Olutayo Isaac writes
that the federal government’s decision to seek external help from international
organisations is perhaps one of the best economic decisions the President
Muhammadu Buhari-led government has taken in response to the country being in recession
The federal government
may not be left with too many options to get Nigeria out of its current
economic crisis as fast as Nigerians expect. But the recent announcement of
seeking external help from international organisations, perhaps, remains one of
the best economic decisions the President Muhammadu Buhari-led government has
taken in response to the country being in recession.
Buhari at a recent
Federal Executive Council (FEC) meeting approved a new external borrowing plan
to retract the country from the scourge of recession which has impacted eating
deep and fast negatively on the nation’s economy.
Data from the National
Bureau of Statistics (NBS) has indicated negative growth (a fall by -2.1%) for
three months to the end of June 2016. This makes it the second successive
quarter of negative growth report.
Economists are agreed
that a negative economic growth for two consecutive quarters is recession. It
is a period of economic decline during which trade and industrial activity are
reduced. It is generally indicated by a fall in GDP in two successive quarters.
Experts have fingered
the mono-product nature of the Nigerian economy as one the main reasons why the
country has found itself in the current economic crisis. The nation is largely
known to be an oil dependent economy, therefore facing the repercussions of
lack of diversification.
The NBS puts inflation
rate in Nigeria at 17.1 percent year-on-year in July of 2016, following a 16.5
percent increase in the previous month, compared to market expectation of 17.15
percent rise. It was the highest record since October 2005 as weak naira keeps
pushing up food prices.
For an economy that
has largely depended on revenues from crude oil production, coping with the
crash in oil prices, which has by extension resulted in inflation and foreign
exchange scarcity, it is indeed high time it sought help externally in ways
that would once again stimulate economic activities.
Seeking External Help
Borrowing from
multilateral organisations is not an uncommon practice by nations faced with
economic challenges. As a matter of fact, some developed nations depend heavily
on borrowing to sustain their economies. It has been argued that such countries
that borrow from international organisations to support investment will always
be better off in the future if the investments are profitable.
In as much as
Nigerians would be supportive of the idea of reducing the country’s external
debt, many would frown at government policies that advocate increase in VAT,
higher pension age and the likes. There are assumptions that it is even more
politically damaging for a government to increase taxes than to borrow,
particularly in a period of recession such as Nigeria is faced with.
The Federal
Government, at this point in Nigeria’s economy, has a legitimate reason and the
best opportunity on its decision to borrow externally, particularly when such
borrowing would be tied to major capital projects which would in turn raise the
standard of living of citizens.
Capital projects and
infrastructure spending have always been indications of economic growth over
the long terms in any economy. If the federal government makes huge
infrastructural investments, quality jobs can be created and the Nigerian
economy can once again gain confidence that it requires.
In essence, the
federal government must invest massively in infrastructural projects such as
roads, refineries, power, transportation, etc.
The federal government
will have to source or take only project driven loans with single digit interest
rates. That is the government should be looking out particularly for
multilateral loans with very low interest rates and with long duration of
repayment period; twenty five to thirty years.
Multilateral funding
sources remain important sources of funding for governments looking to better
livelihoods in their nations. Many of these sources have at the core of agenda,
poverty alleviation projects, environmental projects and the likes. Basically,
they pay attention to capital projects that have the potentials to improve
peoples’ lives.
The benefits tied to
borrowing from multilateral lenders cannot be over emphasised as Nigeria has
been encouraged to seek economic help from these institutions.
The IMF managing
director, Christine Lagarde, during her visit earlier in the year, advised
Nigeria to seek economic help from international institutions, specifically
noting that the IMF was willing and ready to assist Nigeria if it sought help
from the institution.
She emphasised the
urgent need for the country to massively diversify its economy in order to stop
depending exclusively on dwindling oil revenues.
Nigeria is obviously
not buoyant enough to embark on the massive diversification process. This
indeed is the right time to look for help from external sources. If the fund
the Federal Government intends to borrow from multilateral sources is properly
invested, the economy can be sure to find its feet once again.
Due to the autonomous
nature of most multilateral agencies, interactions between them and the federal
government, while official, can remain less politicised when compared to
inter-governmental links or even from the Nigerian capital market or private
sector.
Multilateral loans are
also usually characterised by single digit interest rates.
Loans sourced from
multilateral organisations are largely characterised by rigid auditing and
reporting, hence capital projects agreed upon by the federal government and the
lender are more likely to reach full execution with less or no compromise
because these agencies will monitor economic developments and new policies by
the government and ensure that existing conditions are kept.
The Hitches
Borrowing from
multilateral sources however comes with tedious processes due to their regional
and global structures. Their policies and priorities are usually determined
through complex consultative processes between members and partners.
Also, influencing
their priorities sometimes to align with what the government may feel is best
for its people could be daunting. The federal government may have to go through
some of these cumbersome procedures which usually require some time.
The IMF for instance
under concessional and non-concessional arrangements approved by the IMF
Executive Board require the member to observe specific terms and subject to
periodic reviews in order to continue to draw upon the loans.
However, when one
looks at the benefits of borrowing externally, the hitches attached to the
process become of less concern.
The Director General
of Debt Management Office (DMO), Dr. Abraham Nwankwo, during a speech at a
workshop held in Kaduna State said that the Nigerian economy remains resilient
and diversifiable despite the nation’s huge debts. He encouraged the Federal
Government to draw on the positive side of borrowing.
According to the DMO,
Nigeria’s external debt profile now stands at $11 billion with the domestic
debt hitting 11 Trillion Naira (about $55.2 billion). The Central Bank of
Nigeria (CBN) revealed that external Debt in the nation averaged 375.33 USD
Million from 2008 until 2015.
It was initially
argued that the country’s debt profile can best be maintained by reducing the
level of external borrowing and increasing the rate of domestic borrowing;
precisely 84% domestic borrowing to 16% external borrowing.
The implication of
this however is that the federal government would have to depend largely on the
nation’s private sector that is already enmeshed in the ongoing recession in
order to run the economy. In essence, the country cannot sustainably depend on
the private sector to bring the country out of recession.
More so, when compared
to multilateral loan, domestic borrowing comes short of two things among
others; first, it lacks the open-handedness to give very low interest rates and
secondly, they don’t have the luxury of convenient grace periods.
*Olutayo Isaac contributed this piece.
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