Lawmakers are last hurdle in Nigeria’s $3bn development loans

A nod from lawmakers is all Nigeria needs now to tap into a pool of development funds after the executive arm of government approved plans for borrowing from the World Bank, China and Japan last week.
Kemi Adeosun, the minister of Finance, had told bond investors in London three months ago that Nigeria was in the process of securing $3 billion in development loans.
Analysts say they do not expect lawmakers will delay in approving external borrowings, given the impact it could have on the country’s economy, in recession.
The borrowing plans which would include low-cost and long-term loans with interest rates of 1.25 percent and maturities of 20 years, are helped by the fact that Nigeria has the lowest debt to Gross Domestic Product (GDP) ratio in sub-Saharan Africa, at 13.2 percent, giving the country ample room to take on more debt.
“It is a positive step long anticipated and we do not expect lawmakers to drag on final approval,” said Tiffany Odugwe, a macro-research analyst at Cardinal Stone Partners Ltd, in an e-mailed note to BusinessDay.
“It would boost inflow into the FX market and thus fiscal policy’s approach to tackling the FX dilemma as monetary policy alone is not sufficient”, Odugwe added.
Nigeria’s N6.1 trillion budget has tumbled by 36.6 percent in dollar terms to $19.4 billion from $30.6 billion, following a currency float on June 20.
Capital expenditure accounts for a record 30 percent of the budget, given the country’s growing infrastructure deficit which is snuffing out economic growth potentials.
Estimates of the cost required to bridge the deficit abound. For instance, $10billion per year for ten years is required for the power sector and $16 billion for transport over five years, FBN Quest Data shows.
On the development loans, Tajudeen Ibrahim, head of equity research at investment bank, Chapel Hill Denham, said, “Such funds should be directed to infrastructure projects which will have a multiplier effect on the economy around job creation, availability of power, expansive road network, among others.
“The long tenure should reduce repayment pressure on the government in the short-to-medium term, while the low rate should limit cash outflow from the government in form of interest payment,” Ibrahim added in an emailed note, responding to questions.

Experts had called for diversified borrowing to avoid crowding out the private sector, “because it is important that the productive sectors of the economy are able to access loans at reasonable rates,” said Olutola Mobolurin, chairman of stockbroking and financial advisory firm, Capital Bancorp Plc.
Raising debt capital may be crucial if the country is to jumpstart economic activities in the wake of oil price and output dips, which have stretched the fragile fabric of Nigeria’s treasury.
Data from the Central Bank of Nigeria (CBN) show that gross official reserves declined by $790m in August on a 30-day moving average basis to $25.4bn.
The monthly average movement has been an outflow of US$460m over the past 12 months.
As commodity prices nosedive, the revenue streams of most African countries are drying up and a possible round of US monetary tightening is sending chills down the spines of monetary and fiscal authorities, who fret portfolio investors may have subdued appetite for their bonds (a fixed income security used to raise debt capital).
In the first half of 2016, there was a decline in sovereign bond issuances by 50.58 percent (year-on-year), as only South Africa ($1.25 billion) and Mozambique ($726.5 million) raised international bonds (Eurobonds), as against four issuances totalling $4 billion in the first six months of 2015.
While Angola, Kenya, Ghana and Zambia, have opted for fiscal austerity, Nigeria has taken an expansionary fiscal stance, leaning on the sale of debt instruments and increased non-oil revenue.
“We support the expansionary stance because the FGN has spare borrowing capacity, at least on the external side,” FBN Quest analysts stated in a Sept. 8 note to investors.
“We have previously noted that market conditions now favour Eurobond issuance by emerging and frontier market borrowers,” the note read.
The proposed Eurobond issuance size of $1 billion is double what Nigeria has issued at any given time in the last five years.
To achieve the intended impact, Odugwe of Cardinal stone thinks “Government should ensure contractors return to work by paying up monies owed to them.”
The construction sector (five percent of GDP on average), declined for the fourth consecutive quarter in Q2 by 6.3 percent.
BusinessDay had exclusively reported last week that the Federal government has started paying power contractors, that they may return to site after huge government debt in the previous administration led to the abandonment of projects.