Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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Subjects of Interest
- Financial Market
- Fiscal Policy
Now that Chinese loans have revived interest in Nigeria’s sovereignty 21 Sep 2020
On October 1, 2020, it would be 60 years since Nigeria became a sovereign state by obtaining political independence from colonial Britain. Seven days after the green-white-green-colour flag replaced the Union Jack in the Nigerian territory, the country became the 99th member-country of the United Nations. Since then, and all through the Civil War in 1967 – 1970, Nigeria’s sovereignty was hardly externally threatened.
Nigeria’s internal sovereignty has been far less assured. For over a decade now, the military has been fighting to dislodge Boko Haram, a home-grown insurgency group, of control of any Nigerian territory it has held in the northeast. But law and order, which is important to internal sovereignty of any country, has all but broken down in Nigeria. Rampant communal clashes and killings, banditry, and kidnapping have been the order of the day in various parts of the country.
After decades of denying the people their right to freely give their mandate to those who should govern them, the number of Nigerians who vote during general elections has been falling since the 2003 general election cycle. The competition for power has only deepened divisions across ethnic and religious lines. Nigerians that are not leaving the country to seek greener pastures in other countries, are increasingly defining themselves by their ethnicity and religion, not by their citizenship, to access public sector opportunities and for solidarity.
Then, all at once, in early August, Nigerians seemed to be concerned about the country’s sovereignty again. This was on discovering a clause in a $500 million infrastructure loan agreement between the country and China. The clause stipulates that Nigeria would “irrevocably” waive its sovereign immunity in the execution of arbitral judgement that may be pursuant to the relevant article of the loan agreement. The public concern was raised by the House of Representatives Committee on Treaties and Agreements investigating Nigeria’s infrastructure loans with China.
Nigerians understand that things can get much worse than they currently are in the country, even if they are lethargic towards joint actions at addressing the risk of a socio-political implosion. Indeed, there has been a systematic and progressive worsening of key political, social and economic indicators in the country. Yet, there has been little assurance that the trends would reverse and start going in the right direction. The possibility that the contentious clause could be triggered is believed to be real, as many Nigerians believe that the country’s public debt is already unsustainable.
Taken in isolation, the concern that the $500 million loan would lead to the erosion of Nigeria’s sovereignty may be dismissed. This is not simply because the loan clause is not unusual in many such contracts. As of March 31, 2020, Nigeria’s total outstanding external debt was $27.66 billion. According to data by the Debt Management Office, the country’s total loan from China was $3.12 billion as of March ending. In the worst-case scenario of default, not only of the loan owed to China, which constituted just 11.2 per cent of Nigeria’s total external debt, the Nigerian government has enough assets to sell and defray its then-outstanding financial obligations to all its external creditors.
But it would, nevertheless, be a mistake to overlook the public concern for two major reasons. The first is that the fiscal strategy of the President Muhammadu Buhari’s administration leans heavily on borrowing. In less than five years, the administration has added N14.5 trillion to the public debt, nearly two-and-half-fold increase from the total public debt of N12.1 trillion in Q1 2015, to N28.6 trillion in Q1 2020. That strategy has been pivoted to increase external borrowing, relative to the size of domestic borrowing. Accordingly, the size of Nigeria’s external debt, as a percentage of total public debt has increased from 16.1 per cent in Q2 2015 to 34.9 per cent in Q1 2020.
Accordingly, while the Minister of Transportation, Rotimi Amaechi, was assuring Nigerians that the contentious Chinese loan clause was a risk that would hardly materialise, when he appeared before the afore-mentioned House committee, he said Nigeria was already negotiating a new loan with China. He didn’t want the inquest by the legislative committee to jeopardise the chances of the country in securing the next loan from China.
Regardless of the potential economic impacts of the China infrastructure project loans, Nigeria’s public debt could quickly become even more unsustainable. Before the COVID-19 pandemic, debt service was gulping more than 60 per cent of government’s total revenue. However, at the onset of the economic devastation the pandemic has brought about, debt service as a percentage of government revenue reached 99 per cent in Q1 2020. Without significant recovery in the prices of crude oil, and given that the outlook of taxation in the non-oil sector is now grim (the non-oil sector contracted by 6.05 per cent in Q2 2020), Nigeria is entering a steeper and more dangerous phase of its debt spiral.
The second reason for concern is that, going forward, the federal government will have practically nothing left of its revenue to invest in social development and building resilience in the economy after addressing its debt service obligations. This is at a time the COVID-19 pandemic has laid bare the deplorable state of healthcare in the country. The need to make significant new investments in both in-person and elearning infrastructure in a post-COVID-19 world is also apparent and pressing. According to the World Bank, additional 7 million Nigerians are set to fall below the extreme poverty line in 2020.
Mr. Amaechi gave a visceral assurance that Nigeria was not on course to lose its sovereign immunity on account of the China loan. Beyond Nigeria’s de jure sovereignty, the government has affirmed the country’s de facto sovereignty is not under threat. But it would take more than mealy-mouthed declarations from a government that insists on doubling down on its wrong-headed fiscal strategy, and who would be long out of office when the debts are due for repayment, to protect the country from a looming, disastrous debt default.
But with Nigeria’s sovereignty seemingly to matter again, it is important that the government re-evaluates its fiscal strategy, allowing an independent modelling of Nigeria’s debt sustainability, and taking the advice of such modelling result. Whereas the Chinese project loans may actually deliver the capital projects, keeping such infrastructures operational over the long-term is a challenge the country had failed to meet in the past. The pre-independence Nigerian rail lines progressively went into disrepair until the current so-called rail revival with Chinese loans, Chinese expertise and Chinese labour.
It is simply misguided to talk of a rail revolution in Nigeria that does not include local technological know-how. Also, the rail projects have been unable to create significant local jobs. The journey into Nigeria’s rail future has seemingly left the people behind. This journey is not sustainable.