$500 Million Chinese Loan: Matters Arising; The Economics & Law Of Borrowing At Low-Interest Rate

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By Achor Omodu
August 2, 2020.

Suffice it to say that the Buhari administration is focused on raising the bar of public goods provision and infrastructural development. There is no doubt that there existed multi-sectoral gaps in development. The state of the nation before the Buhari administration was such that gave no hope to Nigerians and that is because earnings of the country were recklessly frittered away without care for the future. This was even when the country’s national income, mainly from our mono product-oil, was at its highest price in the international oil market.

Borrowing of funds, whether at personal, corporate or public levels is as old as mankind. Even the richest of countries, companies and individuals borrow. There is nothing wrong in borrowing, especially, if the fund borrowed is effectively and efficiently deployed to infrastructural development, expansion and new business development. Sustainable development advocates are wont to say that borrowing for development, especially when the interest rate is attractive is a good financing option.

The question any reasonable Nigerian would need to ask is whether Nigeria is experiencing a dearth in infrastructure. If we agree that there exists gaps in infrastructure, the next question would be, how do you we close these gaps as well as stimulate the economy for the good of the country?
Do we have the financial wherewithal at the moment to finance and fill up these gaps?

Primary macroeconomics is to the fact that at a time like this, long-term borrowing would be a very good financial option because the revenue earned from oil and other economic activities can be used to stimulate the economy while a little out of such earnings will be earmarked for repayment of debts spread over a long period of time.

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Any loan obtained by government and applied in public sector investment with a return on the investment which helps to boost productive capacity and increases economic growth should be encouraged. In this case, the government is acting like a firm who takes out a loan to finance an investment. The Nigerian rail project is not just a public sector investment but a catalyst that will boost the economy. Hitherto idle resources would become useful in factories and production lines.

When the loan is cheap, needy countries and governments all over the world usually borrow. Borrowing at very low-interest rates, especially during economic downturn is a good economic decision. When borrowing costs are low, it can be more desirable to borrow instead of raising taxes.
Economic growth tends to reduce the real debt burden. Assuming constant economic growth of 3% a year, the government can borrow more but maintain the same percentage of tax revenue on interest payments. The Chinese loan is 2.8% with twenty years repayment period and 7 years moratorium. This is good for us at this time.

The Keynesian perspective on why governments borrow: John Maynard Keynes, a renowned British economist, advocated higher government borrowing during recession and economic downturn. Keynes noted in recession and economic downturn, firms cut back investment and households cut back spending. This causes a rise in private sector saving and a rise in unused resources. In this circumstance, government borrowing will not cause crowding out, but inject money into the circular flow and kickstart economic activity. Government borrowing will enable economic recovery and an improvement in tax revenues. It’s even more desirable to finance public sector investments with low-interest loans in post-COVID-19 than ever.

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If you want infrastructure which ought to have been fixed in the time past but still lacking because previous governments frittered away substantial parts of our national income fixed now and you do not want taxes raised, the right option is low-interest loans which the Chinese are advancing to us.

The question of ceding our sovereignty to China if and when we default in paying back is neither here nor there. By the way, are those who consider the globally-accepted standards in international or bilateral lending ceding of sovereignty think that we cannot or won’t be willing to pay back the loan?
A debtor must pay back his debt. Lenders and lending authorities are not fools or Father Christmases (as we are wont to say here in this clime). So, clauses that will enable them recover their principal and interest must be inserted and communicated clearly for all to understand.

Like in mortgage transactions, the mortgagee will be willing to lend to the mortgagor because there is something of value the mortgagee can hold on to when the time for repayment has passed and the mortgagor is unable to repay. The mortgagee exercises any power/powers of recovery of the loan created in the mortgage transaction. The fundamental reasons lenders require security are to reduce credit risk and obtain priority over other creditors in the event that the borrower is unable to pay.

Sovereign Guarantees are contingent liabilities of the borrowing governments that come into play on the occurrence of an event covered by the guarantee. A security interest is a right granted by a debtor to a creditor over the debtor’s property (usually referred to as the collateral) which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations.

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This loan is for rail projects in Nigeria. The security is tied to the project itself. If after 20 years and 7 years moratorium period, Nigeria is unable to pay back, which is unlikely, the only asset the Chinese can take over and run profitably until they realize their principal and interest in full is the rail assets constructed with such borrowed funds.

–Achor Omodu, Esq. is a trained Resource Manager and a Legal Practitioner based in Port Harcourt.

DISCLAIMER: All articles are solely the responsibility of the Authors and do not reflect the views of the Publisher of DEROUNDTABLE.COM

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