Nigeria's debt overhang: the dangers of debt trap and debt peonage
The word "debt" evokes trepidation amongst both the informed and the less informed Nigerians because of the probability of default in the repayment of principals as well as payment of interests on the principals, and the implications of such default. The implications of debt repayment default are my concern in this piece. The fear or consternation of citizens in respect of repayment default shouldn't be farfetched in an undisciplined society like Nigeria where lack of accountability and non-transparency of government activities are the rule. This is because the default has implications for further increase in the burden of debt repayment or debt service.
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But despite this, debt shouldn't be unpalatable either, in as much the debt is targeted or tied to projects that can pay for themselves. Perhaps a clear cut understanding of what this exoteric but feared notion or concept of debt means will suffice to reinforce the fact of its utility as the alternative but additional means that countries faced with financing gaps, can employ to finance important development programmes and projects. In this regard, debt can be described or viewed as money owed by an individual, organisation or a nation to a creditor/lender or a group of creditors/lenders who made the funds available to the borrowers for the financing of programmes or projects which otherwise would not have been possible. This process is not without a legally binding agreement for repayment at an agreed date, attracting a penalty for default.
Alternatively, debt is some money borrowed by an individual, firm or a country from a lender/creditor for purposes of programme or project financing, with the obligation to repay within a certain time frame, failing which attracts some penalties. Thus, incurring debt through loan facility is necessary or inevitable where there is a gap between an individual, firm or a country's expenditure programme and the financial resources available to the individual, firm or country. This financing gap is often reflected, with regard to a country, in the yearly budget- the nation's revenue and expenditure estimates for a given year. The sources of funds for bridging the financing gaps are both internal and external.
Nigeria's external loans and their sources will be x-rayed in this piece. The sources are bilateral as well multilateral sources. The multilateral institutions are International Bank for Reconstruction and Development/World Bank, African Development Bank (AfDB), Islamic Development Bank (IDB), International Fund for Agricultural Development (IFAD), International Monetary Fund (IMF), European Bank for Reconstruction and Development (EBRD), European investment banks, et cetera. The bilateral sources vary as the countries providing these funds. Some of the bilateral sources are China’s EXIM Bank, Japan International Cooperation Agency (JlCA), German Development Bank (KFW) and the French Development Agency (AFD).
Nigeria's external loans or debts and the implications for defaults are my concern here, more so that the country is borrowing to the hilt despite her not being known for discipline in all the ramifications of the word. As it will be seen shortly, the borrowing spree, which has become a sort of pastime of the governments of the country has reached its nauseating level and constituted serious concerns for the citizenry. It is being suspected by Nigerians that our political entrepreneurs and technocrats with their familiar kleptocratic predilections for shoddy practices, nay their ingenuity for helping themselves to a part of the borrowed scarce financial resource might be one of the reasons responsible for the unrestrained external borrowing propensities of the post-debt relief administrations.
The implication of this noxious practice is that the debt might become unsustainable, the default in repayment obligations might not be ruled out while the resort to rescheduling of the payment of interest and repayment of the principal might become inevitable. Yet, to the discerning the rescheduling facility as a relief is, indeed, a mechanism that will lead the nation inexorably to debt trap as well as the eventual progression to debt peonage, otherwise called debt slavery or debt colonialism.
Meanwhile, let me be clear and emphatic that, aside the preceding concerns, there is nothing absolutely wrong with borrowing as much as, I must reiterate, the loans are targeted, long term with interest rates that are concessionary and the borrowing country is disciplined. This is because a default portends dreadful expectations of negative impacts on national growth and development. However, nonetheless, it is also necessary and desirable that the government, in opting for loans, be mindful of the dreadful debt burden and adverse implications of debt servicing for capital expenditures or for national socio-economic transformation. In other words, the painful fact of Nigeria's debt service ratio, which currently stands at 66%, is that, doubtlessly, it will impact on other non-debt obligations- national development obligations- adversely.
Back to the issue of the regrettably astounding unconscionable borrowing spree of the federal and state governments. It is extremely, agonising and disturbing that years after the debt relief obtained by Obasanjo administration, the country is heading towards being caught in the webs of debt overhang and debt trap, as well as the likelihood of debt peonage/debt slavery. Recall that the Obasanjo administration embarked on a relentless campaign for debt relief in 2004. In relentingly seeking debt relief, the Obasanjo administration was quite aware of the connexion between sustainable debt, debt burden and economic growth and development. Fortunately for that administration, in 2005 it obtained from the Paris Club a US $18billion debt relief from the total stock of the US $36billion.
But, it seems now that the country's road to the Golgotha of another debt trap is being charted. Certainly the administrations of Jonathan and Buhari cannot be exculpated from this wrongheaded step nor from making a non-sense of the US $18billion Paris Club debt relief obtained by the Obasanjo administration in 2005. For instance, the Jonathan administration incurred US$21.8 billion debt, including US $3.1billion external debt component of its own, with almost nothing to show for it. Ironically, the huge debt was obtained under the watch of Dr Ngozi Okonjo-Iwela, as the Honorable Minister of Finance- the same minister of Finance, that served the Obasanjo administration, which obtained the US $18billion debt relief from Paris Club of creditors in 2005.
Meanwhile, the Buhari administration is set to break the record of the Jonathan administration in the quantum of external debt incurred. According to statistics from the Debt Management Office (DMO), Nigeria's debt profile (both external and domestic), as at June 2020, stood at US $85.9billion. When however, cognizance is taken of the $22.7 billion loan request by the Buhari administration, which was recently approved by the Senate, the nation's external borrowing, under the Buhari administration will hit US $72.7billion while the total debt stock will be above US $100 billion. By the time the Buhari administration leaves the stage in 2023, the debt might have become unsustainable, with the likelihood of default because it is becoming obvious that these loans are, after all, not tied to projects or are tied to projects of doubtful abilities to pay for themselves.
I am very much concerned about the Chinese debt. This is because of its foreboding unsustainability and eventual default by the federal government of Nigeria. As at March 31, 2020, total borrowing from China was US $3.121billion. Meanwhile, the component of US $17.06billion of the US $22.7billion, recently approved by the Senate, will be borrowed from China, thus bringing total borrowing from China to US $20.18billion. Meanwhile, the ability of the US $3.121billion Chinese Rail modernisation and rehabilitation loan to pay for itself is doubtful. This is because the Chinese Rail Modernisation project is focusing mainly on passenger and not freight transportation. Yet, it is recognised, globally, that passenger rail service is a social service. How can a loan for a social service project be expected to pay for itself, one is curious to know?
As I am writing this essay, only one of our five ports is linked by rail (Apapa Wharf). The Tincan Island Port, the busiest in Nigeria is not linked by rail, thus all imports, heavy or light, are transported by road. This is the crux of my concerns and fears. China is not known to suffer defaulters of its loans gladly. When it comes to repayment of its loans, China is, indeed, not a sympathetic undertaker. Default in your loan repayment obligations to China, and you will understand the true meanings of debt trap diplomacy and debt peonage. If you are in doubt, ask Zambia and Kenya about their experiences with the Chinese infrastructural loans.
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