt international best practice fiscal and monetary methods anchored on a single forex market-determined naira exchange rate. And having unwaveringly advocated that approach since 2001, this newspaper now sure-footed yet again shows the way forward. It is significant that the country’s external reserves stood at US$42.1 billion in September 2019.
Nigeria’s external reserves should cease to be the preserve for foreign portfolio investors and domestic destroyers of the economy. As in focused economies, the external reserves should revert wholly to standard CBN Act-compliant national foreign exchange reserves, which may be deployed to fund budgeted national projects and programmes.
The present level of external reserves covers a little over 10 months’ worth of current import commitments. Moreover, Nigeria has consistently enjoyed overall balance of payments surplus. It is countries with severe balance of payments deficits that seek IMF (the alter ego of the World Bank) bailout. However, in Nigeria’s case, even after setting aside $12.6 billion out of the reserves as the precautionary international three months’ import cover benchmark, there would remain the tidy sum of $29.5 billion as spare external reserves, part of which should be put to productive use.
Surely, considering the proposed $2.5 billion World Bank represents 8.5 per cent of the spare foreign exchange reserves, there is clearly no need to borrow such a pittance, which carries the additional price of IMF/World Bank’s condescending meddling in the borrowing country’s internal affairs.
As a complement to utilising foreign reserves to bridge budget revenue gaps, the adoption of a single forex market for transacting the country’s total public and private sector forex earnings would lead to low inflation with the attendant conducive production environment. It would additionally provide an avenue for broadening the tax base by imposing forex access tax (FAT). It has been shown that, given the current volume of forex transactions via the I&E window, the Federal Government would garner FAT amounting to N3 trillion a year. Currently lying fallow are MFBNP departments which were instituted to streamline and harness government taxes such as FAT.
In reality, the MFBNP minister’s viewpoint that Nigeria has a revenue problem is hugely incorrect. The disposition of not doing things the right way and languid political will account for the revenue shortfalls militating against the execution of government projects and programmes.
In truth, Nigeria can fund her priority infrastructure, education, and other socio-economic requirements and outclass India and China as the fastest-growing emerging market and developing economy.
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