Analysts warn of financial fallout as Senate approves Tinubu’s $2.2bn loan

• Nigeria’s debt-to-GDP ratio of over 50% harbinger of distress- LCCI
• CSOs task FG on fiscal discipline, self-reliance  

Onome Amuge

President Bola Tinubu

Nigeria’s national debt burden is about to bear an even heavier load as the country’s National Assembly recently gave its stamp of approval to President Bola Tinubu’s loan request for $2.209 billion ( about N1.767 trillion).

This fresh loan is expected to deal a devastating blow to Nigeria’s already wobbly fiscal stability, analysts warn.

President Tinubu, in a letter penned to the Senate, explained that the amount would be part of the funds needed to finance the N28.7 trillion 2024 budget which has a deficit estimated at N9.17 trillion.

The president reassured the Senate that this request is in accordance with the 2024 Appropriation Act, as approved by the Federal Executive Council (FEC).

In a swift and seemingly unanimous decision, the Nigerian Senate, under the leadership of Deputy President Barau Jibrin, approved President Tinubu’s loan request in less than 48 hours.

This came after the Senate committee on local and foreign debts, led by Aliyu Wamakko, presented their report.

Wamakko delivered a report that promised a silver lining to the government’s proposed borrowing. He claimed that the external borrowing, if approved, would act as a springboard for the nation’s foreign reserves.

The Senate committee chairman stated further that the fund would ensure the completion of ongoing projects and programmes as outlined in the budget.

Like a master weaver, Wamakko seamlessly wove together the potential benefits of the proposed borrowing. He proclaimed that the issuance of bonds would not only contribute to the implementation of the Debt Management Strategy, designed to reduce the cost of borrowing and lengthen the maturity of the public debt stock but would also free up space in the domestic market for other borrowers and help bolster Nigeria’s external reserves.

The committee chairman asserted that Nigeria has the potential to raise the required $2.209 billion through the issuance of Eurobonds,  a strategy that had become a well-honed tool in Nigeria’s financial arsenal.

Furthermore, he noted that Nigeria has been issuing Eurobonds in the International Capital Market for some time, having raised $16.92 billion in total, of which $15.12 billion is currently outstanding.

In a single sweeping motion, the Senate approved the implementation of Nigeria’s new N1.767 trillion loan at the budget exchange rate of $1.00 to N800, which will be funded through various sources including Eurobonds, Sukuk and bridge or syndicated loans in the International Capital Market.

The loan, according to the Senate, is subject to market conditions and will be included in the 2024 Appropriation Act.

As per the approved report, the Senate has given the go-ahead for Nigeria to issue Eurobonds worth up to $2,209,512,902.22, or at least $1.70 billion, but not exceeding the previously approved sum of new external borrowing in the 2024 Act.

While President Tinubu’s loan request was swiftly granted, the weight of its $2.21 billion price tag has been projected by analysts to tip the scales of debt service even further.

Weighing in on the looming effects of the loan approval, the Lagos Chamber of Commerce & Industry (LCCI) has warned that it could send shockwaves through Nigeria’s business community.

The Chamber noted that the economy’s shaky foundations are ill-equipped to support such a hefty financial burden, creating unrest among business leaders and stakeholders alike.

Chinyere Almona, the director-general of the LCCI, drew upon a wealth of evidence to voice her concerns about the new loan.

Speaking out against the government’s decision, Almona recalled that LCCI had consistently warned against using debt financing as the sole means of covering budget deficits.

According to Almona, Nigeria’s estimated debt-to-GDP ratio of over 50 per cent is a harbinger of distress, as the country’s debt servicing costs are projected to eclipse its capital expenditure.

She observed that to compound the problem, Nigeria’s current debt to the International Development Agency (IDA)stands at a staggering $17 billion, making it the third highest debtor.

“LCCI is taking the responsibility to once again warn about imminent debt sustainability issues and how that may further weaken the state of critical infrastructure in the country.

“The chamber has always advised against solely using debt financing without considering other options to fund budget deficits.

“A critical perspective of further borrowing is the risk of losing steam on infrastructure financing as debt servicing alone may rise above what is set aside for capital expenditure in the 2025 federal budget,” the LCCI stated.

The LCCI DG further warned of the potential repercussions of an external currency shock resulting from naira devaluation while servicing the mounting debt.

She observed that despite the CBN’s persistent efforts to stabilise the foreign exchange market and shore up the naira, the efforts have yet to yield a marked improvement.

Almona warned that in light of these multiple issues, a ‘borrower-beware’ stance is critical, as Nigeria’s debt crisis could balloon beyond control if the government fails to tread carefully.

Civil society organisations, including the Transition Monitoring Group (TMG), Transparency International (TI), and the Civil Society Legislative Advocacy Centre (CISLAC), also expressed their collective concerns over President Tinubu’s proposed loan.

Auwal Musa Rafsanjani, the leader of the CSOs, raised the call against this latest borrowing plan, asserting that the nation’s escalating debt profile makes such a move inadvisable.

Rafsanjani noted that the Tinubu administration has accumulated an astonishing N20.1 trillion in debt since taking office, adding yet another heavy burden to the country’s fiscal woes.

“Efforts should instead focus on addressing structural issues, diversifying revenue streams, and implementing fiscal reforms to reduce reliance on borrowing,” the CSOs advised.

The CSOs called upon the government to pursue a two-pronged approach, with immediate and long-term measures working in tandem to address Nigeria’s debt crisis sustainably.

In the short term, the CSOs prescribed a strengthening of revenue mobilisation, advocating for more aggressive reforms to boost non-oil revenue by expanding the tax base and stamping out tax evasion.

The CSOs proposed that the government should consider debt restructuring as an additional measure to alleviate the financial burden, urging the government to engage with creditors and negotiate more favourable loan terms such as extended tenures and reduced interest rates.

On the expenditure front, the CSOs recommended a focus on efficiency by prioritising critical sectors and reducing non-essential spending to reduce the budget deficit.

The CSOs also stressed the imperative of economic diversification as the government’s long-term strategy.

This visionary approach, according to the CSOs, requires a bold shift away from overreliance on a singular economic sector or resource, and towards the cultivation of a diverse and robust economy that can withstand the fluctuations of global markets.

“Invest in infrastructure and key sectors such as agriculture, manufacturing, and technology to reduce over-reliance on oil revenues. There should also be exchange rate stability.

“The government should develop policies that support naira appreciation, including boosting exports and attracting foreign direct investment (FDI),” they recommended.

The CSOs asserted that the government must establish an independent oversight mechanism to ensure accountability and scrutiny of debt procurement and usage.

They also cautioned against a reckless cycle of borrowing without concurrent structural reforms, a trend that they argued could plunge Nigeria into a perilous debt trap.

In a plea to safeguard the nation’s economy and future generations, the CSOs implored for a paradigm shift towards fiscal discipline and self-reliance, a strategy that they believe is vital for long-term economic stability.

Examining the nuances of the borrowings, Ayokunle Olubunmi, the head of Financial Institutions Ratings at Agusto & Co., acknowledged that the borrowings were part of the plan to support the implementation of the 2025 budget.

Olubunmi warned that the borrowing plan could have significant repercussions for the nation, with an increased debt service cost and heavier debt burden expected to follow.

Olubunmi, however, offered a glimmer of hope amidst the potential challenges. He identified a potential respite in the form of the maturity of a Eurobond in November 2025, which could provide some relief from the weight of debt service costs if it is not refinanced with additional borrowings.

Reacting to the loan request and approval, financial expert David Adonri expressed concern that the federal government has already fallen victim to a vicious cycle of borrowing.

Adonri, executive vice chairman at Highcap Securities Limited, explained that the government is currently dependent on new foreign debt to service its existing debt obligations, a predicament that he warned could prove to be perilous for the nation’s economy.

Uche Uwaleke, president of the Association of Capital Market Academics of Nigeria (ACMAN), maintained that the borrowing is fully justified as it falls within the scope of the borrowing plan outlined in the 2024 budget.

While Uwaleke agreed with the president’s borrowing plan, he emphasised the importance of transparency to ensure that the new loan would be used wisely. He explained that specifying the projects that the loan would finance, determining whether they are self-liquidating, and devising a solid repayment plan are essential considerations, especially given the nation’s already crippling debt load.

Uwaleke, Nigeria’s first professor of capital market, observed that the external loan request seemed to focus on Eurobonds, which are non-concessional and come with a heavy price tag.

He proposed that more attention should be directed toward Sovereign Sukuk, which are not only tied to specific projects but also carry a far lower cost.