Chinese loans to Nigeria, what you need to know
Amount and terms of the loans
- China is not a major source of funding for the Nigerian Government – DMO
- Can China take possession of the projects financed by them if Nigeria defaults in the servicing of the loan?
The Debt Management Office (DMO) has sought to clarify issues and state the facts about China’s loans to Nigeria, following various statements and reports credited to several persons on the subject, so as to guide members of the public properly.
The DMO states that the total value of loans taken by Nigeria from China as at March 31, 2020, was $3.121 billion. This represents only about 3.94% of Nigeria’s total public debt of $79.303 as at March 31, 2020. Similarly, in terms of external sources of funds, loans from China accounted for 11.28% of the external debt stock of $27.67 at the same date.
This shows that China is not a major source of funding for the Nigerian Government.
Terms of the Loans from China:
The afore-mentioned loans are concessionary loans, with interest rates of 2.5% per annum, tenor of 20 years, and a moratorium of 7 years. The terms and other details of the loans are available at the DMO website.
The terms are compliant with the provisions of section 41 (1a) of the Fiscal Responsibility Act, 2007. In addition, the low interest rate reduces the interest cost of government, while the long tenor enables the repayment of the principal sum of the loans over many years. These two benefits, make the provisions for debt service in the annual budget lower than they would ordinarily have been if the loans were on commercial terms.
What the loans were used for:
The $3.121 Chinese loans are project-tied loans. Some of these 11 projects as at March 31, 2020, are Nigerian Railway Modernization Project (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos and Port Harcourt), Nigerian Railway Modernization Project (Lagos-Ibadan section), and Rehabilitation and Upgrading of Abuja-Keffi- Makurdi Road Project.
As stated by the DMO, the impact of these loans is not only evident but visible. For instance, the Idu-Kaduna Rail line has become a major source of transportation between Abuja and Kaduna.
Also, the new International Airport in Abuja, has improved air transportation for the populace, while the Lagos-Ibadan rail line when completed, will ease traffic on the busy Lagos-Ibadan expressway.
How the loans were obtained:
The principal process and requirements for borrowing by the Government are expressly stated in the Debt Management Office Establishment (ETC) Act, 2003 (DMO Act) and the Fiscal Responsibility Act, 2007. Section 21 (1) of the DMO Act, “No External loan shall be approved or obtained by the Minister unless its terms and conditions shall have been laid before the National Assembly and approved by its resolution” and Section 41 (1a) of the FRA, “Government at all tiers shall only borrow for capital expenditure and human development, provided that, such borrowing shall be on concessional terms with low interest rate and with a reasonable long amortization period subject to the approval of the appropriate legislative body where necessary,” are instructive in this regard.
The Federal Ministry of Finance, Budget and National Planning works with MDAs under whose portfolio a proposed loan falls and also with the DMO. Thereafter, the approval of the Federal Executive Council (FEC) is sought.
It is after the approval of FEC that the President sends the request to the National Assembly for approval, as required by Section 41 of the Fiscal Responsibility Act 2007. It is only after the approval of the National Assembly that the loans are taken and Nigeria begins to drawdown on the loans.
The loan agreements are reviewed by legal officers of the Federal Ministry of Justice and the legal opinion of the Attorney General of the Federation and Minister for Justice is obtained before any external loan agreement is signed.
Can China take possession of the projects financed by them if Nigeria defaults in the servicing of the loan?
In order to douse that fear, the DMO points out that Nigeria explicitly provides for Debt Service on its External and Domestic Debt in its Annual Budgets. This means that debt service is recognized and payment is planned for. In addition, a number of the projects being (and to be) financed by the loans are either revenue generating or have the potential to generate revenue.