“Borrow to transform Nigeria’s economy, investment firm tells FG”
Contrary to high level criticisms on Nigeria’s rising debt profile, experts at FBNQuest Capital Limited have towed a different path; say Federal Government should borrow to transform the economy.
In January, the Central Bank of Nigeria’s Governor, Godwin Emefiele, after the Monetary Policy Committee cautioned FG about debt level on the ground of sustainability.
In the same manner, the International Monetary Fund in its assessment also added that debt stock is fast rising and could portend great danger.
Fitch, an international rating organisation, downgrade the nation’s sovereign rating having assessed the economic fundamental along associated political risks.
In a recent note, FBNQuest admonished government to borrow from concessionary and market sources in order to support drive to transform the economy into a production-based model.
The firm stated that FGN need to borrow to cover the deficit as if it does not, it cannot transform the non-oil economy.
Experts at the firm are of the view that Nigeria will remain a rent-seeking economy without the transformation.
Budget 2020 projects new external borrowing of N850 billion and the objective is to raise the funds from concessionary sources for the lower interest rates and longer tenors.
Analysts followed that any shortfall, the Debt Management Office (DMO) noted, can be raised from the market. Though, warnings about the FGN’s total indebtedness can be heard in many quarters.
“In our view it should not hesitate to borrow from concessionary and market sources if it wants to transform the economy into a production-based model”, FBNQuest Capital said.
The investment firm recalled that in 2016 the FGN had a similar strategy only that its multilateral partners were reluctant to lend to Nigeria.
“World Bank would not disburse anything, and the African Development Bank released just $600 million of the $1 billion requested”, FBNQuest stated.
It said this arose because the FGN requested budget support and therefore had to pass unspecified conditionality tests.
The government reportedly failed its exams because of objections to the CBN’s circular of June 2015 which listed 41 import items that would no longer have access to foreign exchange other than through the parallel market.
Now FG is looking for external financing for projects, which, we understand, is not subject to the same tests.
“It may be that the federal finance ministry will access project loans to cover the entire N850 billion. Timing is generally an issue however.
“The paperwork to secure such loans can consume much more time than, for example, the rapid process of tapping the Eurobond market”, experts noted.
Additionally, we note that the FGN had an external borrowing target (also of N850 billion) in the 2019 budget but pushed it back into the current year because of the successful harmonization of calendar and budget years.
The argument for caution is based upon an analysis of the indicators and upon the FGN’s track record for deploying loan proceeds over many years.
Experts said: “the debt stock ratio, even when we adopt a loose definition of public debt, is exemplary. It currently stands at less than 30 percent of GDP on a worst-case scenario that assumes, for example, that AMCON makes no more recoveries”.
Kenya’s latest comparable figure is 67 percent, FBNQuest Capital stated.
In its address on foreign exchange risk, experts recalled that as at end-September, the total public debt of the FGN and states combined was 31 percent external and 69 percent domestic.
The investment firm revealed that the external component was 41 percent commercial and 59 percent bilateral/multilateral on concessionary terms.
“Put differently, the FGN has $11.2 billion in commercial borrowings for a $350 billion economy at the NAFEX exchange rate. This is modest FX risk by any criteria”, it held.
The firm observed that the weakest link in the credit story is, of course, the debt service ratio.
“Total debt service consumed 68.6 percent of the FGN’s total inflows in 2017, and 55.9 percent in 2018 according to the implementation reports of the Budget Office of the Federation.
“Purists may object to the measure of total inflows, which consist of retained revenue plus assorted extras and one-offs such as transfers from special accounts and exchange-rate adjustments”, it stated.
FBNQuest held that the ratio is alarming, and reflects the dire history of tax collection in Nigeria.
“Gross federally collected revenue (i.e. for distribution to the three tiers) reached N7.1 trillion in 2017, equivalent to 6.2 percent of GDP.
“In 2018 it picked up to N9.6 trillion (7.5 percent). A frontier/emerging market should be generating more than 15 percent, and more than 20 percent if, like Nigeria, it produces commodities for export on a large scale that it can tax”, experts stated in the review.
The firm said Nigeria is moving in the right direction, albeit far too slowly. The increase in the standard rate of VAT takes effect from February, and the National Assembly has passed legislation that will boost the tax take from the oil industry.
“The mining of data for sharing between government departments and public agencies has started to pay off.
“More generally, coverage of the population will grow as financial inclusion rises.
“The ratio will also look better now that the borrowing rates on both FGN bonds and NTBs have fallen considerably in the last three months”, it stated.
“The wish list for improvement remains long, including: the removal of most tax exemptions; the strengthening of the judiciary to pursue tax defaulters.
“It also includes recover assets marked for confiscation; an increase in the remuneration of officials in the tax collection agencies: and education campaigns to encourage the payment of tax”, experts held.
FBNQuest said for the second argument for caution in new borrowing, the record for productive use of loan proceeds is poor.
It also acknowledged that the proceeds are often lost in funding recurrent spending.
“This, however, is not a reason not to borrow”, experts held.
The firm said estimates of the infrastructure deficit vary: we have seen figures of $100 billion or more, or $10 billion or more per year.
It estimated that the FGN’s capital spending amounted to about $5 billion equivalent in 2018.
“When we add contributions from the donor community, dedicated infrastructure funds and private equity, we are still well short of the annual requirement”.
“FGN could tap the Eurobond market quickly and offer a decent case to investors, based upon its external balance sheet.
“This would fund overdue capital spending and put a better gloss on official reserves. Investors have shown a little fatigue with issuers which have tapped the market regularly such as Kenya.
“Nigeria has not issued since November 2018, and there seems little doubt that an issue would be well received on competitive terms”, FBNQuest Capital noted.