President Muhammadu Buhari on Tuesday forwarded a request to the National Assembly to approve an external borrowing plan of $29.960 billion. He wrote that the loan would be used to execute key infrastructural projects across the country between 2016 and 2018. The president hopes to use the money to tackle the country’s huge infrastructural deficit and to bridge the financing gap. The proposed borrowing includes the sale of Eurobonds worth $4.5 billion and budget support of $3.5 billion.
As Nigeria faces its worst recession in 25 years, no one can question the severity of the nation’s predicament. However, such a large-scale loan in a relatively short period of time will pose problems to the country’s future.
Nigeria has been trying to borrow overseas for the past year with little success. With the skepticism of the international community concerning the flip-flopping of monetary and foreign exchange policies, international borrowing may be costly. Alan Cameron, an economist at Exotix, said, “Nigeria has managed to raise just over $500 million in offshore borrowing this year, the bulk of which was from the World Bank.”
So far, the African Development Bank is the only institution to have publicly confirmed a planned loan of $1 billion. Given the country’s recent track record in raising external funding, many have been left questioning the feasibility of the government’s proposal.
The Debt Management Office (DMO) has also said, in its debt sustainability report, that Nigeria can only afford to borrow $22.08 billion next year, equivalent to 5.89 percent of projected GDP, if it wants to keep overall borrowing under the limit of 19.39 percent of GDP that the government has set. Exceeding this threshold does not necessarily spell trouble, as Nigeria’s debt to GDP ratio (13.5 percent) is relatively low by international standards. However, as of 2015, the total public debt stood at 28.10 percent of revenue and interest payment as a percentage of revenue using conservative 2012 data stood at 18.7 percent.
According to Menachem Katz, former Assistant Director in the Fiscal Affairs Department of the IMF, “If Nigeria is able to borrow US$30 billion in the next 2 years, the interest payments could rise above 40 percent of budgetary revenue, a very worrisome ratio risking an unsustainable budget.” This would mean that the government would only have spending power over roughly 60 percent of its future budget allocations (of which the bulk is spent on recurrent expenditure).
The details of the loan given in a statement by the minister of finance, Mrs Kemi Adeosun, reveal that the borrowings would target projects across all sectors with special emphasis on infrastructure, agriculture, health, education, employment generation, as well as social welfare programs.
A large portion of this debt is targeted at filling the country’s infrastructure gap, and if executed deftly, may turn out to be the drastic injection the country needed. But given the history of the Nigerian government’s inability to implement projects effectively and efficiently, there is little assurance that this time may be different.
In the event the government succeeds in securing the loan and goes on to implement the projects, it still needs a thriving private sector with a credible exchange rate policy to achieve sustainable growth. At the moment, Nigeria does not have that.
