Unlike a corporation or household, a currency-issuing nation cannot be insolvent. That is because Nigeria controls its currency. If Nigeria owes debts and lacks the revenue (like tax and oil proceeds) to pay them, the Central Bank can be asked to print money to pay-off the debt. Of course, it is not the best approach…
The truth is that people don’t like their governments to accrue debt. The worry is even more when you say that it is a Chinese loan. The anxiety is that persistently increasing the stock of debt in a country may eventually trigger a default. This is why the public wants the government to always observe fiscal discipline and avoid Chinese loans like the plague. This article aims to enlighten the public about the wrong assertions that Nigeria may default on its debt.
There are several horror stories about Chinese loans, like that of Zambia, as it failed to make its loan repayments. Such stories reinforce the belief that increasing Nigeria’s debt may result in disaster. Nonetheless, the Chinese have delivered affordable and durable projects in several developing countries across the five continents. For example, the Tanzania Zambia Railway Authority (TARAZA) railway line was financed by China. The project has allowed Africans to gain valuable skills and expertise from the Chinese. China also financed the Morowali Industrial Park, which has increased the production of stainless steel in Indonesia by 50 per cent.
The outcomes of Chinese loans is one of the many reasons China is officially recognised as the world’s largest creditor, surpassing traditional lenders like the International Monetary Fund (IMF) and the World Bank.
There are a few problems with Chinese loans. For example, they are more expensive than those of traditional lenders. Currently, interest rates on Chinese loans are around 3.5 per cent, in comparison to IMF’s 0.6 per cent and World Bank’s 1 per cent. Also, China does not publish details of its overseas lending, as reported by the New York Times in 2019. Such practice is unethical, and it makes it difficult for experts to evaluate the cost and benefits of the projects involved.
Critically speaking, Nigeria’s economic growth depends on human and capital investments. Given that the country does not have the money to pay directly for the projects it requires, the only way to go about this is to borrow now and pay later. This is why Nigeria’s Fiscal Responsibility Act states that all governments tiers should borrow for only capital expenditure and human development at concessional terms (Section 41, 1(a)). Assuming this is the case, it means that the government borrows to develop the country, then uses taxes and other sources of revenue it generates, like crude oil sales, to repay the loans in the future.
To avoid defaulting like Zambia did, Nigeria must ensure that it keeps servicing its debt. Despite the global crisis, Nigeria is in a position to continue to borrow. As long as Nigeria does not borrow to pay its debt, the country will be classified as solvent. The country can afford to pay a low-interest rate on new loans…
The recent public outcry started following the 2020 revised budget because debt servicing will take about 27 per cent of the total allocation. The country’s revenue, not the gross domestic product, is stretched by debt servicing, which is not favourable. The apparent reasons for this include a 40 per cent decline in oil revenue, which makes up at least 70 per cent of the country’s receipts; the impact of COVID-19; and the 40 per cent decline in the Federal Inland Revenue Service’s income in 2019. The first two constitute shocks that will change in the long-run. Thus, high debt or high debt servicing should not be a short-term concern for Nigeria. On the latter, the public deserves explanations on why there was a 40 per cent income gap by the FIRS. As acknowledged by the Finance minister, the government must find ways of generating more revenue for the country.
To avoid defaulting like Zambia did, Nigeria must ensure that it keeps servicing its debt. Despite the global crisis, Nigeria is in a position to continue to borrow. As long as Nigeria does not borrow to pay its debt, the country will be classified as solvent. The country can afford to pay a low-interest rate on new loans as a result of lower global interest rates. Nigeria can currently borrow money for over 10 years at a concessionary rate, making it relatively easy to service. Egypt recently borrowed at a 2 per cent interest rate from China. Back in the days (the 1970s and 1980s), interest rates on 10-year government bonds were 11 per cent.
Finally, I will answer pessimists on a supposed scenario in which the country eventually defaults on its debt payments. Unlike a corporation or household, a currency-issuing nation cannot be insolvent. That is because Nigeria controls its currency. If Nigeria owes debts and lacks the revenue (like tax and oil proceeds) to pay them, the Central Bank can be asked to print money to pay-off the debt. Of course, it is not the best approach, because it can lead to an undesirable scenario of hyperinflation. This is so bad that amongst the bad options, defaulting will be the preferred option. However, the country is currently far from such a situation, which why worrying about defaults on Chinese loans is not worthwhile.
Nasir Aminu is a senior lecturer in Economics at the Cardiff Metropolitan University.
