“The Finance Minister, Olusegun Aganga and his entourage have planned road shows traversing markets in Europe and the United States to promote Nigeria’s credit worthiness and facilitate popular subscription to a proposed $500m/Euro loan.

It would be irrational for anyone to embark on a borrowing spree without a productive object for the loan; it is worse, if such a ‘purposeless’ loan also, annually attracts near double digit interest rates and management fees, payable primarily to the same group who are potential subscribers to this fresh loan application and with whom we ironically domicile substantial surplus funds, which attract minimal returns.

According to the Finance Minister, “the aim of the 10 year bond is to set a benchmark in the global market for Nigeria’s borrowings,” rather than any pressing necessity to actually borrow; consequently, a price benchmark is presently considered more important than the need!! Thus, in layman’s language, Aganga is saying that “we know that with over $30bn present reserve base, we don’t need this $500m loan; indeed, we recognize that our  reserves which usually earn less than 3percent interest, are also usually domiciled abroad, primarily, with the agents of major potential subscribers to our present bond issue; and yes, we know that service and management charges may approach $50m annually, to reduce the actual net inflow to $450m, after further deduction of cost of road show, plus other fees and commissions payable to Deutshe and Citibank (the book runners) and other obligations to Barclays Capital and FBN Capital, the Financial Advisers for this loan; but, government believes nonetheless that this is a ‘sensible’ loan, because future loan applications from Nigeria will be guided by the market price we pay this time out”!!

However, to what purpose will the $500m loan be applied, we may ask? Evidently, the borrowed funds could supplement existing reserves, which notably, earn returns which are a fraction of the cost of the proposed Eurobond; hazy financial logic, you may say!  Alternatively, the funds may be captured as Central bank income, to be subsequently released as part of monthly allocations to the tiers of government after the dollar value is substituted with naira, at CBN’s unilaterally determined exchange rates; thereafter the Apex bank would as usual, proceed to auction all or part of the same $500m to commercial banks and hundreds of bureau de change.  Unfortunately, this traditional management of our dollar reserves, triggers a distorted exchange pricing mechanism, round tripping and capital flight and also facilitates the funding of smuggling and money laundering! Besides, the process of Naira substitution oppressively compels the tiers of governments and federal agencies, who are the constitutional beneficiaries of federal revenue, to return to commercial banks to source dollars for their respective imports.

Indeed, less than a week after Aganga’s interaction with financial correspondents on the ‘need for the Bond issue’, the CBN independently on Monday January 10, 2011 promptly auctioned $300m. Incredibly, prior to this auction, CBN had on new year’s eve, on the instruction of the National Economic Council, also shared the NAIRA equivalent of $1bn, withdrawn from a controversially constituted Excess Crude Account, to constitutional beneficiaries; invariably, the resultant N150bn exchange value for the $1bn complemented the regular statutory monthly allocations to significantly expand naira liquidity, such that the $300m subsequently sold by CBN in its first dollar auction in 2011, became predictably oversubscribed to further weaken the naira exchange rate.

Similarly, the present $500m Eurobond will inevitably also trace the same path of naira substitution and fire the systemic contradictions in our fiscal and monetary policies, with adverse consequences on industrial regeneration, employment and social welfare. It is therefore hard to understand why Aganga is so motivated to commit Nigeria to such an unnecessary and expensive debt, especially when it will not promote inclusive economic growth?  Surely, if additional funds are indeed required for some specific critical infrastructural intervention, government has lately indicated that, apart from the over $30bn own reserves, additional $4bn multilateral soft loans, with low interest charges of between 1–3percent and with 20 or more years' gestation are currently available for the picking!  So why must we choose the hard and much more expensive option!

However, this odious process of forex management may explain Nigeria’s ballooning domestic debt.  Indeed, when the Debt Management Office, DMO (read as Debt Creating Office) was established in 2007, Nigeria’s domestic debt was barely N1000bn, and consisted mainly of outstanding payments to local contractors(external debt was barely $3bn). However, soon after the exit from the controversial Paris/London Club debt burden, the DMO came on board, and their immediate primary mission, according to the prospectus on the Purposes of loans, was to create a ‘benchmark’ (do you recognize that word?) and to also “deepen the domestic market for long term loans”. 

Readers will recall that Aganga had similarly defined the purpose of floating the current Eurobond as that of creating a benchmark for Nigerian bonds in international financial markets.  The DMO’s initial offer unequivocally also confirmed that the loans sought were not intended for any positive, tangible or practical application that could jumpstart our prostate economy or even address our infrastructural deprivations. Incidentally, three years after the creation of DMO, Nigeria’s domestic debt has steadily galloped and quadrupled beyond N4000bn; yet, not surprisingly, there is still no significant impact on the economy!

Not surprisingly, DMO bonds were usually oversubscribed and the commercial banks were primarily, usually, the main patrons; it is rather ironic that, the same banks that government, persistently, frantically and actively supports with trillions of cheap interventions funds, are also the major beneficiaries of government’s Shylock debt obligations!  DMO issues and CBN’s Treasury bill offers are extremely popular because of the mouthwatering yields between 10-15percent, rates which are not consonant with risk free sovereign debts and are clearly well in excess of what obtains in international financial markets.  Currently, the Central Bank and the DMO inexplicably continue to borrow over N200bn monthly, from the same banks that enjoy tremendous government patronage with the hundreds of billions of naira ‘free’ public funds usually domiciled with them, whenever monthly allocations are paid to the accounts of the tiers of government.”  

The above is summary of an article published in Vanguard Newspaper in January, 2011.

Postscript 2017: Nigerian’s debt burden according to DMO is currently above $57bn, up from less than N4000bn (domestic) and ($3b external debt) in 2011! The debt level may however actually exceed $90bn, when contractors and over N5Tn AMCON’s toxic debts are also captured. However, as in 2011, the present Finance Minister, Kemi Adeosun, has again, inexplicably chosen the ‘Shylock’ commercial money market, rather than much cheaper, longer term multilateral loans (with 2-3percent cost of funds) which she had earlier suggested were readily available.

Invariably, the grossly inappropriate cash reserve requirements for banks and misguided and the distortional process of infusing our forex earnings into the economy, have spiked CBN’s borrowings with poisonously distortional rates from commercial banks from N200bn/month in 2011 to well over N600bn by January 2017. Thus, the banks, primarily, will earn over N600bn from such advances to CBN and the government in 2017!

It is inexplicable that we are precariously increasing the debt threshold even when CBN remains challenged with the “curse” of surplus Naira liquidity and while we also gleefully seek a $1bn loan with almost 8percent interest rate even when we presently sit on almost $30bn reserve base. Adeosun may celebrate the over subscription to the February 2017 $1bn FGN bond, regrettably however, she may have inadvertently triggered a new cycle that would propel Nigeria into a horrendous debt trap.