The trending issue around Chinese loan that is been probed by the National Assembly has awaken Nigerians to the reality that our borrowing habit will negatively affect the economy in the nearest future.
As at first quarter of 2020, figures obtained from the National Bureau of Statistics revealed that our external debt has accumulated to N9.987 trillion ($27.67 billion). Domestic debt increased to N18.641 trillion ($51.64 billion) in the first quarter of 2020. Overall Nigeria’s total public debt portfolio is N28.628 trillion ($79.30 billion).
Breakdown of our foreign debt profile reveal that 45.75% of the total foreign debt came from multilateral bodies (World Bank Group and African Development Bank Group). From World Bank Group (IDA and IBRD), Nigeria borrowed a total of $10.099 billion (N3.65 trillion). From African Development Bank Group (ADB, AGTF, ADF, BADEA, EDF, IDB, IFAD), Nigeria borrowed a total of $2.56 billion (N923 billion).
Debt from bilateral relationship with other countries is 13.89% of the total foreign debt. Interestingly out of this 13.89%, loan from china alone is 11.28%. We have a debt of $3.121 billion (N1.13 trillion) with Exim Bank of China. In order words loan from China is 11.28% of our total external debt. Other countries where Nigeria have borrowed money include: France ($408.32 million), Japan ($76.15 million), India ($33.84 million) and Germany ($201.98 million).
Debt from Eurobonds is $10.868 billion (N3.92 trillion) which translates to 39.28% of the total external debt; while Debt from Diaspora Bond is $300 million (N108 billion).
Chinese Loan Probe
The recent probe of Chinese loan clause by the National Assembly has generated concerns from Nigerians as majority perceived that Nigeria may cede sovereignty to China. The loan clause of “Sovereign Guarantee” on the recent $500 million loan request for Railway Project was what generated the argument between the National Assembly and the Minster of Transportation.
Findings have shown that China had in the past been accused of allegedly applying irregular and underhand pressures in the structure of its loan agreements with countries. The Minister of Transportation, Rotimi Ameachi however dismissed fears of Nigeria ceding its sovereignty to China under any guise, explaining that the Sovereign Guarantee clause in the loan agreement was to assure China that it can take over the asset constructed with the loan, should Nigeria default.
Facts about Chinese Loans to Nigeria
- As at March 31, 2020, the Total Borrowing by Nigeria from China was $3.121 billion. This amount represents only 3.94% of Nigeria’s Total Public Debt of $79.303 billion 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 billion at the same date. These data, show that China is not a major source of funding for the Nigerian Government.
- The Total Borrowing from China of $3.121 billion as at March 31, 2020, are concessional Loans with Interest Rates of 2.50% per annum, Tenor of Twenty (20) years and Grace Period (Moratorium) of Seven (7) years. These 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 to 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 otherwise have been if the Loans were on commercial terms.
- The $ 3.121 billion loans are project-tied loans. The projects, (eleven – 11 in number as at March 31, 2020), include: Nigerian Railway Modernization Project (Idu-Kaduna section), Abuja Light Rail Project, and Nigerian Four Airport Terminals Expansion Projects (Abuja, Kano, Lagos and Port Harcourt), Nigerian Railway Modernization Project (Lagos-Ibadan section) and Rehabilitation and Upgrading of Abuja – Keffi- Makurdi Road Project.
- 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.
- The projects also have the added benefits of job creation, not only by themselves but through direct and indirect service providers, a number of which are Small and Medium Enterprises. It is widely accepted that investment in infrastructure is one of the most effective tools for countries to achieve economic growth and development. Using Loans from China to finance infrastructure is thus in alignment with this position.
- 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 the 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 only after the approval by FEC that the President requests for the approval of the National Assembly (NASS) as required by Section 41 of the Fiscal responsibility Act, 2007. More importantly, it is only after the approval of NASS that the Loans are taken and Nigeria begins to drawdown on the Loans. In summary, borrowing is a joint activity between the Executive (FEC) and the Legislative (NASS) Arms of Government.
- The Loan Agreements are reviewed by legal officers of the Federal Ministry of Justice and the Legal opinion of the Honourable Attorney General of the Federation and Minister of 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?
Nigeria explicitly provides for Debt Service on its External and Domestic Debt in its Annual Budgets. In effect, this means that Debt Service is recognised 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.
What if Nigeria defaults?
Every loan has its terms and conditions. According to the clause for the Chinese loan, in case of default, the railway project financed with the loan will be taken over by China, and they will run it till they recover their money. The Sovereign Guarantee clause is only binding on the asset the loan was used to finance and not to take over the Nigerian Economy.
Expert Opinion
- With the kind of infrastructure projects being embarked on by the Government, it is obvious the only way to fund them is through loans. However, excessive borrowings with accumulated interest over the years can cause economic strangulation.
- Instead of taking over projects financed by loan to recover debts, a milder option would have been Debt Rescheduling where both parties involved could renegotiate payment option as against the harsh approach of taking over assets.
- Public-Private Partnership (PPP) model would be the best approach for infrastructural development as against borrowing for projects. PPP is an arrangement between government and private sector for the provision of public assets and/or public services. Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
- An example of Public-Private Partnership model is ‘Build-Own-Operate-Transfer (BOOT)’. With this type of model, the private-sector partner is granted authorization to finance, design, build and operate an infrastructure component (and to charge user fees) for a specific period of time, after which ownership is transferred back to the public-sector partner. At that, the government will be able to reduce its borrowings so that our yearly cost of servicing debt will reduce drastically.
