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Foreign loans are three times cheaper —DMO boss

Senators recently rejected a plan by President Buhari to borrow about $30 billion. In this interview, Director-General of Debt Management Office (DMO), Abraham Nwankwo, spoke with select journalists on the benefits derivable from the proposed loans, but insisting that government is open to other suggestions on how to urgently mobilise adequate resources to fund infrastructure, which will in turn diversify the economy, create jobs, eliminate poverty and develop the economy once and for all. According to him, borrowing externally has dual advantage of being cheap and allowing for the private sector to access funds.  SANYA ADEJOKUN brings excerpts:

Some financial experts are worried that the money you want to borrow is a way of luring us into a debt trap. How do you react to this, and what’s the rationale behind it?

The first thing to note is that this, borrowing is normal. Normal in the sense that in the past two decades, there is no year we have not borrowed. And so, interpreting the proposal submitted to the National Assembly by president for a three year borrowing programme to be an indirect way of trapping the country does not seem to be logical because Nigeria has always borrowed every year. Every year there is a budget and if you check the budgets many years back, you will see that we have been borrowing both external and domestic so there is nothing new about this.

Let me also emphasise that since we exited from the Paris and London club debt in 2005-2006 we have always borrowed almost from all these sources we want to borrow from now.

It was the Chinese loan that financed NIGCOMSAT more than seven years ago. This is to show that Nigeria has always been borrowing on an annual basis. It is nothing unusual. The medium term external borrowing programme is also not new. Am sure that by next year, it would be represented because 2016 would have been exhausted completely and a new rolling plan will come in.

That’s why it is called a rolling programme. It is part and parcel of the total fiscal framework because fiscal framework includes the medium term expenditure framework, which explains how you will fund the expenditure over the medium term and one of the items for funding expenditure over the medium term would be the financing item which is the borrowing and that has always been there.

 

Based on what you have just explained, I want you to use the instance of NIGCOMSAT as a launch pad and tell us what we have actually benefited from all these borrowings we have had over the years?

NIGCOMSAT is too abstract for the man on the street, so I won’t want to use that because it is about satellite imaging and ordinary Nigerians cannot appreciate it. I would rather talk about something more straight forward. You are aware for example that the Nigerian airports are being remodeled, new terminals are being built in almost all parts of the country, these are being done with borrowed money.

Over the past four or five years, the Abuja Airport road was expanded from four lanes to ten lanes and same with Abuja-Kubwa-Kaduna road.

These two projects were actually funded with money borrowed domestically; you are aware that the Nigerian rail lines are being resuscitated with new locomotives purchased, and Lagos, Ibadan, Kano rail line has been fully resuscitated.

These were done with external borrowing. These are some of the example and on routine basis and on a permanent basis. You are aware of the various agricultural projects some mainly funded by the World Bank and some of them in some areas are called FADAMA and some of them are still existing in all parts of the country.

All those projects are funded with borrowed money. You are aware of the polio eradication programmes, those are funded with borrowed money from IDA in particular, that is the concessional window of the World Bank. Generally, however, all the moneys borrowed from external sources are projects tied. Let’s use a good example of the World Bank; you are aware that the World Bank cannot give you a loan without supervising it themselves, that is the system. They must supervise it themselves and they must have people working with the Nigerian team to monitor the project from the beginning to the end. They don’t just disburse the money and walk away, they disburse the money as the work progresses. So, even when Nigeria seeks for a loan and it is approved, the disbursement of the loan is done according to the schedule of the work itself.

 

That question stemmed from public pessimism. People are afraid that these loans may end up being mismanaged. You have mentioned laudable ones but the Abuja CCTV contract for instance is moribund and nobody talks about it anymore. We ask questions but nobody answers yet it is funded by a loan. It is not working and there are no efforts made. What is going on?

Very good observation! The two things to say about that is, first, there is no doubt that Nigerians are right in asking questions and getting concerned about value for money and about how we get proceeds from what we use. The concerns are valid, correct and appropriate, nobody should doubt that and the important thing to say that in every system where there is a failure, there are people responsible for tracking why there is failure and for doing the monitoring for effective and appropriate sanctions if there are needs for sanctions. That is what I can say about that. I am not going to say everything has been perfect. If everything has been perfect, Nigerians wouldn’t be concerned.

Nigerians are reacting based on the experience of many years and they are right to be concerned and also right to ask questions and indeed every Nigerian including the journalist should feel free to confront relevant agencies and MDAs responsible for such projects because every project has an MDA that is responsible for it. Whether it is a road, hospital or university building, airport, farm project or a satellite, you know those responsible. That is the truth and so we should be concerned about the present and the future. However, it is also appropriate to recognize that we have an opportunity that is very different in that we have a government, a president whose administration is founded on transparency, accountability and anti-corruption, which means we have a greater chance and we should have more confidence that resources- revenues as well as loan proceeds will be more efficiently, accountably used and will not be siphoned through corruption.

Having said that, we should make sure that all the various apparatus available for monitoring, for making sure that resources are well used should be put into effect. We cannot afford this time around to experience wastage so the government agrees with the Nigerian people that we cannot afford to continue wasting resources.

 

Despite all these, shouldn’t the government be worried about the huge amount required to service these debts?

Why not? The government is worried but what you should be asking is if we are managing the debts properly. The essence of managing our debt is to know if we service the debt and that is why we do debt sustainability analysis which we have done for 2016 and for every year previously.

It is because we are concerned about our debt that we do debt sustainability analysis and make the result available to the public and everything government is doing is within the scope and recommendations of that analysis. Certainly every government and debt manager is interested in knowing whether it is in a position to service what it borrows. From analysis we know we can service our debt.

Ever since we exited from Paris and London clubs’ debts, we have never defaulted in servicing our debts whether external or domestic. We have managed our debts prudently but that doesn’t mean we are not in a position to improve. There is no country that has any system that is not improving, even the best systems in the world- US, UK, Germany- they’re all still improving. So we are not saying that we have arrived at the peak; we are still improving. But you should also give us the credit that Nigeria’s public debt service management is among the most respected in the world in terms of what they do and how they do it.

I assure that the proposal, which Mr. President has put before the National Assembly for external borrowing has taken into account Nigeria’s ability to service the debt taking into account that those external borrowings are at very affordable interest rates with most of them below three per annum and all of them range between 15 and 30 years in tenure and their moratorium ranging between five and 10 years so those loans are at relatively concessional terms.

Talking of debt service, one of the reasons why they tilt to external borrowing is because compared to domestic borrowing, they are much cheaper. They are at least seven percent cheaper than domestic borrowing, which means when you look at their tenure and the interest rate, their impact on debt service will be minimal per annum so they are even more serviceable.

If you borrow the same amount from the domestic source, you will find out that the impact of the domestic one will be at least three times higher than the impact of the external one. In terms of debt servicing, remember that sometimes in August DMO presented through the Minister of Finance to the Federal Executive Council the debt management strategy, which proposed that in the medium to long term, the mix between our domestic and external debts should be changed from the current 82 percent domestic and 18 percent external as at today to about 40 percent external and 60 percent domestic in the medium term and it was approved.

It is, therefore, a strategy that Nigeria has adopted and the medium term external borrowing programme is working in the context of that programme which is consistent with the programme that we have accepted as the appropriate strategy to follow in the medium term.

 

What would you say about the unexplained $6 billion in the $29.6 billion loans plan described as others? What is others?

The details of the $6 billion others I am sure will be for infrastructure. I don’t think I have noticed that. You know that the aggregation of the borrowing plan is produced by the ministry of finance, the International Economic Department of the Ministry of Finance. This is not to say that it is their problem, it is not my problem, no I am not saying that. Am sure they have the details but I can assure you there is no way the Federal Government of Nigeria will go and borrow billions of dollars on nothing. It must go to a project because even the person lending it will have to lend it for a project. The World Bank for example, cannot give you the money in full at once. They have to supervise their project. It is as the project progresses that they continue disbursing and at the end of the project, they sign off because they also have to go and report to the board of the Bank to show that the project has been completed. I can assure you that every money borrowed will be used well particularly under this administration.

Let’s also use the example of ChinaExim that does not monitor because it is export credit that it deals in. ChinaExim doesn’t give you cash so they don’t need to monitor. It is for projects that you want to install with particularly design so it is we Nigerians that will supervise to make sure that the design that was agreed is what is on ground because they’re not giving you cash.

 

Have you appointed a consultant for the Eurobond being proposed as part of the borrowing plan?

We are in the process. We are undergoing due process because everything we do must follow due process.

 

How has Nigerian bonds fared in the market since JP Morgan and Barclays backed out?

JP Morgan and Barclays backed out more than two years ago and we have been doing well. If we have not been doing well, we would not be doing auctions every month. If you go through the 2016 budget, there is a provision for domestic borrowing. Has anybody complained that when it is due to fund the budget that there is no money to do so? That Barclays and JP Morgan left has not impacted negatively on our bonds and I emphasized when they left that they did not develop the market for us, we developed the market ourselves. It was when they saw that the market was good that they came to identify with it and so if they leave that’s their own business because it is an indigenous market. The market is performing and supporting the growth and development of the economy. You can go and check to see how many corporates aside governments that are borrowing from the market to support economic development. The market is strong, the domestic bond market, which we developed for Nigeria is strong and thriving in spite of the global challenges. It is strong because we have strong players, strong private sector players, in the capital market, strong regulators like the SEC, strong facilitators like NSE and strong supervisor in the Federal Ministry of Finance.

It is not just enough to say that our domestic debt is high without mentioning the benefits inherent in depending on the domestic bond market. Government’s borrowing from the domestic bond market helped to develop the bond market which has given it some stability in terms of some alternative source of funding not only for the government but also for the private sector.

 

Some analysts have argued that instead of borrowing to finance infrastructure government should allow the private sector do that by giving them sovereign notes to build infrastructure. How do you react to that?

Our position is that government should develop infrastructure and government is exploring all options in doing that. In order to fund infrastructure, government is encouraging the private sector through Public Private Partnerships, through concessioning, through Build Operate and Transfer, through guarantees but that doesn’t mean that there is any country where all the infrastructure will be funded by the private sector. There must be some component of infrastructure that must be funded by the government because the private sector does not find it attractive at that point in time. Government is not excluding the private sector from participating in infrastructure funding. Rather, it is encouraging them but government also appreciates that there must be part of the infrastructure, which it must fund at least at this point in time.

 

How much exactly is our debt profile?

Our total debt stock as the end of June 2016 is N16 trillion, which is 12.24 percent of our GDP and so we will continue to emphasize that relative to our GDP, we are very comfortable but we also accept that we have a challenge with our domestic debt service because of the high cost of fund domestically. This is one of the reasons why there is need if we must borrow, as we must borrow, it is necessary for us to see how much we can conveniently borrow from external source since that will help reduce the domestic cost of funds because when the demand from the domestic market by government drops it means whatever resources are available is there for the private sector. And because the demand pressure is lower, the cost will be lower too. That’s one of the strategies of government and that’s one of the reasons why borrowing from the external source is encouraged.

 

With sliding exchange rate, how easy would it be for government to service and repay external loans?

You are borrowing to turn around the economy, to have efficient rail and road transportation, efficient and reliable power supply, that’s why we’re borrowing. We are not borrowing for borrowing sake. You want to transform the economy by covering the infrastructure deficit and if you do that, the cost of production in the economy will fall, so beyond inflation and all those issues like infrastructure deficiency we will deal with them.

Moreover, if you have sufficient infrastructure, it helps to diversify both export and domestic supplies. We import most of our goods some of which we produce locally but the imported ones are cheaper but if the cost of production falls because of reliable and efficient infrastructure, the cost of production falls so the final products from Nigerian factories will be low so Nigerians can now buy the cheaper ones and that boosts the economy.

On the other hand, the fact that you are producing competitively at cheap cost here means you can even export beyond West Africa because you can now compete just as China is producing at cheap prices and bringing them here, we can also produce at cheap prices and sell to other countries. When you start exporting to other countries, of course you will start earning more foreign exchange. If you’re exporting five or seven export products and in addition you are exporting maybe three, four or five solid minerals, which belong essentially to government.

With that type of diversification, all of exports from the private sector export of solid minerals in addition to oil and gas, if we build infrastructure in the next five to seven years before those loans mature in 15 to 30 years, we should be in a position to service our debt and you would have turned around the economy.

But you can’t fold your hands and remain where you are if you want to move forward. But if there is a way anybody can propose we mobilize revenue that is enough to cover the infrastructure deficit in the next five to seven years, that would be fine but the important thing is that we need to mobilise revenue from whatever appropriate source to solve the infrastructure deficit to turn around the economy, to exit recession, to make sure that once and for all we are no more a mono cultural economy, to ensure that the country is exporting five to 10 different products. Whether there is a shock globally or not, Nigeria will be stable and we will not be crying about exchange rate reserve because we are well diversified. That is the whole idea and that is what government wants to achieve.

Remember that the bottom line of all these is poverty reduction and employment generation because when you invest in infrastructure continuously for the next five to seven years, you are creating employment. In addition, because you have provided infrastructure, the real sector will boom because what is holding down agriculture and Agric-processing, small scale enterprises are insufficiency of infrastructure.

So you can imagine if all of us work together, look for appropriate sources of revenue, equity, direct investment or debt and we solve this problem in the next five to seven years, which means in the next 10 years we will be operating at real capacity, the economy will be steaming full blast and that’s what we need. It’s this change that the government is looking at. Whatever any Nigerian can contribute for us to achieve this change to transform the economy so that we reduce poverty, we generate employment such that in the next seven to 10 years we will not be complaining of mass unemployment for the youth, that’s the whole idea.