External Debt Financing is a Bad Idea for now

Dear Mr President,

Nigeria expects to raise about 900 billion naira from external sources to fund the budget deficit. It seems like a pretty good idea, with interest rates at historical low levels in developed economies, debt financing has never looked more attractive. But in the world of finance, what is obviously right can be the wrongest decision. Naira has slid an average of 19% annually against the greenback in the last 30 years. Today we see dollar trading at ridiculously high levels in the parallel market, not to mention the value of pounds and euros against the naira in the foreign exchange market. If Nigeria begins to binge borrow externally from the rest of the world, then we must deploy the funds to increasing our export capacity in order to increase foreign exchange earnings. It is imperative that the debt should not be directed at local investments because if interest rates from America is around 0.25% and annual naira depreciation rate is 19%, the real cost of borrowing from abroad will be around 20% per annum. As it is, it is obvious that internal borrowing is cheaper than external borrowings as our local bonds are priced between 10-11% per annum.

The best use of zero interest rates abroad is for debt refinancing. Once America moves to join Japan at negative interest rates, our best course of action is to borrow to pay off existing debt, not take new ones for investment purposes. This will reduce the total amount of external debt owed by Nigeria.

We understand the government wants to grow the economy and we support this good initiative but it will be a grave mistake to borrow from abroad to support the local economy without first rectifying the persistent naira depreciation issue. A word is enough for the wise, even the blind can foresee the crisis ahead if this mistake is made.

Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
+2348137532722
emekaucheaga@gmail.com

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