Jonathan Goodluck Must Take Note of This Greek Tragedy

Dr. Goodluck JonathanThe Greek tragedy has been a long time in the making. Decades of reckless spending has saddled Greece with debts it cannot afford. The economy is a basket case and the financial markets have had enough. Greek debt is rated as “junk” and the cost of borrowing has soared as those lenders still prepared to deal with Greece demand ever higher returns. The Nigeria Acting President must take note of this Greek tragedy.

Last week the Federal Government announced they have borrowed US $915 million from the World Bank to finance an expected deficit in the 2010 budget. This is contained in the highlights of the budget signed by Acting President Goodluck Jonathan.

On Thursday, April 22, 2010, The Nigerian Minister of Finance, Mr. Olusegun Aganga, said that media reports that the federal government was to borrow about U S$ 950 million to finance the 2010 budget were ‘absolutely wrong’. Mr. Aganga told journalists after witnessing the signing of the 2010 budget by Acting President, Dr. Goodluck Jonathan that the government would not borrow to fund the budget.

Instead, he said, the deficit in the budget would be financed through other sources of revenue, including the sales of some assets and about US$ 500 million bond to be raised from the international market.

Yet while Aganga was lying through his teeth, Jonathan was drafting a badly mangled letter to the deputy Senate president asking the Senate to approve “the 2010 External Borrowing Plan of the Federal Government”.

The Senate wasted no time to give Dr Goodluck Jonathan the approval to borrow the sum of N138.165bn ($915 million) from the World Bank, “part of which would be used to finance the 2010 budget”.

Though the senate approval was unanimous, some members of the opposition All Nigeria Peoples Party, ANPP, cautioned that the utilization of the loan must be properly monitored.

It is unconscionable for the government to deceive the public on what their real intentions are.

The last time we checked “”floating bonds” as touted by Aganga constitute a form of “debt equity” and is a fancy economics terminology for a form of “borrowing with a corporate or Govt guarantee”. There are interest’s charges as well, although usually fixed.

A concerned Nigerian, Joe Igietseme asked the government to “quit all these sophistries and legerdemains that dribble the public around the whole place; but in the end the PEOPLE SUFFER! People should know what they are getting into. Honest leadership rather than manipulative and confusing leadership is the best principle to lead Nigeria out of her present mess.

Nigeria’s foreign debt has risen slightly since Nigeria left the Club of Paris of international creditors four years ago, but internal debt has soared. Foreign debt rose marginally by 447 (million) US dollars since Nigeria left the Paris Club, the debt management office (DMO) said, referring to the group of creditor countries.

“Between 2006 when Nigeria exited the Paris Club debts and December 2009, the external debt stock increased from 3.5 billion USD to 3.947,” the office said.”The increase of 447 million dollars arose mainly from net disbursements, on existing World Bank concessional loans,” it said. But the amount of domestic debt rose significantly from 1.75 trillion naira in 2006 (11.64 billion dollars) to 3.2 trillion naira in 2009, or 11.76 percent of gross domestic product.

Applicable critical limit for countries in Nigeria’s economic peer group is 40 percent, the statement said.

Recent positive ratings of the Nigerian economy by Standard and Poor’s and Fitch rating agencies suggested Nigeria’s positive economic outlook for the year 2010. But sharp rise in domestic debts and more reliance on external borrowing can threaten this positive rating.

The IMF is said to be considering raising the value of its €45 billion rescue package to Greece. The IMF delegation is in Berlin to persuade the German government to commit to a bail-out. Credit ratings agency Standard and Poor’s has now downgraded Greece’s credit notes to junk bond status. Such agencies are all too fallible, having got so much wrong in the run-up to the credit crunch, but on the matter of Greece they reflect a general view: its economy is bust.

Athens has called in the European Union and International Monetary Fund but the proposed 45 billion euro bailout is being delayed by political infighting in Germany. So a meeting of eurozone leaders to approve the rescue package will not take place until May 10 once the German elections are out of the way. That leaves European markets at risk. Even big Countries like Britain are at risk of large sovereign debts.

Delay in approving help for Greece leaves Europe’s Pigs — Portugal, Ireland, Greece and Spain — at the mercy of the bloodthirsty financial markets for the best part of two weeks. Even if the bailout is approved, and arrives in time for Greece to repay €8.5 billion of debt on May 19, questions remain over how it will tackle its problems thereafter.

I repeat; Nigeria’s Acting President must take note. The credit crunch is spreading — from households, to banks to countries. Entire regions are at risk. Sovereign debt is the new sub-prime.

In asking for Senate approval, Jonathan claimed “that Nigeria is in dire need to fund the huge infrastructure deficit critical to rapid development and the highly concessionary credit facilities offered by Multilateral Agencies to which Nigeria belongs and commits substantial resources as affiliation fees, has been identified as an inevitable source to compliment the budgetary allocations as appropriate”.

Yet, barely 24 hours after the Federal Government announced they have borrowed US $915 million from the World Bank to finance an expected deficit in the 2010 budget, the Federal Government announced they will open a separate account for the windfall from oil price this year. The windfall is expected from excess earnings outside the $67 per barrel of oil benchmark for the budget.

We note that at Nigerian production quota levels set at 2.25 million bpd, The Country earns $150.75m per day at the budget earnings of $67 per barrel of oil benchmark for the budget.

Today, with the price of oil hovering around $83pb, that could mean Nigeria earnings of $36m windfall is expected from excess earnings per day.

That could mean the sum going into the separate account for the windfall from oil price this year could amount to $13.14billion in 2010 and the Accountant-General of the Federation has been mandated to open the special account to lodge the windfall.

Under this scenario, why should The Federal Government under Acting President Goodluck Jonathan borrow $1bn from World Bank?

Jonathan also said “The World Bank Portfolio of the facilities totalling $915 million out of which $179 million would be drawn in fiscal 2010 is of particular essence as it would be deployed to Urban Water and Transport. Human Capacity Development and Power infrastructure projects across the country”.

In other words, out of the $915 million loan, $179 million (N27.02bn) will be used to fund the 2010 budget while the remainder would be used to tackle infrastructural challenge in the area of power, roads and other critical sectors.

With the history of money borrowed from the World Bank going into private pockets, some Nigerians simply believe they are borrowing  the $1b to have more $$ to share- to build the PDP war chest in preparation for the 2011 election.

Significantly during debates, Senators, Ahmed Lawan and Mohammed Mohammed, both of the ANPP who though supported the approval of the senate for the Federal Government to access the loan, were sceptical about its proper utilisation.

Senator Lawan said, “In as much as I support the loan, I want to know what exactly those projects that the money will be used for. I think it will also be proper for the government to tell us the communities that will benefit from the loan in the rural areas development scheme”.

We recall that we exited our debt burden with the Paris and London Clubs after shelling out over $13bn of reserves. Worse still, no one could identify the successful projects, if any, that the previous loans had funded. 

It was against this unsavoury background that the Senate Committee on appropriation, rightly objected in December 2008 to Senate approval for a fresh loan application for $500bn by President Umaru Yar’adua. 

The Senate Committee headed by Senator Omisore, called for caution in incurring such ‘foreign’ debt and regretted that even after the re-emergence of non-military rule, in 1999,  NASS had never until now been brought into such loan process as required by the constitution.

In support of the veracity of this observation, we recall the loans unilaterally consummated by the former President from the Republic of China for the power sector and the reengineering of the Nigerian Railways.

Sadly on Wednesday, 21/1/2009 The Senate brushed aside the initial opposition from their ranks to approve President Yar ‘Adua’s request for $500m naira denominated bond from the international capital market.  Thus, the government obtained Senate approval to borrow the naira equivalent of $500m, which would be repaid at the current naira exchange rate in 2019! 

In view of the devaluation of the naira, the naira equivalent may have increased to N75bn by then.

According to Les Leba, “If the economy continues to be mismanaged and our export earnings are as usual stolen by treasury looters or frittered away on white elephant projects, it would be fair to assume that we may actually be repaying a capital sum of over N150bn in ten years, if our naira depreciates by about 100% to N300/$1.  This may not be an unusual depreciation, if we recognize that the naira was barely N80/$1 up to 1998”!

On the domestic front, we also recall the rapid accumulation of local debts particularly through bond issuance by almost N2000bn within four years.  There is practically nothing to show for these loans, and it seems that these loans were incurred specifically for non-tangible purposes with dubious and immeasurable yardsticks!

The mind boggles as to what ends the huge sums of monies borrowed funds were actually applied!

Jonathan said the money was needed because Nigeria was in dire need of funds to finance an infrastructure deficit, which he said is critical to rapid development.

But these borrowings certainly could not be for funding federal budget deficits, as our revenue from all sources at current oil prices exceeded our expenditure. 

As noted above, while the Federal Government announced they have borrowed US $915 million from the World Bank to finance an expected deficit in the 2010 budget, the Federal Government also announced they will open a separate account for the windfall from oil price this year. Who is fooling who?

Moreover, Nigeria currently has more than $42 billion dollars in foreign reserve. So, why borrow $1 billion dollars and become indebted again that would soon accumulate interest?

With the sordid history of dedicated accounts in the country starting from IBB’s Gulf windfall and OBJ’s ECA account from which 16 billion dollars was looted through IPP projects, why don’t we rather use the excess earnings outside the $67 per barrel of oil benchmark for the budget to fund the budget rather that borrowing from the World bank? 

Why does the Federal Government of Nigeria need to borrow and be indebted to the World Bank again?

One can only imagine that the funds were simply stored idly in CBN vaults or accounting records in spite of annual interest payments of between 12 – 17% for such borrowings, just for the joy of it, only if that were so.

On Wednesday, 21/1/2009, the Senate Committee on Appropriation in a spirited attempt to do the right thing noted as follows in its response to the Executive request:  “…the ultimate goal for the implementation of any public sector programme or project is to enhance the welfare of the citizenry.  The purpose by FMF, therefore, focused on the means, rather than the ultimate end of any capital flow.  Such sweeping statements have led the nation into unbridled procurement of externally-sourced loans, only to regret thereafter”

The net benefit of this market-based loan must be convincingly articulated. FGN needs to demonstrate concisely the extent to which the procurement of the loan would enhance the welfare of the citizenry.

As noted earlier, the nation has never prudently utilized external loans for the public sector, since the loan procured in 1957 for the construction of the national rail network.  FMF should, therefore, demonstrate the fundamental institutional improvements towards achieving the stated benefits of this and other forms of external borrowing.

“Research evidence has adjudged the debt sustainability criteria being employed by FMF/DMO as misleading and lacking any theoretical underpinning.  It is also geared towards a nation’s perpetual dependence on loans rather than real development.

Recourse to borrowing for development financing should be a stop-gap measure, and not a perpetual life support facility. 

On the claim that the loan is needed to “finance an infrastructure deficit”, the National Economic Empowerment and Development Strategy (NEEDS) places much emphasis on Public Private Partnership (PPP) as a major source of development financing.  Leba said “The continued emphasis on external borrowing by the public sector negates this orientation, and calls to question our real commitment towards evolving a private sector-led market-oriented national economy”

No rational person would thumb their nose at debt accumulation if the funds so acquired are applied to critical infrastructural projects for public welfare enhancement; but a situation where there is nothing to show for past loans, and with no verifiable façade of discipline or accountability in the use of public funds, it would be folly to expect that the application of the current $915 million and indeed any other loan whether domestic or external would be to the benefit of Nigerians.

Regrettably, the matter is already foreclosed by the Senate; it is not clear if the House of Representatives will stand up on the side of the people, and also ask why the CBN is selling billions of our dollar reserves to Bureau de change every month, while we go borrowing $915 million with cap in hand, from the international capital market! 

Finally, Jonathan said the he is borrowing for infrastructural development around the country, but as far as anybody knows, the man has a few months left in office. He should be tidying things up, NOT increasing our debt load.