DMO Clarifies China's Loans to Nigeria; Economic Viability and Revenue Issues Left Out

Thursday, August 06, 2020 /12:17 PM / By The DMO / Header Image Credit: The China AfricaProject

Theattention of the Debt Management Office (DMO), has been drawn to statements andreports credited to several persons on the subject of Loans obtained from Chinaand has considered it necessary to provide a sequel to its Press Release on thesame subject dated September 11, 2018.

The general public is encouraged to be guided by the facts in this PressRelease.

How Much Loan has Nigeria Taken from China?

As at March 31, 2020, the Total Borrowing by Nigeria from China wasUSD3.121 billion. This amount represents only 3.94% of Nigeria's Total PublicDebt of USD79.303 billion as at March 31, 2020. Similarly, in terms of externalsources of funds, Loans from China accounted for 11.28% of the External DebtStock of USD27.67 billion at the same date. These data, show that China is nota major source of funding for the Nigerian Government.

What are the Terms of the Loans from China?

The Total Borrowing from China of USD3.121 billion as at March 31, 2020,are concessional Loans with Interest Rates of 2.50% p.a., Tenor of Twenty (20)years and Grace Period (Moratorium) of Seven (7) years. The Terms and otherdetails of the Loan are available at here

These Terms are compliant with the provisions of Section 41 (1a) of theFiscal Responsibility Act, 2007. In addition, the low interest rate reduces theInterest Cost to Government while the long tenor enables the repayment of the principalsum of the Loans over many years. These two benefits, make the provisions forDebt Service in the Annual Budget lower than they would otherwise have been ifthe Loans were on commercial terms.

What Were the Loans Used For?

The USD3.121 billion Loans are project-tied Loans. The projects, (elevenin number as at March 31, 2020), include: Nigerian Railway ModernizationProject (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four AirportTerminals Expansion Project (Abuja, Kano, Lagos and Port Harcourt),Nigerian Railway Modernization Project (Lagos-Ibadan section) and Rehabilitationand Upgrading of Abuja - Keffi- Makurdi Road Project. See a Full List ofthe Projects at here

The impact of these Loans is not only evident but visible. For instance,the Idu - Kaduna Rail Line has become a major source of transportation betweenAbuja and Kaduna. Also, the new International Airport in Abuja, has improvedair transportation for the populace, while the Lagos - Ibadan rail line whencompleted, will ease traffic on the busy Lagos -Ibadan Expressway.

The projects also have the added benefits of job creation, not only bythemselves but through direct and indirect service providers, a number of whichare Small and Medium Enterprises. It is widely accepted that investment ininfrastructure is one of the most effective tools for countries to achieveeconomic growth and development. Using Loans from China to financeinfrastructure is thus in alignment with this position.

What Is the Process by which the Loans were Obtained?

The principal process and requirements for borrowing by the Governmentare expressly stated in the Debt Management Office Establishment (ETC) Act, 2003 (DMOAct) and the Fiscal Responsibility Act, 2007. Section 21 (1) of the DMO Act, "No External loan shall be approved or obtained by the Minister unless itsterms and conditions shall have been laid before the National Assembly andapproved by its resolution" and Section 41 (1a) of the FRA, "Government at alltiers shall only borrow for capital expenditure and human development, providedthat, such borrowing shall be on concessional terms with low interest rate andwith a reasonable long amortization period subject to the approval of theappropriate legislative body where necessary", are instructive in this regard.

For detailed information on the borrowing process and required approvalsplease go to "External and Domestic Borrowing Guidelines for FederalGovernment, State Government and the Federal Capital Territory and theirAgencies" here

To summarise, the Federal Ministry of Finance, Budget and NationalPlanning works with the MDAs under whose portfolio a proposed loan falls andalso with the DMO. Thereafter, the approval of the Federal Executive Council(FEC) is sought. It is only after the approval by FEC that His Excellencyrequests for the approval of the National Assembly (NASS) as required bySection 41 of the Fiscal responsibility Act, 2007. More importantly, it is onlyafter the approval of NASS that the Loans are taken and Nigeria begins todrawdown on the Loans. In summary, Borrowing is a joint activity between theExecutive (FEC) and the Legislative (NASS) Arms of Government.

How Rigorous is the Loan Documentation?

The Loan Agreements are reviewed by legal officers of the FederalMinistry of Justice and the Legal Opinion of the Honourable Attorney General ofthe Federation and Minister of Justice is obtained before any External LoanAgreement is signed.

Can China Take Possession of the Projects Financed by them if NigeriaDefaults in the Servicing of the Loan?

Nigeria explicitly provides for Debt Service on its External andDomestic Debt in its Annual Budgets. In effect, this means that Debt Service isrecognised and payment is planned for.

In addition, a number of the projects being (and to be) financed by theLoans are either revenue generating or have the potential to generate revenue.

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