Sometime in 2013, four years after he sacked five Nigerian bank managing directors over a debt crisis in the sector, then CBN governor, Sanusi Lamido Sanusi, explained that he did not “criminalise borrowing” as he had been accused of doing. What he criminalised, he said, was “criminal activity clothed as borrowing”.
Indeed, there can be no law against borrowing or debt. The world economy runs on the wheels of debt. Without the debt market, the level of economic activities would be significantly reduced. But there should be, and there always are, laws or regulations about borrowing and lending. It is the violation of such regulations by borrowers that gives debts a bad name.
This is the kind of conversation currently going on right now in Nigeria’s public finance space with regard to the country’s debt burden. Whether we are talking about the N22.7 trillion outstanding debt incurred through the Ways and Means window of the central bank, or the overall public debt stock, variably put as either N70 trillion now or N77 trillion with some adjustments later, the conversation borders on the inevitability of debt in today’s economy.
David M. Smick describes in his book, The World is Curved: Hidden Dangers to the Global Economy what he calls “A dangerous ocean of money” created through a mesh of financial tools: private equity funds, private debt placements, hedge funds, high-yield bonds, venture capital funds, turnaround funds, and private mezzanine investing. And, as other financial analysts have observed, billions of dollars are exchanged on a daily basis around the globe through these financial assets that facilitate borrowing and investing activities.
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From companies to local governments, state governments and federal governments, economic agents are constantly selling these financial instruments as means of raising long-term capital for the execution of long-term projects. These are projects with long gestation periods the execution of which would be difficult, if not impossible, were their promoters to depend on regular short-term bank loans. True, the world economy would be a different place today without these zillions of amounts moved at the speed of light from lender to borrower at the press of a button.
At the other end of the debt market spectrum is the short-term segment, where each of these agents can also access funds to enable them fill financing gaps for immediate needs or shortfalls in revenue flows. Any economic agent can always experience shortfalls in their revenue flows versus the need to pay for services. It was in recognition of this possibility that the Central Bank of Nigeria Act (as amended) provided in Section 38 that the federal government could experience a “temporary deficiency of budget revenue” and that the bank “may grant temporary advances” to the government.
But as Smick further notes, “There are limits to the amount of debt an economy can finance without the central bank’s monetary policy losing its flexibility and effectiveness to influence the broader economy.” This explains the rationale for the restriction set by the CBN Act, limiting the amount of money that could be given to the government to just five per cent of its previous year’s income. It also states that the funds so given must be repaid within the same year.
Evidence abounds now that supports the fact that both the CBN and the government failed to adhere to these terms, which explains why the debt rose from just about N789.6 billion in 2015 to where it is now.
Undeniably, the government’s fiscal activities (in this case, borrowing) are beginning to disrupt the performance of the larger economy. While borrowing is a good habit, engagement in it must be done responsibly. Nigeria has now found itself in a situation where it cannot service the debt it’s carrying, even when the government is arguing that it has not reached the set limit on the debt-GDP ratio. Right now, that ratio has become irrelevant in the argument because if at the so-called low ratio, the burden is almost unbearable, what would a higher ratio entail but more frustration?
The government’s debt is now getting in the way of the economy, as servicing the loans is now a threat to the performance of the economy. This explains the government’s desperation in getting Ways and Means loans securitised. If this is not done soon, the next administration will find itself like a new tenant who discovers that the former occupier of the apartment accumulated so much debt that the newcomer will now inherit.
But the government is also being realistic in its quest to convert these debts to securities. That’s why for the proposed 40-year bond, the government is inserting an initial three-year moratorium and a coupon of nine per cent. These address the revenue problem because a government that is facing a revenue challenge of this magnitude is not likely to meet the interest-rate payment soon. If the securitisation is not done soon, and as MPR will likely be 17 per cent by end of Jan, the government will be paying 20 per cent (MPR +3%) of N23 trillion, which clearly makes no sense.
But that feature of the bond is sure to affect the class of investors who will be willing to buy it. Most likely, it will be investors who are ready to forego any income flow within the three-year period. But the government should also realise that investors will not be buying the bond out of charity. They will invest as part of their quest to tap into a process that will grow their wealth.
Yet, the challenge facing the (incoming) government is far from being over. The borrowing plan announced by this government needs further explanations. The sources for the funding are domestic sources, for 7.04 trillion; foreign sources for N1.76 trillion; “multi-lateral-bilateral loan drawdowns N1.77 billion and privatisation proceeds N208.18 billion”.
There is a likelihood that a large chunk of the local N7 trillion will come via Ways and Means because the local bond and TBills market may not be able to accommodate more than N4.5 trillion, according to market analysts.
As for the foreign sources for N1.76 trillion (close to $4bn), there is also a need for clarification on this. Is the government hoping to source this from the Eurobond market? Nigeria issued $4 billion at once in Sep 2021, but the reality today is that it is very difficult for us to raise that today.
Ghana’s default is having a contagious effect on the rest of the continent, including Nigeria, so there is not much demand for our bonds for now, except perhaps at extremely high rates.
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