Borrowing in dollars

THE Federal Government is set to raise $3 billion through the issuance of dollar-backed treasury bills to refinance its naira-denominated treasury bills. The move is to enable the government to extend the maturity period of its debts from between 91 and 364 days to between two and three years. During an interaction with journalists on this development, Minister of Finance, Kemi Adeosun, explained that the step was not a move to dollarise the economy. She said, “We are not issuing dollar-denominated treasury bills. No, we are not. What we are doing is that the naira treasury bill, when it matures, we will then issue bonds in the capital market, international capital market… You will recall that when we went to the capital market about three times this year, our average cost of borrowing was less than seven per cent. But with treasury bills, we are paying up to 18 per cent. So, what we are doing is simply substituting the maturing naira debt with cheaper dollar-denominated debt. We are not dollarising the economy.”

The path of issuing dollar-backed treasury bills that the government wishes to toe has some positives. The debt rescheduling strategy will give it a breather; instead of borrowing intermittently to offset short-term debts, the government can now take its time to plan its repayment over a longer period of time. In addition to that, the interests paid on these foreign debts are not as high as the local debts. Then having an additional $3 billion in the economy will increase the country’s external reserves and further strengthen the local currency. It may also result in a decline in the exchange rate of the naira to the dollar. Then, by scaling down its local borrowing, the government will free the space for the private sector to access funding from banks. And since the government is no longer competing with companies for loans at the cut-throat rate of 18 per cent, the lending rate, which is sometimes as high as 30 per cent, may witness a crash.

However, as good as the move by the government seems to be, it is not without drawbacks which could be calamitous for the country. First, the government should not be deluded by the cheapness of foreign loans. The loans will have to be repaid with Nigeria’s foreign exchange earnings which are dependent on crude oil prices and production volumes. Given the volatility in the crude oil market and the uncertainty in the Niger Delta region, government may run into trouble with its repayment plan should there be a fall in crude oil prices or a drop in production. This may lead to serious problems for the country as it may have to devalue its currency to meet its obligations to foreign creditors. While the government can direct the Central Bank of Nigeria (CBN) to print naira to offset local debts in extreme cases, such cannot be contemplated with foreign debts.

Then, what the government attempts to do is debt rescheduling, which gives a reprieve but does not solve the problem in real terms because debts are still hanging and  will continue to impact negatively on the economy. The government has to come up with strategies to reduce its debt burden. Currently, a huge chunk of the country’s revenue goes into debt servicing. In 2015, N1.06 trillion was expended on debt servicing. The figure rose to N1.31 trillion in 2016 and over N1.8 trillion is allocated for debt servicing in the 2017 budget. Government has been finding it difficult to embark on extensive investment in infrastructure and other critical sectors because of the humongous resources it deploys to debt servicing. So, the government has to be creative about tackling the debt issue with a view to reducing its borrowing and the amount that goes into debt servicing to avoid further impediments to the country’s development.

Government should be guided by the fact that while the lure to rack up debt is great, every debt taken is a part of the country’s future chipped off because whatever debt is taken today will be paid off with the earnings of tomorrow. To bequeath a healthy and economically viable country to succeeding generations, the government has to do less of borrowing and more of revenue generation.