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Why FG must slow down borrowing amidst fresh $1.5b loan facility

Sulaiman Umar
18 Oct, 2023
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Ranks 4th on World Bank borrowers’ list

Despite Nigeria’s huge debt burden, the Federal Government (FG) over the weekend disclosed that it had concluded plans to secure a fresh $1.5 billion loan facility from the World Bank.

This is even as Nigeria currently sits in fourth position on the World Bank’s top 10 International Development Association (IDA) borrowers’ list with $14.3 billion in debt.

Explaining the reason for the new borrowing, Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, said the move is part of efforts to address the fiscal gap in the 2023 budget.

Edun disclosed this while speaking with journalists at the just concluded 2023 Annual Meetings of the World Bank and the International Monetary Fund (IMF) in Marrakesh, Morocco.

He pointed out that Nigeria has become almost number one on people’s lists when looking for where to invest.

He promised to coordinate the nation’s monetary and fiscal policies just as he pledged that President Bola Tinubu’s administration would not breach financial Ways and Means limits.

His words: “On the talks with the World Bank on $1.5 billion budget support, that is correct. The World Bank is the number one multilateral development bank helping developing countries or funding developing countries, projects and programmes, and sectors.

“It has free money through either International Development Association (IDA). It is for the poorer countries, and right now, I think we qualify as one of the countries that can borrow in the normal window of World Bank funding but also some concessionary IDA funding, and that means that effectively, the interest rate will be zero.”

Shedding more light on the proposed budget financing, Edun said: “In this particular case, it has long been in the pipeline, and we are hoping that funding will come through soon.

“There is a Federal Executive Council meeting on Monday (today) that should be able to discuss this as well as other initiatives for financing on reasonable terms.

“We have talked about the high costs of money – the World Bank money is the cheapest.”

He pointed out that the country has taken bold and courageous steps to attract investments, assuring that the FG was taking steps towards cutting down its expenditure.

According to Edun, the newly constituted Fiscal Policy and Tax Reform Committee that the FG recently inaugurated was focused on domestic revenue mobilization.

Meanwhile, the World Bank Fiscal Year 2022 audited financial statement has showed that Nigeria moved to the fourth position on the list with $13 billion IDA debt stock, as of June 30, 2022.

According to the financial statement, Nigeria owed around $14.3 billion in IDA debt stock as of June 30, 2023, but maintained its fourth position on the list.

Bangladesh surged up the rankings to become the largest IDA debtor, surpassing India ($17.9 billion in debt), which dropped to second place.

Pakistan retained its third place ranking from the previous fiscal year, with a debt of $16.9 billion.

The World Bank’s audited statement revealed that Nigeria has the greatest IDA debt in Africa, while the top three Asian borrowers are Bangladesh, India, and Pakistan.

Commenting on the sustainability of Nigeria’s continual borrowing, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, stated that the nation’s debt burden is clearly unsustainable right now and the government needs to slow down on borrowing.

According to the country’s Debt Management Office (DMO), Nigeria’s total public debt, rose to N87.38trillion at the end of the second quarter of this year. This represents an increase of 75.29 per cent or N37.53trillion when compared to the N49.85trillion recorded at the end of March 2023.

Data from the DMO further showed that Nigeria’s total domestic debt is N54.13trillion, while its total external debt is N33.25trillion. The domestic debt makes up 61.95 per cent of the total debt, while the external makes up 38.05 per cent.

In its 2022 Debt Sustainability Analysis Report, the DMO warned that the FG’s projected revenue of N10trillion for 2023 could not support fresh borrowing.

According to the office, government’s projected debt service-to-revenue ratio of 73.5 per cent for this year is high and a threat to debt sustainability. It noted that the government’s current revenue profile could not support higher levels of borrowing.

Commenting further on the development, Yusuf said: “We cannot continue like this. Our debt level has reached a point now that is clearly unsustainable. You know our debt profile now is over N87trillion, and the DMO has added the Ways and Means advances that were securitised. So, the thing has jumped to over N87trillion.

“And the debt service burden is still extremely heavy; almost 100 per cent of our revenue. So, the debt situation is extremely bad. Therefore, this is not the time to borrow for projects that cannot significantly add value to productivity.”

Yusuf pointed out that the administration of former President Muhammadu Buhari negotiated some loans with the World Bank before he left office. He, however, stated that if the current government must borrow, it should not be for servicing recurrent expenditures, but must be targeted on capital projects that would attract income.

“Personally, I don’t think this is the right time to be borrowing that kind of money (the $1.5billion loan). We need to be very careful about the way we go about borrowing, given the enormity of the debt service burden, the current size of our debt, and our very limited capacity to service both domestic and external debts.

“If we must borrow, it should be something that can support real productivity in the economy. I’m not saying education is not important, but we should be looking at more structural issues. You are dealing with an infrastructure deficit and a problem of logistics; these things make productivity to be extremely low, thereby affecting the competitiveness of our economy. So, they are much more fundamental.”

culled from Daily Times Nigeria