A case for Nigeria borrowing from China, or not | Insights from a practitioner
Partly forget the sentimental and negative headlines you read about the implications of the Nigeria Government signing up to loans from China, through the China EximBank. It is worth noting that Infrastructure financing is highly contractual with little or no room for trust or verbal agreements. The devil is in the detail and not until we are all privy to the terms of the Agreement, there’s not much we can criticize or analyse.
That said, let me try to share some light on possible reasons why the Government of Nigeria has decided to approach the Chinese for funding. First, the government spends its funds on several things categorized into recurrent and capital expenditure (investments in infrastructure and public facilities). To finance this necessities (excluding corruption) it relies on taxes and exports. As you may agree, taxes are unpopular in this part of the world and usually met with resistance if the Government plans to introduce a new tax or increase the existing tax burdens. No one likes to pay more tax, so the government seeks foreign funding.
Consideration is also given to the source and type of foreign funding. Recall that our foreign reserves (from which we could create sovereign Funds) is continuously depleted and the debt to GDP ratio is relatively high, so the cheaper the additional debt (and subsequently the repayment) the better.
The more our loan portfolio and debt obligations, the less our Global Credit rating.
Now, where else can the Government obtain rock-bottom cheap loans other than from China?!. I personally think that the opportunity to access Funding (whether in terms of providing equipment, Lending directly to projects etc) from the Chinese should be explored.
It is proven that Chinese loans (and the terms of repayment) are better priced than loans from Europe and America.
Furthermore, this is a welcomed development as long as the contracts are watertight, the Government can meet its obligations and the funds received are utilized for the intended purpose. I recall watching a statement by the The Chinese President who said that the loan was not for frivolous projects but to directly assist Nigeria with the development of its infrastructure.
The question we should be asking is who will be responsible for managing the execution of the contract and will the government be accountable?
I have always wished for a time when there will be a channel on TV dedicated to giving account of the use of public funds and government debt; number by number. A time when there’s no hiding place and the citizens are far more enlightened than what is obtainable today.
The question to the government should be that if it’s intended to eradicate poverty through development of infrastructure, where is the statistics that shows the need of Nigeria in terms of infrastructure, where is the mapping of all projects in the country, what percentage is completed versus uncompleted and what is the expected impact from the investment (how many people will be better of) etc. We need to demand for result assessment, to achieve the desired developmental outcomes.
Also, the outcry has been about the Chinese repatriating all the Funds or taking over the Country. Why is this a problem???!. From a practitioner’s perceptive, let me shed some light.
First, it is only normal for an investor to recover its investment from a country. It’s similar to foreign investors that buy shares in the Nigeria capital market. They don’t leave there funds in a foreign country, once it matures, they repatriate. At least, they can’t take the asset which will continue to create value and potential multiplier effect for the citizens of the country, both in terms of job creation and as a catalyst for commercialization.
Secondly, as long as the contracts are properly drafted and the Government / project fulfills its obligations as agreed, there is no way the Chinese can take over the Country. The problem arises when there’s a default in obligations. The Chinese, like any other investor, will exercise there rights as agreed in the contracts. What Nigerians should be concerned about is demanding the Government recruits technocrats that have the experience and skills in executing and monitoring projects of such nature successfully, else loopholes will result in what we all fear the most, a takeover!.
According to the DMO, ‘‘all the government’s borrowing in both the domestic and external markets, including Chinese loans, are all backed by the full faith and credit of the government rather than a pledge of its assets’’. This comment has not been verified but I can imagine it to be typical of the government and so, appears true.
Final thoughts on the Government borrowing from China
The truth is that China is trying to gain economic and political presence across the globe, and fortunately or unfortunately, they have identified developing countries as a target. In similar light, these developing countries have need for the loans which can either in cash or in kind. Hence, a win-win situation.
In conclusion, the loans from China shouldn’t be seen as a debt-trap, if done with brains (transparently and thoroughly).
Principle 1: Never take a loan you are unable to fund or pay back because bad loans are truly a form of entrapment.