Why Do We Still Borrow?

It is official! “As at now, our external indebtedness is as low as US$6.67 billion or about 3 percent of Gross Domestic Product, GDP.” Thus the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, putting value to a concept that only recently began to cause consternation amongst local commentators on the state of the economy.

The latter’s position, arguably deploying much larger values for the country’s gross external debt than the minister has so kindly obliged, has been essentially that we are headed into a “debt peonage” every inch as familiar and harmful as that which we allowed to build up in the 1970s and 1980s. The minister demurs. Not just is the final tally of our external debt (to date) much smaller than the doomsayers have indicated. Relative to our domestic output, it is piffling.

Indeed, the cost alone of servicing our previous debt burden, before we so graciously exited the trap, was in multiples of the current total external debt count — US$8 billion in 2006 and US$10.1 billion in 2005. And we owe this new debt, contracted on concessional terms, “to foreign creditors such as multilateral agencies [like the Africa Development Bank, World Bank, the Islamic Development Bank], as well as other bilateral sources [including the China Exim Bank, the French Development Bank or the Japanese Aid Agency], or to private creditors such as investors in our Eurobonds”.

So, may we ask, “What has changed?” The French critic, journalist, and novelist, Jean-Baptiste Alphonse Karr writing in 1849 (admittedly about matters quite different) put the problem we confront on our external debt pithily: “the more things change, the more they stay the same”! Those who worry about our “rising debt profile” appear to have forgotten the least and learnt the most. When in October 2005, the Paris Club of Creditor countries announced that it had reached agreement on a comprehensive treatment of Nigeria’s debt the following members of the Paris Club participated: representatives of the governments of Austria, Belgium, Brazil, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, the Russian Federation, Spain, Switzerland, the United Kingdom and the United States of America.
In addition, representatives of the governments of Australia, Canada and Norway as well as the International Monetary Fund, the World Bank, the African Development Bank, the European Commission, the Organisation for Economic Cooperation and Development and the Secretariat of the U.N.C.T.A.D. were observers to the negotiations.

Technically, therefore, in terms of the character of our creditors, not much has changed since 1970. Nor has much changed in terms of the conditions of the credit. We have nearly always borrowed from bilateral and multi-lateral sources on concessional terms. In those days too, creditors included gallingly seductive moratoria on initial service and repayment (often as long as 10 years) to sweeten the loan deals. And anyone who remembers the atmosphere in the 1970s, when higher oil prices meant a higher revenue take at the federal level will recall that most foreign “experts’ on our economy then did argue that we were under-borrowed. As indeed, the Honourable Minister of Finance may be suggesting in our new circumstance.

Experience does, however, teach that in Nigeria, the road from “under-borrowed and well able to meet debt service obligations” to “a debt trap and the regular capitalisation of due payments” takes a fork in the road where oil prices reach much lower than our domestic planners expected. There is strong reason to believe that we are nearing this junction. Therefore, despite the finance minister’s panglossian take on the subject, we do well to be very concerned.

Part of our problem is that we have failed to take advantage of relatively strong oil prices since 2004 to address structural imbalances in the economy, including our continued dependence on oil revenues for most of our spending, a huge and growing domestic debt burden, decrepit physical and social infrastructure, the dead hand of the public sector on the economy, etc. Essentially then, the economy is not much changed from 2004, just before the epic debt write-off.

I have heard arguments to the effect that similar to 2004 though it may be, the economy is different from what it was in the 1970s and 1980s. There have been changes, true, but, largely all at the margins. All of which (at present) is reversible, at any point, going forward. Thus, if we must borrow, it should be to change the structure of the economy in a way that supports its resilience and long-term growth prospects.