Why Nigeria Keeps Attracting Lenders
(All references are below the article.)
A friend came across an article I wrote in October 2022 where I mentioned Nigeria’s debt problem (1). As of the time of the article, Nigeria’s total debt stood at ₦42 trillion, up from ₦12 trillion in June 2015, when President Goodluck Jonathan handed over (2). The amount of debt was not the reason he reached out. He reached out because he saw me write that, since 2016, the average revenue performance of the federal government is 60%, meaning that the debt keeps accumulating but Nigeria as a country is unable to generate revenue to cover it. In fact, between December 2021 and March 2022, Nigeria spent 108% of its revenue to service debt (3). In case this is not clear to you, it means Nigeria spent all the funds it generated during that period and borrowed some more to pay the interest on its debt. Note that the borrowing is not to pay the debt; it is to pay the interest on the debt. Hence his question, “Tosin, if Nigeria is not generating enough funds for his loans, how are we able to borrow more? Why are these creditors still throwing money our way?”
Yes, despite the fact that President Muhammadu Buhari is scheduled to leave office in May of next year, he intends to borrow an additional ₦11 trillion, roughly the same amount of debt he met on ground, to fund the budget (4). Bola Tinubu, the presidential candidate of the president’s party, APC, in his manifesto, promised to continue this borrowing spree (5).
Why are Buhari and Tinubu so certain they will be able to accumulate so much debt? I mean, in 2023, the country projects to generate ₦9.73 trillion (6), while earmarking ₦11 trillion for fuel subsidies alone (7). From history, we know it will not be able to generate that much. At best, only 60% of that revenue target would be met, while we know that we always pay the full sum for the opaque subsidy regime. Yet instead of being unwilling to put more money into the country, you would be surprised that were Nigeria to issue bonds today (that’s a way of requesting loans in the international market), it would be oversubscribed (meaning that more money would be given to Nigeria by investors than it requested for).
When Reality Beats Fiction
The first thing to note is that investors are not foolish. They calculate risk and reward and allocate capital appropriately. It is a general rule that bonds issued by countries are one of the safest investments in the world (8). However, all bonds are not created equally. Some bonds are safer than others. In other words, there are different types of bonds. Bonds issued by developed countries are one type, while those issued by emerging countries, including Nigeria, are another. Those from developed countries are extremely safe, but they carry a low interest rate. Because emerging markets are riskier, investors charge higher interest rates to compensate. It is the reason Nigeria’s 10-year Eurobond has an interest rate of 14.23% (9) compared to the US’ 10-year bond with an interest rate of 3.28% (10). If you understand the power of compound interest, then you know that our level of risk is expensive. As you can see, the reason investors would flock to Nigeria’s bonds is because we are offering more than four times what stable countries are offering. It is tempting to go for Nigeria’s 14% interest rate over Switzerland’s 1.05% (11). If Nigeria offered 5%, it would not get subscribers. The lesson here is that when the authorities and their supporters rejoice over the oversubscription of offerings, ask them what rate they are offering.
The Risk of Default
Yet with more reward comes more risk. In 2009, Greece defaulted on its debt obligations (12). When this happened, poor GDP growth, government deficits, budget compliance, and data credibility were factors that significantly contributed to this sovereign debt default. Greece owed nearly 15% of its GDP (that’s the total sum of all economic activities in the country) in loans; it defaulted on several of them, and its bonds were downgraded to junk status, indicating that the loans are in significant danger of default. The country ran to the International Monetary Fund (IMF), Eurogroup, and the European Central Bank for bailout loans. It also met with private banks and pleaded for them to let go of 50% of what was owed. The same thing happened with Sri Lanka. This year, it became the first Asian nation in decades to default on its external debt of $51 billion, about half of which is held by private bondholders (13). When it went to the IMF for help, the leaders of the country were told that a $3 billion bailout loan would be contingent on it negotiating debt forgiveness with its creditors.
Interestingly, for both Sri Lanka and Greece, there were already signs, and experts had been sounding alarms to creditors about the possibility of default way before the fears became reality (14) (15). Why did the creditors not listen? Greed! At the moment, alarms are being sounded on a host of countries, including Nigeria, Ghana, and Kenya (16). Will creditors listen? It’s unlikely if the potential reward is high enough. In September 2021, yields on Nigerian bonds were less than 7%. It’s trending towards 15% now. Even though just a few months ago, JP Morgan recommended that investors be wary of Nigerian bonds, few will listen (17).
Why Creditors Trust Nigeria
We already established that Nigeria’s high interest rates attract creditors. Despite warnings of default, Nigeria still attracts funds in the international loan market. But another reason Nigeria attracts creditors is its status as a major oil producer in Africa. In fact, with the capacity to produce 2 million barrels per day, we have the 10th largest crude oil reserves globally (18). And we can do more if the recent discovery of oil found within the Kolmani area of Gombe and Bauchi is taken into account (19). With these resources, the lender expects that funds will be available in the future. Hope is not always in short supply for international investors.
Another way is for lenders to securitize loans, meaning that partial ownership of oil rigs is taken to repay the loans. China favors securitization in a lot of its deals. In 2014, Angola was required to deposit its daily profits from selling 10,000 barrels of oil from Sinopec’s four oil blocs in Angola into an offshore account in order to repay a $2 billion debt from China Eximbank (20). Similarly, Zimbabwe had to deposit tobacco sales money in order to repay its $110 million debt to China (21).
Citizens Bear the Brunt
While leaders are all too excited about taking loans and creditors are tempted to part with their funds, citizens should be alert to the dangers of sovereign debt default. This is because it disproportionately affects their standard of living. Here are a few consequences of a country not being able to pay back its debts:
- High Interest Rates: When a country’s sovereign debt defaults, it tends to borrow at higher interest rates. I already explained why this is the case. Borrowing at high interest rates causes local banks to lend to businesses and individuals at higher interest rates. With businesses unable to borrow from the banks at competitive rates, their operations are handicapped. You know what follows. Furthermore, with little or no trust in the government, borrowers attempt to withdraw funds from banks. This exacerbates the economic problem. When Argentina defaulted on its loans in 2001 worth $132 billion, cash withdrawals from bank accounts were limited to $1,000 a month (22). The economy collapsed.
- Foreign Portfolio Investors Exit: Foreign portfolio investors, mostly those who operate on the stock market and other exchange-traded funds, attempt to sell their domestic assets in order to flee the defaulting country. This causes exchange rates to drop in the international market. This has an additional impact on domestic exports and imports. I wrote a sobering piece on this catastrophe in Lebanon a few months ago (23).
- Domestic Market Shrinking: Within the domestic market, defaulting on sovereign debt leads to the wipeout of the market capitalization of major firms within the country. Venezuela’s sovereign debt default was so bad that it contributed to the economy shrinking by about 75 percent (24).
Greece is a particularly good example of why it is in the country’s best interest not to default. Due to its sovereign debt default, it suffered the longest recession of any advanced mixed economy to date. As a result, the Greek political system was upended, social exclusion increased, and hundreds of thousands of well-educated Greeks left the country. In 2015, a bakery chain in Athens gave away ten thousand loaves of bread a day, or one-third of its production. In some of the poorest neighborhoods, according to the chain’s general manager, “In the third round of austerity measures, which is beginning now, it is certain that in Greece there will be no consumers — there will be only beggars.” (25)
Therefore, when Bola Tinubu, APC’s presidential candidate, said while presenting his 80-page manifesto that “America should be in jail if borrowing is a crime,” you may want to ask yourself if playing Russian roulette with your future is acceptable.