• N22.7 Trillion Public Debt: Nigeria’s Ticking Time Bomb

Discussions around Nigeria’s debt profile have been loud and clear. And when the country’s public debt profile hit N22.7 trillion based on Debt Management Office (DMO) statistics, the figure is of great concern to Nigerians.

But the Federal Government is rather positive about the figure, assuring Nigerians that there is nothing to worry, insisting that its borrowings are to provide national assets that will boost economic growth and development.

Federal Government’s domestic debt at the end of March stood at N15.9 trillion.

Speaking at the International Monetary Fund (IMF) Regional Economic Outlook for Africa with the theme: “Domestic Revenue Mobilisation and Private Investment,” in Lagos, DMO Director General Patience Oniha said Nigeria took loans to fund the budget and put more funds into the capital projects.

Oniha said with the level of reserves, oil production and population, Nigeria can’t be saying the country is an oil producing nation just like Saudi Arabia which is an oil producing nation.

She said Nigeria is miles apart from Saudi Arabia in terms of oil being a source of its revenue. “We have since realised we should not be benchmarking ourselves against these countries. We borrow because there is revenue shortfall. The National Assembly passed the budget last week and we know it was higher than what the executive presented. So, as a debt manager, what I am looking for is to see where the funding of that incremental size may come in from,” she said.

Oniha said the government would be borrowing to make up the shortfall in budget. “All of government’s borrowings were targeted at infrastructure development. Without borrowing, we won’t be able to deliver on the budget and I think we should be clear about that and a lot of that went into capital,” she said.

She said Nigeria should not focus on the debt to Gross Domestic Product (GDP) ratio, adding that the debt strategy is not to crowd out the private sector.

Oniha said the decline in interest rate means that there are about N200 billion out there in the market for private sector to invest. “You will also notice that we are retiring some of the Treasury Bills as they mature. The main challenge I am giving to the private sector is that why is all these money still sitting where it shouldn’t be? Why has it not reached the private sector because that was the key objective of our strategy.”

The IMF’s Head in Nigeria Amine Mati said Nigeria and other countries in the Sub-Saharam Africa need three to five per cent Gross Domestic Product (GDP) growth to thrive.

“We think that for the region, there needs to be three to five per cent GDP growth is needed. How do you get there? In Nigeria, you can remove a lot of exemptions and expand income taxes. If you look at all the various forms of taxation, you can take another look of property tax, then you can have tax administration and improving compliance. You know, in Nigeria, complying with many of the taxes is still very low,” he said.

He urged Nigeria to double tax compliance to GDP ratio from 25 per cent to 50 per cent. Such measure, he said, can make the difference in increasing revenue mobilisation.

He said raising growth is really key for the challenges ahead in Nigeria and Sub-Saharan Africa. “For the region as a whole, we can say the average growth rate on a per capita base is low. And a third of African countries, in 2017, with Nigeria as one of them, has seen a decline per capita GDP level. And we expect some of that to continue. To really make a difference, that trend needs to be reversed. So, the growth rate really needs to surpass its population growth to make a difference”.

He said the interesting characteristics are that non-resource countries have higher private investments. “Oil prices have gone up and this is an opportunity for these countries to really use the opportunity provided by the pick-up in oil price to initiate some reforms that would encourage more private sector investments,” he said.

According to the DMO, the combined debt of of the federal and the state government stood at N6.75 trillion. The new Debt Management Strategy (DMS), Ms. Oniha said, has brought about the restructuring of the debt portfolio, which “has resulted in reduced debt servicing costs, lowered interest rates in the domestic market and an improved availability of credit facilities to the private sector.”

Explaining the motive behind the recent spate of borrowings, the DMO chief said: “It (borrowing) is essentially for financing capital expenditure and stimulating the economy. The funds injected through borrowing strongly supported the implementation of the Federal Government’s budget, which helped the country to exit recession in 2017.”

Former Executive Director in Keystone Bank Richard Obire said when it comes to debt, what is important is not the figure, but the developmental projects that the borrowed funds are used to finance.

Obire said: “I am not concerned about the size of the debt, but do such debts have the capacity for repayment? Also important is whether the debt is cash-flow friendly and of relatively low pricing. The problem with Nigeria’s debts is that when you look around, you will be searching for what the funds were used to do.”

Obire said that at this level of borrowing, the road and electricity infrastructure, airport infrastructure, social infrastructure, such as health and education, and even broadband infrastructure, should be visible for all to see where the funds have been channeled to.

“The problem with this high debt is that you cannot really justify the high borrowing. We need to channel the loans to productive sectors of the economy.

“The government has to explain where the funds had gone to. Have you seen any new university, health care centre? I have not seen something dramatic. Overall, I have nothing against borrowing, but the funds must be channeled to good uses.”

Besides, the government saw the recession which ended last year as an opportunity to widen its borrowing plan. There were approvals to borrow from the World Bank, African Development Bank (AfDB), Japan International Cooperation Agency (JICA) and Export-Import Bank of China. The DMO has a mandate to facilitate access to the funds from the multinational agencies.

The move came on the heels of an approval for a three-year external borrowing plan. The government’s plan was to raise about $5 billion from Eurobond market and multinational and bilateral lenders.Regarding foreign debt, the strategy is to borrow on non-concessionary terms for projects with self-paying capacity, and/or job creation potential, and on concessionary terms and grants for social sector projects.

The Director-General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. AkpanEkpo, explained that budgetary allocations alone may be inadequate to finance the infrastructure deficit with dwindling oil revenue.

Prof. Ekpo described the borrowing option the most viable; pointing out that Nigeria’s rebased (Gross Domestic Product (GDP) economy has given it the leeway to borrow more to bridge infrastructure gap.Ekpo said the government can also borrow internally to achieve the feat, even as he disclosed that internal borrowing is always short-term while external borrowing has longer tenor.

Ekpo said the DMO has the capacity and constitutional role to advise the government on the available choices. “The World Bank rates are cheaper with longer repayment term. The DMO can also leverage on the Nigeria Trust Fund with the AfDB to get a better deal on the loans needed to fund developmental projects”, Ekpo said.

Nigeria has been grappling with economic crisis since crude oil prices dropped by about 43 per cent from an average of $100.35 throughout 2014 to an average of $65.20 presently.Specifically, the drastic fall in the prices of crude oil, which constitutes the largest component of the forex reserves has cut dollar earnings from about $3.2 billion monthly to about a billion dollar for the same period. Analysts believe that with the fall in crude oil prices, the government needs to borrow to support economic development, but the funds must be well utilised.

OlakunleEzun, a currencies analyst with Ecobank Nigeria, said the DMO works closely with the government to manage the national debts. He said although funds from the domestic bond market are more expensive than the international bond market, investing in the local bond market is also in the best interest of the economy.

The FGN Bonds, he added, helps the government in the funding of its deficits in a non-inflationary manner while providing the benchmark yield-curve for pricing other securities/bonds. It also engenders rational management of government’s fiscal and monetary operations.

Ezun said that the debts, if well-spent, will boost liquidity in the economy and investment in key sectors like agriculture and mining, among others.

Fresh $2.8b loan targeted abroad

The Federal Government plans to raise $2.8 billion of debt offshore as part of its 2018 budget and will explore all options to lower costs, Oniha said.

The government has laid out plans to borrow abroad even though interest rates are rising in the United States which could see Nigeria pay a higher premium on this occasion compared with its most recent debt sale in February.

She said the debt office has sent a request for a proposal to banks for an international bond offering, IFR reported, citing sources. “We will explore all options keeping in mind our twin objectives of extending the tenor of the debt stock and lowering costs,” Oniha told Reuters.

The parliament needs to approve the new borrowing. Oniha in January said the DMO could tap capital markets or concessionary loans from the World Bank and would consider funding options after the 2018 budget had been approved.

President Muhammadu Buhari last week signed a record N9.12 trillion budget for 2018 into law, aimed at fostering growth in Nigeria before elections next February, in which he will seek a second term.

Growth rates in Nigeria have bounced back since the third quarter of 2016, when a recession, its first in 25 years, hit bottom. It exited that contraction last year, largely due to higher oil prices, with the country relying on crude sales for much of its revenue.

However, growth slowed in the first quarter of 2018 for the first time since pulling out of recession as its non-oil sector struggled. Nigeria raised $2.5 billion through a dual-tranche Eurobond offering in February, selling a 12-year note at 7.1 per cent to raise $1.25 billion and a 20-year tranche at 7.7 percent. The February deal was the second international bond sale in less than three months, after the debt office raised $3 billion through an offering of 10- and 30- year bonds in November.

Diversification to the rescue

As worrisome as the economic indicators may be, analysts described them as temporary and surmountable setbacks when the government’s policy on diversification of the economy begins to crystalise.

According to them, after diversification, growth would no longer be determined by the prices of crude oil even as the country has been unable to exploit up to 25 per cent of opportunities in agriculture.They said: “We need to achieve internal food security and have the opportunity to export agro-based products in processed form. Imagine the variety of food stuff from savannah to the deserts, all the various legumes, roots and others that can be grown from these environments.

“If we effectively exploit agriculture, if and as we are making progress in agriculture, firstly, the major consumer of our forex like agro-based raw materials, rice, fish, poultry, wheat, will be taken care of and government will save billions of dollars from these imports.”

To them, the government’s ability to borrow from a domestic debt market also has some strategic value. Besides, domestic debt reduces the exposure of the country to exchange rate risks and the limitations of the size of foreign reserves.

The independence, they said, lies in the country having the option to exercise the choice to borrow from internal sources, external sources, or a mixture of both.”Sovereign borrowing from the domestic debt market encourages the development of a functional bond market, with the scope to introduce different instruments, which will encourage the habit of domestic saving, intermediation and investment. Such a functional domestic bond market will be tapped by the private sector to raise long-term funds for investment in the real sector and infrastructure projects. Nigeria has developed a deep and liquid domestic bond market where funds of up to 20 years tenor can be raised,” they said.

Borrowing guidelines

By law, the government may borrow from the capital market, subject to National Assembly’s approval. The government at all tiers shall only borrow for capital expenditure and human development on concessional terms,” the DMO guidelines said.

Any government, or its agencies, can only obtain external loans through the Federal Government and such loans must be supported by a Federal Government Guarantee. The guideline stipulates: “No state, local government or federal agency shall, on its own, borrow externally. State governments and their agencies wishing to obtain external loans shall obtain Federal Government’s approval-in-principle from the Federal Ministry of Finance.”

However, the borrowing proposal must be submitted to the Ministry of Finance and the DMO for consideration. The proposal must state the purpose for which the borrowing is intended and its link to the government’s development agenda.

It must also state the cost-benefit analysis, showing the economic and social benefits to which the intended borrowing is to be applied; cash-flow statements of the Ministries, Departments and Agencies (MDAs), to ascertain their viability and sustainability.

There must also be copies of the state’s executive council’s approval and the resolution of the State House of Assembly.Also, all banks and financial institutions requiring lending money to the federal, state and local government areas or their agencies shall obtain the prior approval of the minister of Finance and shall state the purpose of the borrowing and its tenor.

Govt bonds still get positive rates

The government recently announced that it priced its offering of $2.5 billion aggregate principal amount of dual series notes under its Global Medium Term Note Programme. The notes comprise a $1.25 billion 12-year series and a $1.25 billion 20-year series. The 12-year series will bear interest at a rate of 7.143 per cent, while the 20-year series will bear interest at a rate of 7.696 per cent, and, in each case, will be repayable with a bullet repayment of the principal on maturity.

The offer is expected to close on or about 23 February 2018, subject to the satisfaction of various customary closing conditions.The country intends to use the proceeds of the notes for the refinancing of domestic debt. The notes represent the Republic’s fifth Eurobond issuance, following issuances in 2011, 2013 and two in 2017.

The offer has attracted significant interest from leading global institutional investors with a peak order book of over $11.5 billion. When issued, the notes will be admitted to the official list of the UK Listing Authority and available to trade on the London Stock Exchange’s regulated market. The Republic may apply for the notes to be eligible for trading and listed on the Nigerian FMDQ OTC Securities Exchange and the Nigerian Stock Exchange (NSE).