Recently, the senate approved an N850 billion loan request from the presidency. A number of people have again wondered what the borrowing is for and why.
Firstly, the Appropriation ACT 2020 approved a deficit of N1.59 trillion, in a bid to “part finance the deficit of the budget”. This means, the N1.59trillion was the amount the appropriation act approved for the government to borrow both domestically and externally.
Take note that the approved amount to be borrowed was before a request from the ministry of finance to revise the budget, reflecting the new projection in revenue as a result of economic shocks facing the country. Recall that in the approved act, the oil bench mark was pegged at $57/barrel and the country expected oil revenue to be N2.6 trillion. The government had decided at the time, that N850 billion of the approved budget deficit to be borrowed would be externally generated i.e. borrowing from either multilateral, bilateral or commercial organisations, while N794.99 billion was to be borrowed domestically, which is borrowing from sources within Nigeria.
Read also: When crude oil and pandemic collide
Now, with the dual economic shock the country is faced with, the hard hitting covid-19 pandemic, and a sporadic drop in crude oil price for a heavily oil dependent nation, and also, the dwindling value of the naira against the US dollar, the country is in a dire situation. Worthy of note is that Nigeria, did not come into the economic crunch caused by COVID-19 on a strong footing. This led the ministry of finance and other stakeholders to present a revised 2020 budget, now reflecting a $27 drop in previously projected oil bench mark, hence revising it to $30/barrel, a 90 percent drop in previously projected oil revenue for the 2020 fiscal year. Under the same breath, the naira began devaluating as a result of various factors such as drop in production, coronavirus strain on the economy, drop in availability of the green back and a halt in international trade among others. These factors left the Ministry of Finance, DMO and other stakeholders to re-evaluate their initial plan to borrow N850 billion externally, instead, they agreed to source for the needed funds domestically through bond issuance.
The question now becomes, why the change in plan? This is supposed to protect the country against higher debt repayment in the future. If Nigeria had decided to go ahead with the external borrowing through i.e. Euro bond, it would need to issue bonds with attractive interest rates in order to win investors over. This would leave the country at the risk of a bloated debt repayment as the country grapples with possibilities of further devaluation of the naira, making repayment more burdensome. Hence the need to nib at the bud the potential impact of a crippling repayment plan. Alternatively, if the borrowing is done locally, the interest rate could be slightly above current inflation figures and there would not be future concern of repayment in foreign currency.
Although the country has expressed their need for assistance from multilateral organisations like the IMF, World Bank and the African Development Bank, countries like Germany has granted Nigeria debt relief. So far, the IMF has approved the request for $3.4 billion rapid response which represents a 100 percent of Nigeria’s quota according to the IMFs RFI. The RFI has a 5 years’ repayment period with a 1 percent annual repayment starting from the third year of issuance through the fifth. The country needs as much assistance as it can get to hedge against the potential risk of a recession. The exact impact on the economy cannot be accurately quantified as a vaccine for the virus is yet to be discovered. According to the IMF, the economy—which remains highly reliant on foreign exchange proceeds and the recycling of petrodollars—is expected to contract by about 3.4 percent in 2020. This would mean a 6 percent drop from the initial growth projection.
Would COVID-19 impact reinforce the government’s will to push for a more diversified economy, debt sustainability and financial stewardship?
With the decline in economic activity, the country is experiencing a large fiscal and external financing gap and may need to identify home grown solutions while grappling for international assistance. Sadly, revenue expected from crude oil was slashed from N2.6 trillion, down to N254 billion, a product which contributes about 10 percent to the nations GDP. As the country struggles to now meet the deficit of between N4.5 trillion to N5 trillion as seen in the revised 2020 Appropriation bill, this is a call for a more aggressive push towards the diversification of the economy beyond oil. Transparency in borrowing and more important result-oriented expenditure reports would be well appreciated. As said by Dick Clark, “A crisis is a terrible thing to waste. Nigeria must take advantage of the pandemic and restructure for a strong comeback
Ubani is a business journalist at Plus TV Africa and a regular contributor on the BBC Money Daily programme BIZ100 which airs in Nairobi. Irene is currently running the Women in Business (WIMBIZ) mentoring program
