Buhari’s Bailout: A Swindle Of Future Generations?
IN an attempt to soothe the pains of Nigerian workers, who were being owed several months of salaries and allowances in states across the country, President Muhammadu Buhari, recently, directed the Debt Management Office (DMO) to restructure the loans contracted by state governments, a move euphemistically known as bailouts.
The local components of the loans by end of last year had climbed to N1.655trillion.
Most of these were short-tenured—between three and four years— and configured to fit within the lifespan of governors that contracted them, but have now been elongated to up to 20 years and beyond.
The implication of the reconstruction is to reduce the amount that will be deducted from the states’ revenue from the Federation Account (FAAC), which means those that contracted the loans will transfer them to future governors and children yet unborn for some 20 to 30 years down the line.
The development has drawn the ire of lawmakers and civil rights activists, some of who have
condemned the move and have headed to court to stop the President from going ahead with the plan. Others say that if the bailout scales through, it would set a bad precedent, and encourage governors to be more reckless with public funds.
However, as the agitation for the dropping of the plan continues, the DMO has gone to town with the President’s directive, while the Central Bank of Nigeria (CBN) has equally concluded arrangements with commercial banks, who are to release about N400bn approved by the President for states needing the bailout to meet financial obligations.
Already, Zamfara and Kwara States, who have met the conditions set for the deal, have receive their portion, while 25 other states are still battling with meeting the requisite criteria.
The DMO, recently, in a statement announcing the conclusion of the reconstruction exercise said, “ The immediate cause of the fiscal imbalance was the structural drop in the international price of crude oil by more than 43 per cent and the resultant drop in the revenue allocation from the distributable pool for all governments in the federation by about 40 per cent. The situation constrained the ability of many states to meet their financial obligations, including payment of salaries. Hence, the
government’s decision for a prompt response.”
It said as one of the salutary options for short-term fiscal stabilisation, it put forward a proposal for restructuring the short-term bank loans of states into long-term Federal Government of Nigeria (FGN) Bonds. The purpose, it explained, was to reduce the debt-service outflow of states and free resources for meeting other obligations, particularly, clearance of arrears of salaries and pensions.
“As at August 19, 2015, 22 states had submitted requests for the bank loan-to-FGN bond restructuring. Out of the twenty-two, the first eleven states, which had completed and submitted all necessary documentations, including the submission of government’s jointly authenticated balances with banks as at August 14, 2015, had their bank loans restructured into 20-year FGN bonds effective August 17, 2015.
“Fourteen banks were involved in this Phase One debt restructuring operation and their total loans to the eleven states, which were restructured, amounted to N322.788 bn. The restructuring was effected using a re-opening of the FGN Bond issued on July 18, 2014 and maturing on July 18, 2034. The pricing was based on the yield to date of the bond at a 30-day average, resulting in a transaction yield
of 14.83 per cent.
“Indicators of the impact of the debt management operations include: monthly debt service burden will drop by a minimum of 55 per cent and a maximum of 97 per cent, among the eleven states; and, interest rate savings for the eleven states ranges from three per cent to nine per cent per annum,’ it said.
Noting that more states are concluding their documentation and reconciliation of balances with banks and their debts will be restructured in Phase II in the next couple of weeks. The debt manager said the restructuring is good not only for the states, but also for the banking system because banks’ balance sheets will improve as weak subnational loan assets are replaced with high quality Sovereign assets and the FGN Bonds enjoy enhanced liquidity as they are traded in the secondary market. Another reason was that banks would have improved space to lend to other sectors of the economy, as they are free to convert their FGN Bond holdings into cash in the secondary market.
Reacting to the development, a member of the House of Representatives, Mr. Igariwey Iduma-Enwo from Ebonyi State, has applied to a Federal High Court in Abuja, for an order of perpetual injunction restraining President Muhammadu Buhari from giving out funds to states and local governments without the appropriation by the National Assembly.
The lawmaker, who is a member of the Peoples Democratic Party (PDP), is irked by the decision of the president to bail out states many of which had been battling to pay their workers salaries’ now in arrears.
By the suit with number FHC/Abj/CS102215, the plaintiff asked the court to determine whether Buhari had such powers under the 1999 Constitution to give the bailout without the approval of the National Assembly.
Listed as defendants in the suit are the President; Attorney General of the Federation; Federal Ministry of Finance; Accountant-General of the Federation; Auditor-General of the Federation and the Revenue Mobilisation Allocation and Fiscal Commission.
The plaintiff, who represents Afikpo-North/South Federal Constituency, asked the court to determine whether Buhari, could by presidential fiat direct that public money from the pool account of the federal government be disbursed to states and local governments without recourse to the National Assembly, “the authority vested with the power of appropriation in this case.”
But the CBN has allayed fears by some Nigerians that the bailout funds may be frittered away by the governors, saying tight security measures which is one of the conditions set for its disbursement have been put in place.
The CBN spokesman, Mallam Muazu Ibrahim, speaking with The Guardian, said, “It is not possible that this funds will be diverted by anybody because it is tied to workers’ account details. In fact, as the disbursement is made the money goes straight to the workers accounts. All these measures have been put in place.
It is not possible to give you a figure of how much is involved because the states have peculiar needs and secondly, it’s purely a business relationship between the commercial banks and the affected States.
“Then CBN is just a facilitator, that is why we are not supposed to be talking on the figures release to the state because it’s a bank- customer relationship affairs.”
However, Nigeria has had a checkered history with debts, as past experiences have pitched the DMO against the Finance Ministry in recent years.
Between 2009 and 2010, Director General (DG) of Nigeria’s Debt Management Office (DMO) Abraham Nwankwo, was locked in a war with his former boss and benefactor Dr. Ngozi Okonjo Iweala, over the true picture of Nigeria’s domestic debt profile.
Then, it was ballooning, in the estimation of Dr. Iweala, who had left the country earlier in 2007 as Nigeria’s Finance Minister to assume a ‘higher’ stool as the Managing Director at the Breton Woods Institution, the World Bank, an organisation she left earlier as one of its Vice President to serve Nigeria.
The battle was fierce, with Dr. Iweala sounding a note of caution that Nigeria should watch the ‘reckless’ appetite of both the states and the Federal Government with regard to domestic credit from the debt market—both capital and money markets.
Her grouse with the moves were with the cost element of the loans; the crowding out of the private sector in the debt market; nature of most of the loans, which were purely for consumption and not production purposes, and the need not to return the country to the death trap of indebtedness, from which she assisted it in exiting, particularly from the Paris and London Clubs of creditors. After haplessly tagged a pariah state in the comity of nations due to debts, Nigeria had to painfully part with a whopping $12.4bn dollars to the Clubs under a debt relief deal, which saw the country gaining about $18b written off for her between 2005 and 2006 during former President Olusegun Obasanjo’s administration.
And by 2011, when Dr. Iweala was returning on her second tour of duty to Nigeria as Coordinating Minister for the Economy and Minister of Finance, her fears were confirmed. Nigeria’s domestic debt had already reached a crisis level, with yearly service commitment taking almost a quarter of the country’s Federal Government-approved fiscal year spending plan.
Pronto, she set about to clear government’s mounting local debt component by setting up a N75bn yearly retirement fund, so that credits can fall through instead of rolling them on a higher premium like Dr. Nwankwo did.
Giving reasons for the initiative, Dr. Iweala said the plan was to cut domestic borrowing to N500bn by 2014, as part of moves to reduce growing debt. She added that the local borrowing target of N577bn is expected to decrease the next year from the height reached in 2010, when it exceeded a target of N867.5bn and sold N1.1tn of bonds.
Nigeria, for the first time then, retired N75bn of maturing bonds in February of that year and pledged to continue to do so to reduce debt.
According to her: “Our current approach balances Nigeria’s needs for investment in physical and human infrastructure with a strong policy to limit overall indebtedness in relation to our ability to pay.”
However, as the Federal Government was attempting to address this malaise, the states, on the other hand, continued with the specter of loan grabbing. Even as quantity and price shocks from oil minerals resources negatively impacted on their revenue flows because the DMO, in assessing states’ debt sustainability, dwelt greatly on Federation Accounts revenue, instead of Internally Generated Revenue (IGR).