BY HENRY BOYO (Twitter.com/betternaijanow)

The Federal Executive Councils’ approval to refinance an estimated N915bn ‘Naira denominated’ Treasury bills by borrowing $3bn from external sources, was announced by Finance Minister, Kemi Adeosun, after Council meeting on 9th August 2017.
A report titled “To Finance $3bn T/bills with dollar debt” in Punch newspaper of 10th August, narrates the Minister’s defence of this additional foreign debt. Hereafter, excerpts from Adeosun’s explanations, will be followed by this Column’s comments. Kindly read on.

FINANCE MINISTER: “$3bn worth of T/bills will be refinanced into dollars. So, as the Naira T/bills mature, we will be issuing dollar instruments. We are not increasing our borrowing; we are simply restructuring. Instead of borrowing naira, we are borrowing dollars.”

COMMENT: In practice, T/bills are government debts which mature for interest and repayment within 3-12 months. Ironically, the borrowed funds are deliberately sterilized from any tangible application, as the objective of such loan is to remove perceived excess Naira supply, that could spur a destabilising inflationary spiral, which will compel CBN to induce higher cost of borrowing to discourage banks from lending liberally to customers, because such loans will inevitably propel increasing consumer demand that cannot be readily satisfied from domestic production.
Alarmingly, Banks can now earn upto 18 percent interest, annually, to lend their excess Naira stock to government, who will in turn, sterilize the borrowed funds from use, to restrain inflation.

Sadly, since these loans do not yield any profit, government simply prints more Naira to pay interest, when loans mature. Thus, even if Naira further depreciates before such loans, ultimately mature, government’s capacity to repay is never in doubt.

However, servicing interest charges on Naira T/bills with borrowed dollars is another kettle of fish; clearly, since borrowed funds are not applied to productive investment, there can be no returns. Invariably, therefore, annual interest and eventual repayment of the $3bn T/bill loan, will gulp government forex revenue and reduce spending on vital industrial and social infrastructure. 

Nonetheless, despite the Minister’s assurance, total foreign debt will actually rise above the present $11.41bn with an additional $3bn loan. Worse still, if the expectation for higher internally generated revenue fails, because of irrepressible inflation, high cost of borrowing and weaker Naira exchange rates, we may, ultimately require additional borrowing to service and repay an increasing oppressive debt burden annually.
MINISTER: “The advantages are two: one is cost reduction. The average rate at which we borrow internationally, is at 7 percent; whereas we are paying between 13 percent and 18.5 percent on our Treasury bills. Thus, we are almost halving the cost of borrowing and this is to try and reduce pressure on debt service.” 

COMMENTS: Incidentally, the Minister warned in July this year that we can no longer borrow, since Nigeria’s debt service/revenue ratio was already, uncomfortably, beyond 50 percent of aggregate revenue; she had therefore suggested that the drive for other internal revenue sources will be intensified. Consequently, the apparent celebration of a fresh $3bn foreign loan to refinance a zero utility debt, is arguably, a gross disservice to the remediation of our critical social infrastructural deficit.

Nonetheless, the acclaimed superior 7 percent interest rate, on this loan, is ironically, actually applicable to ‘mismanaged’ economies such as ours; better managed economies pay much less on their sovereign, risk free borrowings.
Besides, a sincere appraisal, will clearly reveal why government, inappropriately, pays such high interest rates for its loans, in a domestic market that is constantly flush with surplus Naira, and over which government also has absolute control over Naira supply.

MINISTER: “The second thing is that we will be spreading the maturity profile of the debt. All our T/bills mature within 364 days maximum. We will be taking that borrowing ($3bn) out for up to three years, in the expectation that, as the economy recovers and grows, we will be in a better position to repay, instead of just rolling over the debt, just as we are doing now.”

“So, by reducing government’s borrowing by $3bn, we will be creating more room for banks to lend to the private sector and hopefully that will also create some downward pressure on interest rate, which we all agree needs to come down.”
COMMENT: Clearly, Nigeria’s economy will continue to totter, if inflation and cost of funds remain in high double digit rates. Besides, any expectation of rapid economic growth before 2020 will sadly be misplaced because of the presence of unceasing surplus Naira liquidity which continues to drive inflation, cost of funds and weaker Naira rates. Consequently, unless the perennial burden of excess Naira supply is minimized, we may actually end up borrowing more, with disturbingly higher interest rates to service Nigeria’s sovereign debts; ultimately, well over 60 percent of aggregate revenue may, sadly, be required to service debts.

Furthermore, with CBN’s projection to borrow and remove about N7tn excess money supply in 2017, the annual reduction of N305bn, in debt service charges before 2020, will not really make a significant difference in bank lending to the productive sector; notwithstanding, interest rates will remain high so long as irrepressible excess Naira liquidity continues to fuel inflation.

MINISTER: “It ($3bn loan) actually increases our foreign reserves. If you look at our debt profile, 80 percent is in Naira and that is actually challenging the economy because government is borrowing heavily. There is no room for the private sector to get loans from the banks and there is no incentive for banks to lend to the private sector.”
COMMENT: In practice, a predominantly domestic debt profile is a sign of good economic management, as the economy is well shielded from the destabilising influence of nimble footed international portfolio investors, who have no interest in leaving any productive footprint in any country.

Furthermore, the persistent flood of excess Naira liquidity that forces CBN to crowd out the real sector with high interest rate mop ups, clearly suggests that there is actually no shortage of funds. However, it is also inexplicable that borrowing should cost more when money is undeniably in excess supply. 
Instructively, if excess liquidity remains untamed, CBN’s heavy borrowings to reduce money supply will invariably still crowd out productive investment.

The unsavoury reality of course is that CBN’s inability to effectively and efficiently manage money supply and tame inflation, is actually the primary cause of excess liquidity, double digit inflation, high cost of funds and a weak Naira.
Invariably, if government pays very high interest rates for its risk free sovereign loans, in a market that CBN recognizes to be suffocated with excess money supply, even a bank managed by angels, will rationalise that, it is clearly less risky to lend to government than to expect any serious business to survive and successfully repay loans with 20 percent and above interest rates.

MINISTER: “It (loan process) will commence when the National Assembly resumes. We will need the resolution to be able to do this. As soon as that is done, we have already negotiated with the various lenders and they are ready to do this.”
COMMENT: Instructively, we will pay about N190bn as service charges on this $3bn (N915bn) loan within three years; the huge service charge and full repayment will invariably increase in step with further Naira depreciation beyond N305=$1. Consequently, if further demand pressure and low crude oil prices crash Naira beyond N600=$1, we will need over N1.3tn to service and repay the present presumed modest $3bn. 

Instructively, CBN has the mandate for issuing Treasury bills in its management of monetary policy, but it is not clear how CBN regards Adeosun’s present digression from her own Ministry’s clearly chellenging fiscal responsibilities.
Nonetheless, the National Assembly should arrest this present madness and resist this $3bn loan!