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Bayelsa, Benue, Ebonyi, Edo, Imo, Kaduna, Kwara, Lagos and Ogun: what do these states all have in common?

They have gone to the capital market to raise bonds ostensibly for various projects.

Before we go on,
let us define what a bond is. In finance, a bond is a debt security in
which the authorised issuer owes the holders a debt, and, depending on
the terms of the bond, is obliged to pay the interest, and to repay the
principal in the future, when the bond is said to mature. In English, a
bond is when you owe someone and repay with interest at an agreed date.

The idea behind the
government issuing bonds to finance large scale infrastructure projects
really took off in the United States at the end of World War II. Unlike
the pre-war years when there were many people who were willing to
accept next to nothing just to get some work, America had emerged from
the war as the only rich country in the world, and there were debts to
be bought. However, by the late 1950s and early 1960s, large, high
profile defaults on bonds particularly in the road construction sector
contributed to a perception that bonds were risky business.

We must however,
consider the two scenarios here, America pre-war (that is immediately
after The Great Depression), and America post-war (when there were a
lot of rich people). Then consider what is happening in Nigeria.

The first scenario
is what applies largely to Nigeria. Nigeria has a lot of able-bodied
young men who in reality constitute a vast pool of cheap labour.

Borrowing large
sums under the pretext of paying for projects that can be undertaken by
these people is in reality a non-starter.

I admit though,
there is indeed a need to tap into the cheap funds, which the bond
market supposedly represents, but that is if, and only if, the money
would be used for the purposes advertised. But the question has to be
asked about securities. What exactly would guarantee those bonds? How
do the various state governments intend to pay back the people who buy
the bonds?

Most importantly, WHY is it NOW that the state governments are one by one beginning to rush to the bond market?

A few years ago,
the Federal Ministry of Finance under Ngozi Okonjo-Iweala instituted a
process for handling bonds. A facility known as the Irrevocable
Standing Payment Order was instituted for all states, in the event that
a state could not make its bonds self paying. This means that states
that cannot pay back their bonds would have the money (plus interest)
deducted from their monthly federal allocations in the case of a
default.

You see, Nigeria is
a rent economy where the states do nothing but wait until the end of
the month (or is it beginning?) to receive their monthly allocations,
then go and share amongst each other. What becomes of such money is
anyone’s guess. The only state that has managed to extricate itself
from this vicious cycle is Lagos State. Lagos State has gone the route,
which the rest of the country really needs to go; one, which Edo State
has begun to slowly go down- taxes. If there were a proper and
efficient tax system in place, the issue of bonds and their payment
from the federal allocations would be a non-starter.

In recent times, strong signals have emerged to indicate that Nigeria is broke.

The excess crude
account created by the Obasanjo administration has been all but wiped
away, oil prices have not exactly been in favour of what is laid down
in the budget, and our legislators have been taking a lot more than
should be their fair share of our national income. This means that
there is a distinct possibility that the allocations from the federal
government to the states are beginning to dry up.

Now, given that our
state honchos are people who know how to do nothing other than
appropriate funds, staying in government would for them be paramount.
For those who have reached the end of their constitutionally allotted
tenures, anointing a ‘boy’ who would perform two functions is
important. The two functions are protecting their tenures from scrutiny
(remember Celestine Omehia in Rivers State), and to ensure that they
would still have a straw nestling deep in the government coffers
(remember Bola Tinubu in Lagos State). Ensuring all of this costs
money. And as we said, it is quite possible, that the only source of
money that they know is drying up.

Solution? Go into
the bond market, and take bonds that will over time be paid for with
future allocations from the Federal Government. How else can one
explain the mad rush by someone like Gbenga Daniels in Ogun State to
raise N100billion in bonds at all costs just a few months to the end of
his tenure?

How sustainable this is, is anyone’s guess, but the reality is this:
Nigeria can ill afford to go into more debt for any trivial reason, let
alone the avarice of serving government officials who are looking to
raise money in order to ensure that they remain in a position to steal
even more money.