23

Mar

PARADOX OF DEBT ACCUMULATION IN SPITE OF HEALTHY RESERVES 02122013

2013-12-02

PARADOX OF DEBT ACCUMULATION IN SPITE OF HEALTHY RESERVES

HENRY BOYO
 
The subject of reckless debt accumulation has been discussed in several articles such as “Another Useless Debt Burden” November 2006, “National Assembly Fiddles as Debt Burden Cripples” May 2008, etc; (please see www.betternaijanow.com).  Incidentally, when Nigeria’s Debt Management Office (DMO) was established in 2003, the excruciating existing burden of external debt was over $35bn; domestic debt, however, was still tolerable and manageable, with treasury bills accounting for about 60 per cent at over N800bn, while treasury bonds accounted for about N430bn. 
 
Ultimately, after our exit from the controversial Paris Club debt with the payment of over $12bn in 2006, our external debt balance tumbled below $4bn!  However, external debt has, of today, almost doubled to about $7bn, while domestic debt has multiplied multiple fold from over N1tn to the current level of about N13tn, sadly, without any critical impact on social welfare or infrastructural enhancement.
 
What, we may ask, was responsible for the rapid accumulation of “useless” domestic debts at atrocious interest rates between 2006 and 2013, during which period we hoarded our huge forex ‘savings’ and billions of idle naira?
 
The following is a summary of an article published in 2005,  titled “WILL YOU BORROW N120BN IN SPITE OF IDLE BANK BALANCE OF OVER N4,000BN?”  On hindsight, it seems we have not learnt any lesson.  
 
“In early 2005, the Debt Management Office announced Federal Government's intention to borrow about N140bn in seven tranches of N20bn each.  The purpose of the new wave of borrowing, according to DMO, was “To restructure part of the outstanding 91-day National Treasury Bills into longer-tenured bonds; provide a benchmark instrument for the pricing of other securities in the capital market, as well as facilitate the development of the bond market in general”.   
 
“The question is why must the DMO convert matured short-term treasury bills to long term debts with an interest rate premium of about 17 per cent, when we are adequately equipped to redeem these debts from  our existing huge idle reserves of over $32bn?  Some analysts warn that our present repugnant burdensome external debt of over $35bn comprises such high service charges as DMO’s present borrowings.  Even though there is nothing to show for those external debts, we nonetheless allegedly paid over three times the value of the actual amount borrowed without reducing the principal sum!  This ugly reality may once again materialise in the domestic scene, since there is no guarantee that DMO’s fresh 2-3 year bond will not also be rolled over once again when  these loans are eventually due for redemption! 
 
“The second objective of the DMO in offering the current 2nd FG Bonds for N140bn is to use the adopted interest rate as a benchmark to guide other rates in the Nigerian capital market.  In reality, this could be a possibility, but the truth is that the primary instrument for control of cost of funds is CBN’s Minimum Rediscount Rate.  The MRR, currently at 13 per cent (2005), is considered very high in view of MRR of 2-4 per cent in serious minded, progressive and stable economies.  Analysts will wonder why government's risk-free borrowings, which attract an industrially and economically disenabling high interest rate of 17 per cent should be targeted as a benchmark for cost of funds in the capital market!  
 
“The other objective of DMO’s fresh bond issue is to facilitate the development of the bond market in Nigeria.  Once again, observers sadly note that market depth may not bring any direct real positive or tangible impact to most Nigerians; in any event, observers may argue that the estimated heavy cost burden of the N140bn FG Bond 2008 Series does not justify the superficial benefit of developing the bond market, in place of the direct impact of specific project-related bonds for provision of verifiable enhanced educational, health and other social infrastructure!!”
 
The above piece was first published in July 2005; since then, the DMO and CBN have rapidly fuelled the debt accumulation process, so that domestic debt now exceeds N13tn ($80bn), while external debt is almost $7bn in 2013!
 
Inexplicably, CBN & DMO’s debts were incurred regardless of prevailing surplus naira reserves, particularly from the huge stock of surplus naira continuously mopped up with double-digit interest rates and kept as idle funds for fear of inflation by the apex bank!  
 
Pray, why should government prefer to borrow at high interest rates to fund alleged annual budget deficits especially when CBN simultaneously keeps huge idle reserves of Naira and Dollars?  It certainly makes much better sense for government to borrow from CBN (its own richly endowed subsidiary) at minimal cost than to expose future generations to loans that will be burdensome to repay with the attendant Shylock interest rates. 
 
In spite of healthy reserves,  the DMO and CBN set the pace for institutionalising the process in which government borrows back its own funds from the banks at oppressive interest rates of up to 17 per cent. The directive that banks can henceforth only leverage on 50 per cent of government deposits in their custody is a belated admission of this perfidy by the CBN!   The product of this obnoxious strategy is the current domestic debt balance of over N13tn (about $80bn), ironically accumulated simultaneously with rising external reserves above $44bn, which sum ironically earns minimal yields of probably less than three  per cent.  Yet, paradoxically, government's voodoo economic and fiscal strategy debars us from accessing these relatively healthy foreign reserves at no cost, to redress our high cost oppressive debts.
 
Indeed, with the accommodation of annual deficits of over N500bn in the 2014-2016 budgets, total domestic debt may horrendously increase by over N2tn to exceed N15tn! Regrettably, the annual N100bn sinking fund established last year, will most certainly be inadequate to meet annual debt service charges of over N600bn and repayment of a principal sum of over $92bn!
 
Furthermore, critics have noted that alleged budget shortfalls are indeed ghosts deficits, since deficits cannot exist simultaneously with the handsome surplus dollar revenue captured in an Excess Crude Account annually; besides it appears fraudulent to borrow and fund presumed deficits while excess revenue above budget benchmark projections are similarly consumed in the same year!
 
In the same manner that the DMO commenced operation with conversion of short-term to long-term debts, the fashionable official current debt management strategy in 2013 despite surplus revenue appears to be the conversion of the bloated domestic debt of N13tn to foreign loans, because of the attendant cheaper cost of funds for external loans.  Undoubtedly, a better strategy would be to put a lid on additional loans, while operating an appropriate monetary strategy that would drive down domestic cost of funds!

Save the Naira, Save Nigerians!!