Sovereign Guarantees: An Ineffective Way in Curbing Government’s Rising Debt Profile

by  Enifome O. Akporube, Esq.

Nigeria’s debt profile increases as the Government prepares for another round of borrowing.

According to the Debt Management Office (DMO), the total public debt of Nigeria as at 31 December 2020 stood at N32.915 trillion. This debt comprises N12.7 trillion in external debt, contracted by the Federal Government and N20.2 trillion in domestic debt including loans by banks. Of this amount, the Federal Government owed N16 trillion. The other balance are loans by the State Governments and the Federal Capital Territory (FCT). 

Despite this enormous debt profile, the Nigerian Government has expressed its interest in securing more loans. Perhaps because its borrowings are still within the World Bank’s and International Monetary Fund’s (IMF) threshold of 55% for foreign aid. Many Nigerians have castigated this initiative because they believe it is an attempt by the present government to mortgage the future of Nigerians. 

Borrowing should not always be seen from a negative viewpoint. Borrowing can also drive economic development. At the NAN Forum in Abuja, the Minister of Works and Housing, Hon. Babatunde Fashola, addressed this concern by stating that “it is in our interest that the government does some borrowing and spends it on investment because that sector contributes to the Gross Domestic Products (GDP) and contributes to employment.”

Earlier this year, Bloomberg had reported that the Federal Government of Nigeria through the Debt Management Office would increase sovereign guarantees to 5% of the GDP and begin issuing sovereign guarantees as  alternative means to funding capital projects in the Country instead of borrowing.

Defending it’s position, the DMO highlighted the benefits of sovereign guarantees across low interest-rate lines. It further emphasized that sovereign guarantees reduce the interest cost to the Government and enable the repayment of the principal sum of loans spread across many years. 

While I laud the Government’s initiative, I don’t see sovereign guarantees as a viable option for a developing economy like Nigeria. Kindly note that a sovereign guarantee is security for loans and not an alternative to borrowing.

Sovereign Guarantee and what it means for Nigeria’s bleeding economy.

Sovereign Guarantee is a common concept in Infrastructure Finance. Governments explore this option in obtaining loans that are project-tied from a project lender; it issues a sovereign guarantee as a promise to repay the loan. Consequently,  the host government makes assurances to take or refrain from taking certain actions that may adversely affect the successful completion of projects. Accordingly, it shields the project lender from certain risks in the event of unforeseen circumstances that may negatively affect the project; the Covid19 Pandemic, for instance. A country that issues a sovereign guarantee to a project lender may be compelled to bear all the economic risks that the pandemic caused the project.

Sovereign guarantee, an economic instrument, became a political tussle in Nigeria sometime in 2020. The tussle ensued at the interrogation of the Minister of Transportation, Hon. Rotimi Amaechi, by the House of Representative on the issuance of sovereign guarantees to the Chinese Government for the construction of railway lines across the country. The legislative investigation caused quite a stir, and somehow suggested that the Ministry of Transportation in collusion with the Ministry of Finance and Budget Planning had ceded the sovereignty of Nigeria to China. 

This controversy misinformed the public about the meaning and nature of a sovereign guarantee. As a result, many Nigerians accused the Minister of Transportation of ceding the country’s sovereignty to China. While this allegation is technically false, there might be some justifications for them since the one who plays the piper dictates the tune. China seems to be the player presently. Although Nigeria has not ceded its political sovereignty through the agreement it has with China, the economic sovereignty of the country is being threatened at the moment.

The rules of engagement must be fair.

In sovereign guarantee, much of the risks are borne by the host government. In Nigeria, the major project lender to her economy is the Chinese Government. Compared to other global creditors, the Chinese Government provides attractive concessional loans to developing countries through the Export-Import Bank of China. These loans are often characterized with low interest rates of about 2.8%, a tenure of 20 years and a 7-year moratorium. The loan is relatively cost-effective, and ignoble governments who do not weigh the pros and cons fall into a debt-trap. At my last check, Nigeria has utilized this facility in obtaining 17 loans from China for different capital projects. Some of the projects involved include,  Lagos-Ibadan, Ibadan- Kaduna, Kaduna – Kano and Abuja-Kaduna railway lines. 

It is speculated that China uses attractive concessional loans as a ploy to gain  economic control over developing countries. China’s loan terms are liberal because they are to be utilized for revenue-generating projects, which if completed, could be utilized in repaying the loan. But the Chinese government has absolved itself from any liability or eventuality that may arise during the course of the project. That seems like a fast one to me.

In a sovereign guarantee relationship, the higher burden is on the host government, who must ensure that it does not fail on the project otherwise it bears the risk of a concession.  The Nigerian Government must ensure that it takes loans that it can effectively manage by churning out sound policies such as exchange rates and political-risks insurance and not prejudice the performance of the project. 

Why Nigeria must not throw caution out of the wind in accessing foreign loans

According to a study from Germany’s Kiel Institute for the World Economy (IFW), China imposes unique conditions on borrowing nations which could be giving Beijing extraordinary influence over their economic and foreign policies. Nigeria had cause to investigate the veracity of this report through a commercial loan agreement it signed with China on September 8th, 2018. A clause in the agreement states that “The Borrower (ie, the state of Nigeria) hereby irrevocably waives any immunity on the grounds of sovereign or otherwise for itself and its property in connection with any arbitration proceeding pursuant to Article 8(5), thereof with the enforcement of any arbitral award pursuant thereto, except for the military assets and diplomatic assets”.

The implication of this clause is that the Nigerian government cannot rely on the defence of sovereign immunity to avoid the enforcement of any arbitral award against it. Where the Nigerian government defaults on its agreement, the Chinese government shall have the power to recover the loan through any assets in the country except military and diplomatic assets. In other words, the Chinese government shall have unfettered control over the attached national assets. 

The experience of Sri Lanka, Zambia and Rwanda are testimonies of what could be the likely fate of Nigeria if it defaults on her agreement.  Sri Lanka which is one of the beneficiaries of the Chinese soft loans lost its Magampura Mahinada Rajapaksa Port after it defaulted in repaying its debt. Zambia and Rwanda are on the verge of losing their electricity company ZESCO and port of Mobasa  respectively due to their inability to repay their debts. The antecedence of these countries reveal that the soft loans issued by China do not only deprive the borrowing nations of independence in formulating policies, but it threatens the economic sovereignty of such nations. 

Nigeria must secure its future by building its capacity and capabilities to become a producer-nation.

Some experts have connected Africa’s slow industrialization to it’s leaders–leaders who have failed to pursue bold economic policies for fear that they might be on the wrong side of the books with their donors. For instance, presently, Nigeria may not implement any policy that could prejudice China since China accounts for over 11% of the external debt stock of Nigeria.

Conversely, Nigeria must harness its own potentials, build her capacity and capabilities to become a producer-nation again. We must stop the gargantuan  consumerism that has characterized the nation. Loans and charities only service poverty. It never takes people to economic abundance and financial freedom. The hand that gives is always greater. 

Conclusion

Sovereign guarantees are not bad in themselves as they are only as good as the country issuing it. Countries like China and Sweden use sovereign guarantees in financing certain projects. The issue is not the sovereign guarantee but whether the country can pay its debts. If a country pays its debts, then the sovereign clause will not be activated against it. Factors such as the decline in global oil prices, unstable exchange rates and economic recession may affect a country’s ability to repay its debts. 

Nigeria should pedal softly on granting sovereign guarantees and issue Comfort Letters instead. Comfort Letters assures project lenders of the host government’s commitment to repaying the debt owed. It also protects the project lenders from any eventualities occasioned by any economic frictions in the performance of the loan-project. But issuance of sovereign guarantees or comfort letters does not curb borrowing if there are no sound policies to drive economic development.

About Enifome

Enifome O. Akporube is a Lagos-based lawyer. She has interest in International Economic Law and Comparative Copyrights Law. She is currently pursuing her LLM at the University of Ibadan. 

You may send her an email via enifomeabraham@gmail.com and reach her on call, 08100548867.


Share:

1 thought on “Sovereign Guarantees: An Ineffective Way in Curbing Government’s Rising Debt Profile

Leave a Reply

Your email address will not be published. Required fields are marked *