News Column

Boko Haram As Excuse for U.S.$1 Billion Loan

July 23, 2014

There can be no denial of the threat of the Boko Haram insurgency to security, the economy of the north-eastern states, particularly, has become seriously dislocated while thousands of people in several communities have become viciously traumatized by the indiscriminate killings of kith and kin and the continuous decimation of their homes and livelihood. Indeed, in response to the recognition of the serious threat to peace, the sum of over N960bn (about 20 per cent of the 2014 federal budget) was appropriated for security, primarily for addressing the Boko Haram insurgency.

Regrettably, despite the huge budgetary allocation, the violent onslaught has continued unabated; consequently, until a thorough and reliable audit of funds application is available, I guess we will never know whether the equivalent of over 40 per cent of the 2014 capital vote was judiciously expended. However, it may be presumptuous to expect that a supplementary sum of just $1bn (N160bn), now requested by President Jonathan, would obliterate the Boko Haram threat when N960bn already appropriated failed to slow them down.

Nevertheless, the main thrust of today's article is not an inquest on the application of the initial N960bn, nor is it a debate on the need for a supplementary sum of $1bn to specifically tame the scourge of Boko Haram. Hereafter, we will take a closer look at whether or not a dollar denominated external loan is the most appropriate source of funding President Jonathan's additional request for $1bn. No doubt government agents will argue that external loans are relatively cheaper since the bench mark rate for such Nigerian government loans is about 7 per cent, while loans sourced locally from Nigerian banks may cost well above 14 per cent. Nevertheless, we may be also permitted to ask why external loans are cheaper than domestic loans since it would seem obviously easier for us to appropriately control the cost of funds within our own sovereign territory in the interest of our economy.

In reality external loans that are not derived from multilateral sources, such as the World Bank, may ultimately become injurious to our economy because of the higher cost and volatility of such capital flows and the adverse severe repercussions on our economy and the exchange rate of the Naira; conversely, domestic loans may be strategically less hazardous for public finance despite their relative cost.

Instructively however, the cause of the higher cost of domestic loans is to be found in the excruciating and unyielding burden of surplus cash in our monetary system; in this event the aberration of the prevalence of high cost of funds simultaneously with excess funds in the market should be of concern to us all! Surely, no commodity, including money, becomes more expensive when that item is very much surplus in the market! Regrettably, our Economic Management Team has remained in denial of this contradiction, while both the Executive and the National Assembly don't seem to care anyway.

The truth of course is that any enduring solution to the problem of systemic surplus Naira will invariably constrict the source of funds that facilitates corruption and supports an unbridled rent-seeking economy. The leeches in the system, whether they are commercial banks, civil servants, politicians and legislators, government consultants and contractors, all benefit in one way or the other from the perennial presence of excess Naira liquidity instigated by CBN's substitution of Naira allocations for distributable dollar revenue.

Thus, inspite of the obvious destructive self-inflicted burden of surplus Naira, those entrusted with the mandate for economic growth and our social welfare will not lift a finger to reduce or terminate the prolific source of excess liquidity; consequently, the negligence and avarice of responsible public servants may have actually driven us to pursue external loans, inspite of the dangers they could pose to our economy and our nation's sovereignty. Indeed, even if multilateral loans appear more competitive, the attached conditionalities are very often antagonistic to enhanced social welfare. We are living witnesses to the economic and social inequalities and deprivations that have become consequent upon the conditionalities of the debt write off by our Western creditors in 2006.

However, inspite of acquiescence by our Economic Management Team, the adverse consequences that are collaterals of constantly surplus Naira include: zero per cent interest for government deposits with banks while government simultaneously borrows from the same banks at double digit interest rates; excess liquidity is undeniably also responsible for the Central bank's oppressively high monetary policy rates which in turn induce over 20 per cent cost of funds to the real sector; furthermore, the 'curse' of eternally surplus cash in the economy is also responsible for high inflation as well as a weaker Naira exchange rate. Ultimately, a weaker Naira exchange rate is primarily responsible for the high cost of fuel and the attendant outlay of over $12bn annually to subsidize fuel prices. Thus, the incidence of systemic surplus Naira readily funds corruption and promotes rent-seeking and an inebriate economy.

Instructively, however, no rational person borrows when they have custody of surplus idle funds; yet surprisingly, the same self seeking strategy that characterizes the domestic market for government loans is apparently also replicated in the structure of government's external loans; for example, inspite of the relatively huge idle dollar reserves in Central Bank's custody, monetary authorities still prefer to seek dollar loans which attract over 7 per cent interest rate even when such risk free sovereign debts should attract less than 3 per cent for a resource rich economy with enviable growth rates. Consequently, nothing stops a potential investor from borrowing at 2 or 3 per cent from those international banks in which CBN's relatively buoyant reserves are domiciled and then to later turn around and lend the same funds to the Nigerian government when the Debt Management office ironically offers to pay over 14 % for our risk free government loans!

A startling example of such a faux pas was evident when President Jonathan visited China last year to seek $1.5bn loan for the upgrade of four airport terminals and the enhancement of our railway infrastructure; ironically, Lamido Sanusi, former governor of the Central bank, who was also on the same expedition with Mr. President, informed the media that he was in China to seek investment opportunities for the CBN's cache of dollar reserves!

Official information today suggests that apart from the Excess Crude Account, CBN is currently sitting on almost $40bn reserves. It would certainly be appropriate if Nigerians demanded an explanation as to why Mr. President cannot simply obtain $1bn interest free loan from CBN's idle reserves rather than the adoption of the primitive economic strategy of potentially borrowing back your own money.

Besides, in view of the huge security votes and the attendant collateral of increasing debt to counter the surge of Boko Haram, we may wonder how inspite of the obviously more extensive, capital intensive and extended nature of the civil war, the government did not borrow a single Kobo to fund its operations despite its relatively modest reserves.


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Source: AllAfrica


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