The Nigerian Senate last week approved President Muhammadu Buhari’s request to borrow $22.7 billion from external sources to finance infrastructure projects, social investments, power, Agriculture and Mining.
The funding which is largely concessionary is expected to come from the Islamic Development Bank, the African Development Bank (AfDB), the World Bank, the China Exim Bank, Japan ICA and KFW Germany.
Some of the specific projects the government intends to use the money for include: Water supply for the greater Abuja area ($381m), staple crops processing zone development ($500m), Development Finance for Micro, Medium and Small Scale Enterprises ($1.1 bn), a mining reform fund ($150m) and Education sector reform ($500m).
Others include the Mambilla Hydropower Project ($4.8 bn), Transmission upgrade for the Transmission Company of Nigeria ($764M), Housing financing guarantee project ($100m), the Ibadan – Kano railway ($5.53 bn), coastal railway from Calabar to PortHarcourt to Onne Deep Sea Port for $3.47 billion and the Abuja Mass Tarnsit Rail 2 ($1.25 billion).
For roads you have the East – West Road ($800m), Enugu – Abakaliki – Ogoja, Gombe – Biu Road, Calabar – Ekang – Ajassor Road, Katsina – Jibiya – Niger Rep Road and Maokwa – Kaduna Road, all to gulp ($434.7m).
“The loans will have a positive influence on the GDP of this country,” Senate President Ahmed Lawan said during debate just before passage of the loan requests.
We tend to agree with the Senate President, with some caveats.
Successfully raising the full amount of $22.7 bn, should help to bulk up Nigeria’s dollar reserves, at a time oil prices are weak (as a result of the corona virus), and OPEC is set to increase output.
In essence with oil seemingly suffering a twin supply and demand shock at the same time, it is reassuring to have these inflows which in total would amount to 62% of current gross dollar reserves of $36.2 billion, is a massive confidence booster.
Of course we know that not all the funds will flow into the country as some (especially the Chinese funding), will largely be used to finance acquisition of equipment and manpower from China.
In all we do expect more than half of the $22.7 bn to actually flow into the Central Bank of Nigeria (CBN), coffers.
The inflow of dollars should help the CBN with its naira stability mandate, and ease the pressure to devalue over the next 18 months.
This now brings us to the cost of the loans which mostly range between 0.25 percent and 3 percent. Raising Eurobonds in comparison would have been more expensive at around 7 – 9 percent yields.
In terms of debt sustainability, the country is also doing ok for now.
Nigeria’s outstanding loans amount to about 25 percent of its gross domestic product (GDP), although the country spends more than half of its revenue servicing debts.
The International Monetary Fund has warned that without major revenue reforms, the debts could rise to almost 36 percent of GDP by 2024.
We think being an oil producer that earns dollars, the dollar debt is quite manageable currently, even as we seek more clarity from the Government on the structure put in place to effectively and efficiently appropriate the funds and get these projects in place without them running behind schedule.
This is necessary because the economic lift from what is essentially a fiscal stimulus is expected to help propel growth going forward and also improve government earnings and tax take.
The loan request is equivalent to N8.4 trillion which is 80 percent of the 2020 annual budget.
It should however bring more bang for the buck since the money will already be available to spend, as opposed to the budget which are merely estimates (and often have revenue shortfalls close to 50%).
The fact that most of the expenditure is going to infrastructure and capital projects, which often have a multiplier effect on the economy is also quite positive.
The only grouse with the list would be the rationale for choosing some of the projects (which seem like pork barrel spending) and some missed opportunities to unlock growth in major industrial clusters of the country.
We struggle to see why the Nigerian Television Authority or NTA (with its limited and diminishing viewership), would need $500 million for a digitalisation project.
Some of the chosen roads seem like roads to nowhere, while funding things like rural water supply or power sector vocational school, while laudable, often turn out to be wasteful and ineffective.
Consider these alternate projects for instance: up to 50 percent finance support for a fourth mainland bridge in Lagos, finance to support the completion of the metro blue rail line in Lagos, railway connections between Lagos – Benin – Asaba – Onitsha – Awka – Enugu – Abakaliki (one of the busiest road corridors for passengers and cargo), and a Lagos – Abuja – Kano high speed rail line.
