Rising from the Euphoria of successfully raising US$1 billion from the international capital markets, Nigeria seems to have resurrected a huge appetite for both local and foreign debts. Acting President Yemi Osinbajo on 23 February asked the Senate to approve a fresh request to raise US$500 million Eurobond. The request is coming on the heels of the US$7.8 billion in subscription received when the country raised its US$1 billion Eurobond. The huge demand for the Nigerian Eurobond indicated that investors had a huge appetite for the country’s debts. From the level of subscription, the country could have easily raised US$5 billion. Perhaps this is the motivation that has made acting president Osinbajo seek the approval of the senate for the country to raise an additional US$500 million in March. This will take the country’s borrowing in the first quarter of this year to US$1.5 billion. Many sources in the international community have urged Nigeria to take what loans it can from the international community now because the loans will not always be available.
But with the latest issue, Nigeria’s cumulative bond issues to date stands at US$2.5 billion with maturities ranging from 2018 to 2032. The additional US$500 million will take total Eurobonds in issue to US$3 billion. The federal government has also announced plans to issue US$63 million in green bonds and possibly another US$300 million in Diaspora bonds all within this year. All these issues combined will take Nigeria’s cumulative commercial loan exposure US$4 billion by the end of this year. With loans attracting an average interest rate of 7 percent, they cannot be said to be really cheap internationally even though when compared to the average of 15 percent paid on domestic debts, they look cheap without taking into consideration the foreign currency risk that the country is exposed to in the case of a further weakening of the naira.
The argument for external debt has been that the country’s external loan profile is low. Figures from the debt management office (DMO) shows that as at June 30, 2016, total external debts stood at US$11.26 billion when compared to total domestic debts of US$37.5 billion at the federal level. States owed another US$12.7 billion in debts, most of which are domestic debts, bringing Nigeria’s total debt to US$61 billion or N16.3 trillion.
So the current trend to borrow externally, according to the government, is aimed at balancing the loan portfolio and reducing the pressure on domestic borrowing. But the government is also arguing that it is not borrowing for borrowing sake. It tells critics of its heavy borrowing pattern that it is borrowing to invest in infrastructure even though there is no indication that the loans have been project-tied.
Critics have rightly noted that the government could have easily approached the International Monetary Fund for its cheap loans which come in at less than one percent interest rate instead of the significantly more expensive commercial loans which it is building up. Obviously, the government is avoiding the IMF because it is not a politically popular decision. Nigerians are not particularly in love with the IMF because of the conditionalities that the fund will force the country to implement in return for its cheap money. So the fear of the IMF has pushed the Nigerian government into the arms of shylock lenders who will demand for their pound of flesh if Nigeria at any point in time is unable to repay the loans.
Sadly, unlike the IMF, investors giving Nigeria money through the Eurobond will not border to see whether the country really spends it in infrastructure as promised. All they are interested in is that the country does not default in its payment schedule. This is unlike the IMF that will put in place a monitoring programme and ensure that the funds are used as stated and future funds released only when the stated spending plan and in many cases cost plans are met. While the Eurobond can be spent in a way and manner that suits the government, an IMF loan cannot be spent in a similar manner. This may be the real reason the government is running from an IMF loan. Consistently, the government has shown a preference for financing recurrent expenditure with 70 percent of national budgets going to fund it. There is no guarantee that loans collected will not go into support of recurrent expenditure. Even when the loans are spent on capital expenditure, returns on capital expenditure has been typically low in the country and therefore there is no guarantee that Nigerians will get value for money borrowed. To make Eurobond worth the while of Nigerians, they should be project-tied and the projects should be commercially viable projects with internal rate of return well above the yields on the bonds so that future generations will not be saddled with a debt that they were not part of incurring and did not benefit from.
Anthony Osae-Brown
