Tuesday, 6 February 2018

Genesis of Cross River State Debt Overhang —by Cijeyu Ojong

6 February 2018 

The genesis of the now existing debt overhang in CRS which is currently being borne and suffered by all in the State is traceable to the borrowings for three major projects undertaken during the Donald Duke era (Governor of CRS: 1999 -2007): 

1) The Tinapa Project in Calabar 
2) The Obudu Cattle Ranch Project (actually in Obanliku) - renovation and revamping of the resort to international standards, building of 1st Cable Car in West Africa, the Beebi Airstrip and the Mountain Race initiative, etc.                   
3)The World Bank Water Project Loans.

There largely were serious mismatches in the financing mix of the projects. Short-term commercial bank loans were procured to fund long-term projects with irrevocable standing payment orders (ISPOs) secured against the State's share of monthly allocations from the Federation Account. Under such arrangements the projects can hardly generate the required cash-flows to service the debts meaning a likely project failure and a debt trap. The Tinapa Project had in addition a N40 billion Bond Issuance backed by Federal Government Guarantee. 

In 2005, as a then principal analyst, debt management strategist and lead officer of the Federal Government Securities issuance (FGN Bonds) at the Debt Management Office (DMO), I thought there was a lot of potential in the Tinapa Project and I was a bit sentimental because it was my home State and this was a huge opportunity for development coming, so when I analysed the Cross River State proposal for the Tinapa Bond issuance within my line of duties at the DMO, I recommended that the Federal Government should support and provide guarantee on the CRS Tinapa Bond issuance. I was then a mini-authority of some sort on those matters, so my opinion carried and was eventually approved by the Federal Government through the Honourable Minister of Finance.

Indeed, most States were then seen as high default risk candidates on any bond issuance or flotation in the capital markets as unlike the Federal Government their bonds cannot be said to be 'issued with full faith and credit' since they do not control the tools and instruments of monetary policy. Bonds in our market are usually subscribed to mostly by institutional investors that include banks. The idea is to reduce the high flotation costs and time-consuming processes that would occur if individual subscribers were to participate directly in the Bond issue. A system of primary dealers and market-makers facilitate trading of the bonds in the capital markets after the issuance. They have a system of marking to the market, trading on the margin accounts and gaining on the interest rate spreads. 

Unfortunately, CRS defaulted on the semi-annual fixed interest (coupon) payments on the Tinapa Bond and the Federal Government stepped-in to the rescue to maintain the integrity of the financial markets. That became a debt CRS owed the FGN. So, the Asset Management Company of Nigeria (AMCON) comes into the Tinapa picture in later years  to find ways of recovering FGN's assets (monetary). 

Conversely, most World Bank loans are highly concessionary with low interest rates, long moratorium periods and long maturities dates. In the debt management lingo they are referred to as multi-lateral institutions debts, which are part of the external debts of a country. They are external debts of a country because the borrowing is done offshore mostly in foreign currencies and in the country's name on behalf of the sub-national governments or target agencies of the Federal Government such as Ministries of Health, Education, Water Resources and Agriculture, etc. The country essentially provides the sovereign guarantee against a default which implies in the worst case scenario of a default, the country's external assets can be seized by creditors. 

In our case the FGN almost never defaults in servicing those multilateral loans and deducts promptly from the monthly allocations of the respective beneficiary entities to service the debts. Loans from African Development Bank and other international development financing institutions are multilateral external debts. Whereas country-to-country borrowings are bilateral external debts. Then there are different borrowing windows usually at commercial rates in the international capital markets including the sovereign bond. 

So, Cross River State like other sub-national governments cannot borrow externally on its name but through Sovereign Guarantees from the Federal Government of Nigeria. Such external borrowings of the country according to the Borrowing Guidelines that we developed at the DMO some 15 years ago or so require that external borrowing must be from highly concessionary sources with low interest rates and long moratorium or gestation periods. 

That was to effectively shut the window against unbridled borrowings at commercial rates from the international capital market by the Federal Government and Sub-national Governments in Nigeria as had been done previously leaving Nigeria then with a precarious external debt burden. And where such borrowings eventually occur and the loan service falls due, the Federal Government promptly makes monthly debt service deductions at source from the share of the Federation Account Allocation regarding any and all entities under such debt obligations that have Federal Government Sovereign Guarantee. 

Finally,  it should be recognised that the first step to solving a problem is acknowledging the problem and putting it in context to be able to find solutions. This treatise is by no means a blame game, rather it is more about alerting us as to the contextual setting of the debt quagmire we find ourselves in today as a State and to start thinking real and practical solutions to get us out of the woods. It should also be noted that all governments after Donald Duke in CRS compounded the problem with further borrowings and the projects in themselves were not necessarily bad. But the mechanisms for securing the loans may not have been the most optimal in line with best practice. We cannot for instance use short-term loans to finance long-term projects and hope for project success because the short-term loans will mature for repayment even before the project is completed and starts generating cash flows. 

Viva Cross River State!                                                                         
Cijeyu Ojong (Ceejay) is an Economist, Chartered Accountant and Public Financial Management Expert, who also was a foundation staffer of the Debt Management Office (DMO: 2001-2010) writes from Abuja. ceejayojong@yahoo.com

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