Foreign loans and Nigeria’s critical assets as collateral

The news of some African countries losing some of their critical assets, and even their sovereignty, to China as a result of heavy indebtedness has recently dominated social discourse. Because of the country’s growing interest in Chinese loans, the rumour sparked widespread interest in Nigeria.

Several weeks ago, widespread media reports stated that Uganda had to surrender one of its national assets, the Entebbe International Airport, to China’s EXIM Bank for failing to make loan repayments.

According to reports, Chinese officials turned down Uganda’s request to renegotiate certain “toxic clauses” in a $200 million loan issued in 2015 to upgrade and refurbish the Entebbe airport.

This news quickly spread on social media and was covered by several mainstream media outlets.

The Ugandan and Chinese governments, on the other hand, have refuted the claim.

Stakeholders in Nigeria’s financial and economic sectors continue to express concern about the country’s apparent indebtedness to China.

Some stakeholders expressed concern that the nature of the loan agreements with China might jeopardize the country’s sovereignty.

In May 2020, the House of Representatives charged several of its committees with investigating all China-Nigeria loan agreements, determining the viability of the facilities, and then regularizing and renegotiating them as needed.

A sovereign guarantee clause in the agreements piqued stakeholders‘ interest, as they fear Nigeria will sign away its sovereignty in the event of a payment default.

However, Nigeria’s transportation minister, Rotimi Amaechi, explained that the clause’s purpose was to allow China to pursue various options, including arbitration, to resolve potential payment disputes.

“They are saying that if you are unable to pay, do not prevent us from reclaiming those items that will assist us in recovering our funds.”

“And it is a standard clause, whether you signed it with America or with Britain or any other country, because they want to know that they can recover their money,” Amaechi explained.

According to the Nigerian News Agency (NAN), the country’s total debt stock is 92.9 billion dollars, with a foreign component of 37.9 billion dollars, which includes debts from multilateral and bilateral sources, commercial loans, and promissory notes.

Loans from China are classified as bilateral loans, and they total 4.3 billion dollars, or 11.59 percent of the total debt stock, when combined with loans from other countries such as France, Japan, India, and Germany.

The Chinese component of the loans is currently worth $3.59 billion, accounting for 9.47 percent of the country’s total foreign debt stock.

This demonstrated that China is not the most important source of borrowing or funding for the Nigerian government.

According to Patience Oniha, Director-General of the Debt Management Office (DMO), loans from China are primarily concessional loans with annual interest rates of 2.50 percent, terms of 20 years, and grace periods of seven years.

Oniha also stated that no national assets had been designated as collateral for the loans.

“As of September 30, Nigeria’s total foreign debt stock was 37.9 billion dollars, which included the external debt stock of the Federal Government, 36 state governments, and the Federal Capital Territory.”

“However, total loans from China amount to $3.59 billion, or 9.47 percent of total external debt.” “The loans did not require any national assets as collateral, and they were mostly concessional,” she explained.

She explained that before foreign loans were contracted, sensitive steps were taken by various government institutions to ensure that they were beneficial to the nation.

“Before any foreign loan, including the issuance of Eurobonds, the Federal Executive Council must approve it, followed by the National Assembly.”

“The approval of loan agreements by the Federal Ministry of Justice is an important and extremely critical step.”

“Before the agreements are signed, the Attorney-General of the Federation and the Minister of Justice issue an opinion.”

“Several measures that work in unison have been put in place to ensure that debt data is available and that debt is serviced when due.” “Debt service is explicitly provided for in annual budgets,” she explained.

Oniha explained that the loan agreements outlined a number of steps to take in the event of a dispute.

“The first step is for the parties to resolve it among themselves, and if that fails, they should go to arbitration.”

“In other words, a lender, in this case China, would not simply seize an asset at the first sign of a dispute, including defaults,” she explained.

She explained that the DMO kept proper debt records, provided debt service projections, and processed actual debt service payments.

She went on to say that the low interest rate offered by the Chinese reduced the government’s interest cost, while the long tenor allowed for repayment of the principal sum of the loans over many years.

However, some stakeholders criticized the government’s apparent perpetual reliance on loans to fund infrastructure as well as budget deficits.

Mr Tope Fasua, an economist, advised the Federal Government to improve the budgeting system in order to control deficit financing and make annual budgets more impactful.

Fasua stated that while borrowing had become necessary due to current circumstances, particularly with the introduction of COVID-19, such borrowings should be used wisely to improve infrastructure that can help the economy grow.

“Unfortunately, we have found ourselves in a difficult situation as a result of the COVID-19 pandemic and falling crude oil prices, and we will have to borrow like the majority of the rest of the world.”

“The government should ensure that our borrowings are used effectively for maximum economic impact,” he said.

However, with the country’s national debt as a percentage of GDP at 35.51 percent, some analysts believe the debt situation is still within reasonable bounds.

According to a World Bank study, a debt-to-GDP ratio that exceeds 77% for an extended period of time may have a negative impact on economic growth.

This implies that Nigeria’s debt situation is not particularly worisome when compared to the country’s GDP.

Mr Laoye Jaiyeola, Chief Executive Officer of the National Economic Summit Group (NESG), stated that while Nigeria’s debt-to-GDP ratio was low, the revenue spent on debt servicing was still high.

Jaiyeola believes that spending between 25% and 30% of national revenue on debt servicing, as the Nigerian government currently does, is unsustainable.

He urged the federal government to make difficult but necessary policy decisions in order to increase revenue and reduce reliance on foreign and domestic loans to fund the budget deficit.

“We should all be concerned about the country’s rising debt profile.”

“Some argue that the debt-to-GDP ratio remains low. “It may be low, but servicing debt is still difficult,” he said.

As a means of reducing the debt burden, he proposed a drastic reduction in the cost of governance, a reduction in recurrent expenditure, and the elimination of subsidies for electricity and petroleum products.