Intrigues, fears over rising Chinese loans
The Debt Management Office (DMO) recently unveiled its record of the country’s incremental obligations, in the second quarter of 2019, which stands at about N750b, but cumulatively at N25.7t.Among the nation’s top creditors in the record are multilateral institutions like the World Bank Group, African Development Bank and the International Monetary Fund (IMF) totaling $12.7b, and commercial debts- Eurobond, which stands at $11.2b.
However, the People’s Republic of China emerged Nigeria’s major creditor under the bilateral deals, with $2.3b, out of $3.3b. This is beside several private sector-led foreign investment inflows from the country, championed by its Export-Import Bank.Indeed, like several other African countries, debt deals and investments from the Far East Asian country have been hugely suspicious, especially with allegedly unpalatable outcomes of such transactions in some countries.
Back in April 2019, the IMF warned African countries, particularly Nigeria, against embarking on wholesale borrowings from China.The advice, according to IMF, was based on the fact that China was struggling with a €70b debt burden that rose from €62b in 2017, which represented 12.25 per cent increase in one year.
Besides, the IMF noted that loans from China were contracted under concessional terms, without consideration to the Paris Club debt servicing arrangements.
Also, data from the DMO showed that Nigeria’s external loans obtained from the country currently stands at about nine per cent of the country’s total external debt portfolio.
Specifically, the IMF Director of Monetary and Capital Markets Department, Tobias Andrian, while admitting that borrowing from the country is good, however, raised concerns about Nigeria and other emerging market countries taking loans from China without considering the terms of such facilities in compliance with the Paris Club arrangements. He warned that the terms of such loans had become questionable overtime.
“Let me reiterate that in many frontier markets, we see that the share of debt that is not conforming to the Paris Club standards is on the rise. And that means that if there is any debt restructuring down the road one day, that can be very unfavourable to those countries. So, the borrowing terms, the covenants, are extremely important. And we do see a deterioration in that aspect.
“The issue of borrowing from non-Paris Club creditors has been identified as potentially creating some instability or some vulnerabilities in the debtor countries.“Not that the debt itself creates problems, but they have to be used for productive purposes. Usually, debt given under non-Paris Club or multilateral types of agreements to low income countries, particularly a lot of sub-Saharan African countries, have led to debt vulnerabilities.”
One of the controversial allegations trailing Beijing’s loan deals is that it earns both ways- interest on loans and execution of projects that the loans are meant for. A former Deputy Governor of the Central Bank of Nigeria, Dr. Obadiah Mailafiya, once noted that most of the funds given out by China actually go back to them by way of supplies, construction contracts, with all the equipment brought over from China.
The country’s Export-Import Bank has always been ready to bankroll all initiatives related to the country, be it bilateral or private sector-led. For Mailafiya, the antidote to, or caveat against China deals is to “read” the small prints of the “conditionalities” put forward by the country’s business representatives in order to avert laying claims on some assets later.The fear of conversion of assets, when businesses go awry by the Chinese appears unending, especially as they have been reportedly doing in Madagascar, Kenya, Zambia and Zimbabwe presently.
The need for diligence in dealing with them has also been emphasised alongside strict patriotism. Nigerian representatives have severally been called out for shady deals, with international notoriety for shortchanging the country. The ongoing $9.6b case against the country is just one. The fine levied against telecommunication giant- MTN Nigeria, by the Central Bank of Nigeria (CBN) and the bribery allegations against top government officials who waded in to slash the fine was another one.
While the government has so far paid more than N800b in servicing the multiple obligations, which cut across domestic and foreign deals in the first half of 2019, Nigeria would be worse off if those Chinese debts are not properly structured, or if they fail.But the Chief Executive Officer of Financial Derivatives Limited, Bismarck Rewane, said Nigeria is too big for debt disagreement with China, adding that the country cannot default, not even to the point of asset conversion.
“Of course, the loans with China are project-related. The projects will be completed and run. I do not think there would be projects that will not be completed. So, there is no need to worry about default in the first place,” he said.An economist, Ayodele Akinwunmi, said his concerns were not where the debts are contracted, but the best bargain and mostly, commensurate investments with the level of borrowing that can be traceable, adding that for now, parts of the borrowings are used up in subsidies that dominate government’s spending.
“We have said it often that it is not good to borrow for consumption, but rather for investments that would ease bottlenecks in doing business, particularly infrastructure. There are a lot of subsidies ranging from petroleum to electricity. We must change to benefit from these borrowings,” he said.On his part, a development consultant, Jide Ojo, described the country’s rising debt profile as a concern irrespective of the source of the funds, especially without commensurate infrastructural development. He described the situation as heart-rending and disastrous.
Ojo, who pointed out that sovereign indebtedness should have been used on the productive sector of the economy, since it is not ideal to borrow to pay salaries and allowances, added that corruption is the main reason behind not having value for the huge debts that the country has piled up, not even much about the Chinese.
He quoted an article in the October 10, 2019 edition of The Economist magazine, as saying that $582b has been stolen away from Nigeria since independence.“In the 2020 budget, we are set to borrow additional N2.1t. Despite exiting the debt trap about a decade ago, we are back to that inglorious era. I advise that we borrow less, block revenue leakages, and expand our income generation. But mostly, governments must be accountable,” Ojo said.
An analyst at Agusto & Co, Jimi Ogbobine, also said that the major concern in the country’s rising debt will be the country’s weak revenue profile, which would determine its ability to sustain its obligations, not necessarily the country of the creditor.
“While the political rhetoric keeps alluding to the debt to GDP ratio, which is in the 20 percent range, the level of revenue being taken for interest payments is worrisome. With over half of the revenues being used up for debt repayment, the country may have reached a debt ceiling. “Fiscal policy should now focus on recurrent cost control to rein in debt and free up revenue for capital expenditure. With that, the county’s borrowing levels will be moderated,” he said.
A fiscal governance campaigner, Eze Onyekpere, is also worried about the high level of indebtedness in the absence of value for money in terms of projects, services, goods, works, and construction.According to him, Nigeria may likely default in its debt repayment in the near future, considering that we are using more than 50 per cent of our revenue to pay/service debts.
Besides, with the opaque manner that our debts are negotiated, coupled with the absence of real value for money, our national assets may be seized and taken over by China the way it has happened in some other African countries.“The antidote is that debt contracts from whatever source should be published in the electronic portals of the Federal Ministry of Finance and that of the ministry executing the projects with the proceeds of the loan.
“The National Assembly should start conducting real public hearings, which will give stakeholders opportunities to voice their views before the procurement of new loans are approved,” he said.Onyekpere noted that these debts contracted from wherever, apparently are for phantom projects that are not in tandem with statutory obligations in the Fiscal Responsibility Act.
“For now, it is not about fears, but the certainty of a trajectory that shows that if we continue in this direction, the country may sooner than later default on its debt repayment obligations. Then, the worse and unexpected will begin to emerge,” he added.For the Executive Chairman of the Foundation for Economic Research and Training (FERT) Lagos State, and former Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, there is nothing wrong in borrowing from China, as the country has become an economic powerhouse, hence it is important for Nigeria to break the monopoly of borrowing from the West bilaterally and multilaterally.
To him, what is crucial is for Nigeria is to ensure that the terms and conditions are favourable, adding that the country should also be disturbed about the continuous borrowing from the West and multilateral institutions. Subscribing to the views of other financial experts and stakeholders, who have expressed worries about conditionalities attached to Chinese loans, especially terms, which may hurt the country badly, Ekpo noted that it was crucial for the country to use experts during negotiations.
“It is important to examine through the lines in the contract documents. There is always a so-called grant element in most Chinese loans. The matter is whether it is a grant element? If we negotiate properly, set aside self-interest and minimise road shows, then loans from China could be a win-win situation. The conditionalities must be scrutinized, and Nigeria should be open and transparent in obtaining Chinese loan,” Ekpo said.Without mincing words, the Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, Prof. Adeola Adenikinju, said there was need to worry about any loan, especially those that are denominated in foreign currency.
He explained his reasons: “We are susceptible to currency volatility risks. Such risks, most often are transferred to the country with a weaker economy. Secondly, the use to which the loan is put. Any loan should generate sufficient economic flow to meet up with the repayment conditions, including servicing of the debt, or improved productivity of the overall economy, such that the net social benefit to the economy is positive.”Adenikinju noted that, loans, before they are contracted should be subjected to rigorous economic analysis, stressing that the terms should be as transparent and as assessable as possible.
According to him, stakeholders are worried that some of the loans contracted from China, may not necessarily meet the rigours of deep economic analysis needed to ascertain their overall net social benefits to Nigerians, hence, as a country, the nation needs to be wary of external loans.“Africa should not return to the environment when the autonomy of economic policy was lost to western countries and multilateral institutions. China, may simply replace these donor countries that held Africa countries captive in the 1980s and 1990s,” Adenikinju said.
A Professor of Technology Management, Francis Ogbimi, whose theory is currently seeking massive employment of all productive citizen as a way out of poverty and economic quagmire, described the country’s continuous borrowing as a reflection of the bad state of the nation’s economy, stressing that it is currently difficult to point to meaningful projects achieved through Nigeria’s long history of borrowing.
“Look at what happened to Germany after the World War because of borrowing. The western world had in the past forced a programme on us through the IMF due to borrowing. There is going to be confusion in Nigeria through this borrowing. We cannot be borrowing money when the nation is not growing. “So, the way forward is to start building an economy. Learning is the basis for development, while education, training, employment and research constitute the way out. An economy that does not employ people with knowledge and skills is a weak economy. To make this process faster, we must get everybody to start working. That is what China did. That will stop insecurity and poverty,” Ogbimi said. Ogbimi, who averred that the country has been enslaved by the West in the past through excessive borrowing, noted that the current development could bring about a repeat of such scenario, adding that the country would not develop through borrowing.
A former President/Chairman of Council, Chartered Institute of Bankers of Nigeria, Prof Segun Ajibola, insists that Chinese loans add to the country’s debt burden, which has agitated IMF and other bodies.Stating that concerns are not misplaced given the portion of 2020 budget being devoted to debt servicing, Ajibola noted that the outcry by IMF won’t create panic if only Chinese loans provide value addition to the country’s economy and come with positive multiplier effects.
“China has become a fully integrated economy. Hence, they expect beneficiaries of their loans to procure essential items from them, using the proceeds of the loans. I guess their loan agreement would carry such clauses. China wants to be sure that it benefits from the loans it gives out to borrowing nations. “Project-tied loans are good. Provided there will be discipline and accountability in the execution of the projects and effective monitoring of the explicit and implicit returns accruing to the nation,” he said.
Dr. Victoria Enape, Pro-tem President, Chartered Institute of Forensic and Investigative Professionals of Nigeria (CIFIPN), said the development should create serious concerns for Nigerians, especially as generations ahead would be affected by today’s loans.She equally insisted that Nigeria is only borrowing into a drain as traditional challenges, especially corruption, if not properly tackled, would continue to undermine any borrowing plan.
Indeed, Enape sees no reason why the country should borrow, when it is blessed with enough resources, and has wealthy individuals who are transforming the economy of other nations with looted funds from the country.Enape, who believes that President Muhammadu Buhari’s signing the CIFIPN Bill into law following its passage by the National Assembly, would help in conserving the nation’s resources in-country, by reducing corruption and holding the system accountable.
“If you have enough money here will you have any need to borrow from China? Nigeria is blessed with resources that if properly harnessed, we should be the ones to borrow to others. Indeed, the money we are borrowing is being mismanaged. That is why we need forensic. But our people are not ready to embrace the truth because of sentiments and personal interests.
“This development has pushed Nigeria to a corner, where borrowing has remained an option, if we don’t wake up, we will continue to borrow,” Enape said. But allaying fears of an imminent crisis, the Minister of Finance, Budget and National Planning, Zainab Ahmed, stuck to her rhetoric of “No debt crisis, but revenue crisis.”
“We have heard repeatedly that Nigeria is inching towards a debt crisis, but I have consistently said that Nigeria does not have a debt crisis. Our total borrowing rate is just under 50 percent of our GDP.
“What we have is a revenue problem. Our revenue performance by half-year is 58 percent. There is the need for us to ensure that we have the right legal enablers and other enablers that will enhance revenue performance.“Nigeria as a country must mobilise significant domestic resources to be able to make necessary investment in human capital, as well as in physical infrastructure,” she said.
While Chinese loans are insignificant compared to the country’s total debt portfolio and project-based, it must, however, be taken into consideration that the deals are not Paris Club compliant, hence the need for caution.China’s loan outcomes in some economies on the continent has been generally mixed, a development that also calls for caution in terms of agreement and general content of loan deeds. Caution, indeed, is the watchword.
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