LAST WEEK, Acting President, Prof. Yemi Osinbajo, wrote a letter to the Senate President and Speaker of the House of Representatives, seeking the approval of both chambers of the National Assembly for $1.5 billion loan for ten states.
The intended beneficiary states are: Abia, Ebonyi, Enugu, Jigawa, Kaduna, Kano, Katsina, Ogun, Ondo and Plateau. The credit facility is reported to be part of the 2016-2017 External Borrowing (Rolling) Plan. The Acting President’s letter urged the legislature to separate the states’ projects from the items listed in the Borrowing Plan, so as to give them speedy consideration. A breakdown of the loans indicates that Kaduna and Ogun States are seeking $350 million each from the World Bank, while Abia and Ebonyi States are asking for $100m and $70m, respectively, from the Africa Development Bank (AfDB). Also, Katsina, Jigawa and Kano are seeking $110m, $32.4m and $200m, respectively, from the Islamic Development Bank. Enugu, Plateau, Ondo want a total of $200m from the French Development Agency.
We urge the National Assembly to carefully consider these loan requests, the projects for which they are being sought, and the ability of the states to repay the loans without getting into a debt trap, either now or in the future. Ordinarily, there is nothing wrong with loan procurement, provided the facility is prudently utilised for the intended projects and repaid as due.
Our concern, however, remains that many states have been fiscally irresponsible with previous loans obtained. This is in breach of key provisions of the Fiscal Responsibility Act. Moreover, some of the states seeking these loans already have a huge debt profile. For example, Katsina, Kano and Ogun States reportedly have external debt profile of $81bn, $67.3 and $103.7bn, respectively.
Sections 43-44 of the Fiscal Responsibility Act are clear on the processes for obtaining external loans. For instance, section 43(1) says that securing of external debt shall be the direct responsibility of the government incurring the debt. Section 43(2) is even more explicit. It says that “the case of securing government-guaranteed loan should be deducted at source from the share of the debtor government from the Federation Account”. Also, section 44(2)(b)says “the proceeds of such borrowing shall solely be applied towards long-term capital expenditure.”
It is necessary that the states are aware of this fact, to avoid misapplying or misappropriating the loans. It is rather sad that some state governors have been reckless with the resources of their states. To avoid such a situation, the Fiscal Responsibility Commission (FRC) should be alive to its mandates. Sub-section (4) of the Act enjoins the commission to verify, on a quarterly basis, compliance with the limits and conditions for borrowing by each government in the federation. Some of the states seeking approval of their loans already have huge unpaid external loans and are at risk of a debt overhang that is capable of stymieing their development. With many of the states already struggling to pay workers’ salaries and meet their other obligations in spite of bailouts from the federal government, their quests for further loans require all hands on deck to ensure their ability to meet the terms of the loan repayment.
With domestic debt at the end of the first quarter of this year standing at N14.9trn, and N474bn committed to debt servicing within the same quarter, there is need to worry. Last year alone, domestic debt gulped N1.23trn, while N839bn was the highest interest payment made on debt acquired using the Federal Government of Nigeria (FGN) Bonds. The latest statistics from the Debt Management Office (DMO) show a total national debt of N19.16trn as at the end of March this year. The federal government’s domestic component of the debt was N11.97trn, while external debts of both federal and state governments stood at $13.81trn.
We agree with the concern recently expressed by the World Bank that, with the lower earnings for government due to the uncertainty in oil prices in the international market, the capacity of both the states and the federal government to sustain the present level of debt servicing could be in danger. This is despite the assurance of the Director-General of the Budget Office of the Federation, Ben Akabueze, that Nigeria’s total indebtedness is sustainable, and still within the globally accepted threshold.
Already, the increased borrowing and falling revenue has pushed Nigeria’s tax to GDP ratio to an all-time low of 6%. This is against Ghana’s 20.8%, South Africa’s 26.9% and Egypt’s 15.8%. This is not good for a country that aspires to be a dominant economic player in Africa, or among the league of 20 top economies in the world.
In all, if this loan request is approved by the National Assembly (as we believe it will), we will need to carefully monitor the loans and the execution of the intended projects. Most importantly, the governors of the ten states involved should be aware of the full cost implications of the loans, as the repayments will be deducted at source.