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Foreign loans: Lesson from the 80s
By Thompson Ayodele and Olusegun Sotola
Monday, 26 Jul 2010
President Goodluck Jonathan has appealed to the G8
member countries to grant 100
per cent debt cancellation to African countries. The
call for total debt
cancellation is more strident at a time Nigeria itself,
which has just been out debts
obligation, is getting more foreign loans and
consequently increasing its debt profile again.
What is not clear is whether African leaders
intentionally get foreign
loans with no specific plans for repayment but with sole
aim of thereafter asking for
cancellation no matter how long it takes to get that
accomplished.
Recently, the Chairman, House Committee on Business and
Rules, Ita Enang, said most of
the foreign loans obtained by Nigeria were hurriedly
approved without taking the
pains to articulate the terms and conditions of such
loans. He said the chunk of the loans from the
World Bank and other financial
institutions has, rather than alleviating poverty,
actually perpetuated it.
The fact that loans papers are not carefully examined
may be waved off if the
National Assembly members are conducting their personal
businesses.
But in the present circumstances, where more than $1bn
loan had been
authorised within the last one year, the future of
millions of Nigerians
is put on the line as a result of the inability of the
federal legislators
to properly scrutinize loans‘ paperwork. This in the
long run will
jeopardize the nation‘s economic growth prospects.
While experience in Africa has shown that many countries
that borrowed to finance
development ended up being heavily indebted, lending
money to inept or corrupt
governments is not likely to help such countries
develop.
Most of the countries that obtain loans in order to
ginger development are ill
advised and reckless. Many countries get into debt
repayment problem because a
substantial part of the loans is kept in secret accounts
overseas and is not spent on the primary purpose
for which the loans are meant.
Despite the shortcomings associated with foreign loans
and past
experiences, there are fears that Nigeria‘s loan
portfolio might be on the rise
and consequently put the nation among debtor nations. It
is not accidental that the
Minister of Finance, Olusegun Aganga, warned of dire
consequences for unbridled borrowing in the face
of cash crunch.
The fiscal deficit right now has risen to an estimated
deficit of 10 per cent of GDP
in 2009 from a surplus of 3.7 per cent of GDP in 2008.
Nigeria is gradually on the road to being a highly
indebted country. In view of
the mounting debt, what is more worrisome is the
penchant for increased foreign
loans. The external debt stands at $4.3billion. Early
this year, domestic debt was $21.3billion. This
amount excludes the verified
$40 million owed local contractors and $200million
unverified amount.
The Director-General of the Debt Management Office,
Abraham Nwankwo, has argued
that Nigeria‘s current debt to GDP ratio that is put at
13.88 per cent is one of the
lowest in the world. But a mere comparison of debt
figures with other countries does not present the
whole picture. The main issue
is the tangible progress achieved from the loans and the
volume. In the past, debts
were amassed without deriving any commensurate value.
It is therefore economic folly for officials to
erroneously think
Nigeria‘s problems are over with more and more loans as
they tend to see foreign loans
as easy money, so to say. On the contrary, aside from
the loans‘ conditionalities,
which are often in the interest of the creditors,
such loans in the end often retard growth and
consequently undermine the
potential to use the resources for development purposes
rather than for debt
servicing. In this year‘s budget, a total of $3.3billion
is expected to go into debt
servicing alone.
Government functionaries‘ statements tend to indicate
that Nigeria cannot develop
without resorting to loans, whether domestic or foreign.
While it is easier to get
loans, the hard part relates to accumulations in the
principal as well as interest that will later
accrue. The effect is that it
puts avoidable pressure on interest rate, drives up
foreign exchange and
inflationary rates, and frustrates long-term economic
development.
The World Bank has said that no nation with aggressive
agenda like Nigeria can
succeed without borrowing a lot. The Bank also needs to
be reminded that a country
with poor debt management and where a lot of hard-earned
resources are going into debt servicing will find
it hard to succeed.
This is a familiar route that was treaded in the 80s,
which resulted in economic
turmoil and consequently triggered the Structural
Adjustment Programme. The bulk
of the debts negotiated for cancellation in 2005 were
obtained in the 80s. Unfortunately, a large
percentage of the loans was
expended on projects that had doubtful value and most of
which became moribund or
abandoned.
The experience tends to suggest that there is a tendency
to mismanage loans in a way
that only the leaders, lenders and the privilege few
benefit. It does not inspire confidence that any
loan will be well spent this
time.
With depleting oil revenue arising from fluctuation in
oil prices, one can reasonably
infer that government might resort to excessive
borrowing to finance its
deficit. One danger that this presents is the tendency
for government to crowd out
private sector. Excessive borrowing from domestic
market will no doubt lead to a situation where
there won‘t be enough credit
left for the private sector. This will stifle the growth
of the private sector as well
as further enlarge the public sector
disproportionately.
The natural outcome is that it will increase the
interest rate and make the few
available credits expensive. To forestall this, our
economic policy must be geared
towards keeping the exchange rate flexible and
market-based in order to help spur
diversification. It is equally
important to also curb the fiscal deficit and keep an
eye on debt increases,
especially the domestic debt.
At present, the recurrent spending constitutes a
substantial part of the
budget. Of the amount budgeted in this year‘s budget,
almost 60 per cent is slated
for recurrent expenditure at the expense of addressing
infrastructure, which is actually needed to spur
economic growth. On the
contrary, there is a need to invest and upgrade the
infrastructure.
Without such investment, economic growth is a mirage. At
the same time, there is a need
to discontinue budget practices that create conditions
that make debt seem normal.
What is evident over the years is that there has been an
increase in the size of
government without commensurate rise in revenue. This
ordinarily puts pressure on
the government finances. The only way to prevent this is
to do away with big government. There is no
economic justification for
duplication of several appointments. For instance, one
may ask: what is the need for
a minister of state when there is a permanent secretary?
Already, unspent capital allocations have lately been
the object of EFCC‘s probe. It
is not clear how a ministry or agency that cannot
effectively execute project
budgeted for in the budget will be able to execute
projects being funded by loans in a timely
manner. In fact, what is
usually the case is that most of the ministries that are
unable to utilize previous
year‘s budget presents an increase in budget estimate
following year. Government
should not frivolously seek loans when in actual fact
the nation‘s woes arise from
unsustainable use of available resources.
Should loans be an option in the face of dwindling
revenue, it will only succeed
in achieving one thing: the coming generation will be
saddled with repayment burden.
Spending a substantial part of loan on recurrent
expenditure is largely
unsustainable. Past experience dictates caution. There
is nothing on the ground to
suggest that another round of loans will actually spur
growth and development. Over
the years, the nation‘s resources have been
mismanaged and cornered.
Instead of aggressively seeking loans, policymakers
should be more
concerned with how to address the present large fiscal
deficit, huge
depletion of the Excess Crude Account and the rise in
domestic and foreign debt.
These call for the adoption of a more realistic
benchmark and eliminating
profligacy.
Ayodele and Sotola are with the Initiative for Public
Policy Analysis, a public
policy think tank based in Lagos.
Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompson.ayodele@gmail.com
Website: www.ippanigeria.org
*****Good Public Policy is Sound Politics**********
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