Analysts weigh in on debt
Analysts say: Funding model suits Nigeria’s infrastructure development needs at this critical time and should not be jettisoned Nigeria should get better terms for its investments assuming the selection is done right
THE STORY OF NIGERIA’S INDEBTED NESS to China has recently come into sharp focus and has become a hot topic for good reasons. There is concern about who truly benefits from China’s infrastructure...
THE STORY OF NIGERIA’S INDEBT EDNESS to China has recently come into sharp focus and has become a hot topic for good reasons. There is concern about who truly benefits from China’s infrastructure investments in developing economies through direct loans, especially given stringent conditions that could mean handing over sovereign assets to the country in the event of a default.
This reputation has recently been earned with the 2017 China’s takeover of the $1.3 billion Hambantota Port in Sri Lanka for 99 years, a project which suffered financial losses and could not repay the debt financing the construction. Concerns about Chinese lending are also not helped by the usual lack of transparency around them, much unlike commercial debt obtained from the Eurobond market and multilateral debt sourced from institutions such as the World Bank, the International Monetary Fund (IMF) and the African Development Bank (AfDB).
According to research analysts at Afrinvest Research who spoke to Business A.M. on the matter, they submitted that: “What is clear is that while China’s interests in these projects can be strategic and unclear, it is also mostly about selling excess capacity to the rest of the world, with China financing projects that use its products and services”.
The risk involved, Nigeria’s total external debt and the revenue generation potentials
In Nigeria, the Debt Management Office (DMO) has sought to address these concerns by providing clarity on bilateral loans from China. Historical data suggest that total bilateral lending from China since 2010 is $5.6 billion, with an average size of $506.8 million at 2.5 per cent interest rate per annum, seven (7) years moratorium and a tenor of twenty (20) years across eleven (11) projects. These projects are mainly in road, airports and railway development but also for infrastructure in agriculture, power, water and ICT. Only five (5) project loans have been fully disbursed, four (4) have a disbursement rate ranging from 17.5 per cent to 91.1 per cent while three (3) are yet to be disbursed at all. The $1.3 billion loan obtained for the Ibadan-Lagos section of the Nigeria Railway Modernisation Project is the largest.
Meanwhile, as at Q1:2020, the total outstanding borrowing from China stood at $3.1 billion ( 1.1 trillion), which is 3.9 per cent of total public debt and 11.3 per cent of total external debt.
“The low share of borrowing from China and the attractive terms signal low risk, especially when compared with Zambia which is facing debt troubles as 65.8 per cent of its total external debt is owed to China, according to the Brookings Institution in 2019”, Afrinvest analysts said in a note to Business A.M. To buttress this point, Afrinvest writes, the DMO noted that loan terms were properly reviewed before signing and that repayments are fully provided for in annual budgets while the projects either generate revenues or have revenuegenerating potentials.
Uche Uwaleke, a financial economist, and professor of capital markets at the Nasarawa State
University, and a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), stated in a position statement sent to Business A.M. on this matter thus: “This is, in no way, tantamount to a waiver of Diplomatic Sovereignty which borders on the independence of the country in question. As a non-aligned Creditor Country, not belonging to the Paris Club of creditors, China needs such a sovereign guarantee in bilateral commercial deals to facilitate enforcement of loan terms.
“Nigeria is not at risk of default with respect to credit facilities from the China EX-IM Bank considering that the entire $3.1 billion owed the bank as disclosed in the DMO March 31 2020 Nigeria’s public debt report, represents less than 4% of the country’s total debt stock of about $79 billion,” Uwaleke posited.
Another issue of contention is the quality of these projects but as analysts at Afrinvest Research have noted, “this is assured under the right framework and bidding process, much like projects implemented by non-Chinese firms. In our opinion, China’s infrastructure loans provide strong expertise and offer access to infrastructure financing through concessional debt which would have been difficult to obtain otherwise. China’s investments also provide competition to other financing options available, which means Nigeria should get better terms for its investments assuming the selection is done right”.
Uwaleke, the capital market professor, who shares similar view with the Afrinvest analysts, affirms that: “The relevant clause usually invoked in the event of default relates to waiver of commercial sovereignty which is a standard clause in bilateral loan agreements of this type. In any case, adequate provisions have been made in the MTEF for the servicing of public debts the bulk of which, about 65%, is domestic debt”.
He further noted that “Unlike Eurobonds, which constitute circa 40% of the country’s external debt and contracted on commercial terms, China loans are largely concessional. Currently, and to my knowledge, Nigeria is enjoying facilities from China EX-IM Bank at 2.5% for 20 years with 7 years moratorium. Like Infrastructure bonds such as Sukuk, they are project-tied”.
Uwaleke, who also thinks this funding model suits Nigeria’s infrastructure development needs at this critical time, says it should not be jettisoned.
In his words: “It’s important that Nigerians are not misled with respect to the ‘sovereignty waiver’ clause in the country’s loan agreement with China. The fact is that China can only take over a country’s assets, built with the loans, which served as Collateral Security. In addition, the money goes straight to the Chinese firms handling the projects thereby minimizing the likelihood of diversion”.
Overall, the lesson is that the impact of these projects ultimately depends on Nigeria’s selection of funding/implementation partners, project specifications and the identification of projects that can deliver the most economic benefit. Our concern is that getting these conditions right is rarely assured in Nigeria, which could result in sub-optimal impact.