Recession, $30billion Loan request and the arguments


Friday, November 25, 2016 3.00PM / Taiwo Ologbon-Ori

The urgent need for improved cash-flow/revenue on a large-scale for government to stimulate the falling economy out of recession cannot be overemphasised. In fact, the more government delay this stimulus package and the needed fiscal policy, the worse for the economy, which will translate to more pain for the masses.

Having said this, you will agree with this fact without iota of doubt, that there is a general believe/consensus from all concerned quarters and stakeholders that the Nigerian government needs to (1)  constructively double its capital spending to reduce its huge infrastructural deficit significantly, (2) beef up its weak foreign reserve to meet FX Demand and strengthen Naira (3) sustain/upgrade labour's welfare (4) to diversify economy, expand agricultural value chain to boost produce and stimulate job creation. (5) invest in security to curtail insurgency and militancy.

However, there has been hot disagreement among concerned stakeholders on the source of funds/financing these laudable listed projects, as government proposed to go for a $30billion loan from foreign financial institutions to finance its projects. In support of this, the government has made its poor financial position known to reinforce the necessity for the loans.

It is a fact that government's revenue had contracted significantly and it has fallen short of budget target for 2016 due to low global oil prices and low oil production caused by militant activities in the Niger Delta region. Despite this obvious fact, several divergent views and arguments have been made for and against the $30 billion loan proposal.

The argument for large-scale government borrowing is listed below
·         The current infrastructural deficit is preventing a sustainable economic recovery
·         The need to stabilise our foreign reserve and embark on infrastructure development 
·         The need to stimulate economic recovery in short-term and stem the overwhelming effect of inflation
·         Urgent need to augment the budget deficit and maintain workers' welfare
·         Government has limited option, the borrowing is external and concessional in nature, which makes it a better financing approach
·         Nigeria has a good  low “Debt-to-GDP” ratio, which comfortably accommodates the said loan and provides space for more borrowing
·         The proposed projects are essential for the economic growth, and it would not only to get us out of recession but also to ensure sustainable economic growth.
·         Proposed loan is a better option over raising of tax or VAT during recession, it will boost economic activities and tax income, provided investment in infrastructure is genuinely pursued 

On the other hands, the summaries of argument against the loan as listed below are showing that the borrowing strategy is not sustainable.

·         This loan request will increase existing loan stock by 268% while there is nothing to show for past foreign loans by past administration
·         It will put total external debt stock to $41.162 billion from $11.262 billion as at June 2016

·     The proposed projects are largely not profitable, so the ability to service and make repayment is greatly challenged
·         The Debt-burden is worrisome and unbearable as 45% of the Federal Government’s recurrent expenditure is currently used to service debt
·         Both foreign and local financial institutions said there is no comprehensive economic blueprint or policy support instrument, detailing the utilisation plans for the said loan.

·         The pain and gain of the loan is likely to be regionalised and politicized.

Also, former president Obasanjo lend his voice against the proposed loan by stating that “we immediately need loans to stabilise our foreign reserve and embark on some infrastructure development but surely not $30 billion over a period of less than three years. That was about the magnitude of cumulative debt of Nigeria which we worked and wiped out ten years ago. Before that debt relief, we were spending almost $3 billion to service our debt annually and the quantum of the debt was not going down. Rather, if we defaulted, we paid penalty which was added on”. The former president suggested the need to prioritize the projects, warning that borrowing $30bl in 3 years, will mortgage Nigeria’s future for another 3 decades. He is worried about how the non-profitable projects factored into the loan will help the repayment, when the past ones did not achieve their set goals.

Opinion and conclusion
In the absence of this loan, and as we are all aware that government has limited options, the alternative approach may lead to stiff, painful and unbearable fiscal policies like sale of Oil & Gas assets, increase fuel price, increase tax and VAT, upgrade import-duties and tariffs. The subtle or underground campaign for recovered looted-funds may not go a long-way in revamping economy.

Nevertheless, in anticipation of possible huge investment in infrastructure, which would spur economic activities, aid diversification of economy and lead to inclusive growth in major economic sectors like agriculture, transportation and trades for Nigeria as a nation, we would like to suggest that the debt to GDP ratio is very reasonable with ample space if we consider the rebased GDP.

Though, the loan may push our debt-to-GDP ratio to 19% from 11% as at Dec 2015- we consider this relatively lower to benchmark of 40%, and when compared with other emerging, developed and developing economies. e.g Russia is 18%, United States is 104%  India has 67%, China is 23%,  Brazil is 66%, South Africa is 50%, Ghana is 68%, Gambia 51%, Morocco 63%, Kenya 53% Mexico 43%, Indonesia 27% Turkey’s 33%, Germany 71%, Japan 229%, and Greece is 176%.

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