Enhancing Nigeria’s debt management effectiveness

On Wednesday, May 20, precisely nine days to mounting the saddle, Vice President-elect Yemi Osinbajo looked visibly sad. It was at the opening ceremony of a two-day policy dialogue on the implementation of the agenda for change organised by the Policy, Research and Strategy Directorate of the Presidential Campaign Council of the All Progressives Congress (APC).

The cause of his discomfiture was the state of Nigeria’s public debt, which he said now stands at $60 billion, with our debt servicing bill for 2015 at N953.6 billion, representing 21 percent of the current budget. The worrying fact that came out his dirge was the revelation that “today, the nation borrows to fund recurrent expenditure”.

This is a clear departure from standard practice, in which nations usually borrow to close temporary budget deficits, or to invest in projects designed to increase the production capacity of their economies. This is when tax revenues subsequently rise and eventually close the deficit gap. How Nigeria came to form the habit of borrowing to fund recurrent expenditure is a serious cause for concern and a reason for revisiting our debt management policy. And this is not novel. Even in the US today, there is a raging debate on the need for review of the US debt management policy.

For example, last year Robin Greenwood of Harvard Business School and his other three colleagues, in a working paper presented at the Hutchins Centre on Fiscal and Monetary Policy at Brookings, in examining the appropriate debt management policy for the consolidated government, argued that traditional merits of longer-term debt may be overstated, and suggested that there are several advantages to issuing greater quantities of short-term debt. They pointed out that, under current institutional arrangements, neither the Federal Reserve nor the Treasury is caused to view debt management policy on the basis of the overall national interest. Therefore, they suggested revised institutional arrangements to promote greater cooperation between the Treasury and the Fed in setting debt management policy. This is particularly important, they said, when conventional monetary policy becomes constrained by the zero lower bound, leaving debt management as one of the few policy levers to support aggregate demand.

Greenwood and his Harvard colleagues only corroborated what another scholar of repute, Mohammed Rabie, contributing to Aljazeera.com, said three years earlier in 2011. Rabie argued that for the US to ameliorate its debt problem (which stood at $17.8 trillion as of September 2014) in the short run, the US president and congress have to acknowledge, first, that the traditional fiscal and monetary tools of economic and financial management are no longer workable. He asserted that if they continue to follow the largely outdated policies and give priority to political infighting and special interests, the problem will only get worse.

Nigeria’s rising debt profile is not, by itself, what is worrying. Rather, the concern should be how to effectively manage the debt. Managing the debt should not stop at advising government on terms and conditions of loans, restructuring and refinancing by the Debt Management Office. Just as the US scholars have argued, we too should look at the functions of our own DMO and see if adding oversight powers, for example, will help ensure proper utilisation of the funds they facilitated in securing. I strongly believe, for example, that included among the powers of the DMO should be the powers to intervene if loans are diverted from their original targets or if their implementations are having negative impact on the economy.

The DMO has done very well since its establishment in 2000. For example, following the historic Paris and London Club debt exit of 2005 and 2006, the DMO focused on domestic debt management strategies for the government, which include: using a market-based approach to raise finance in the domestic debt market to meet government’s borrowing needs at minimal cost and prudent degree of risks; funding the nation’s budget deficit in a non-inflationary manner without recourse to monetary financing; creating a market for long-term debt instruments which the private sector can build upon to raise funds for the funding of long-term investment in real sector; and developing the domestic bond market as part of the overall programme for the development of the financial sector.

The strategies have produced some results. In January 2011 Nigeria made its debut in the ICM through issuance of USD500 million 10-year Eurobond. Since then the confidence of the investors in Nigeria’s bond has been on the increase. In 2014 the DMO won the 2013 prestigious Best Sovereign Bond in Africa award for its decision to issue a USD1 billion Eurobonds in the International Capital Market (ICM) in 2013 despite the risk the pronouncements of US Fed tapering of Quantitative Easing (QE) might have had on the pricing of the bonds at that particular time.

Most of the funds generated from the ICM ($1.5bn) were supposed to go into financing and upgrading our power infrastructure which the country badly needs for its economic growth and development. But today our power generation is at its lowest ebb of less than 2000MW for Africa’s largest economy. The negative impact of dwindling power on the economy reached sobering proportions recently when many industries closed business and banks cut their operational hours by four-five hours to save cost of fuelling generators. It is clear for those watching the economy that while the DMO is providing effective direction on how the nation can finance its economic growth inexpensively, it is helpless in ensuring government or its agencies stick to the plan.

The fact that our cumulative domestic and international debt has risen from $35 billion in 2010 to $60 billion (as claimed by the vice president-elect) today, despite these strategies, means something is wrong somewhere. And I’m tempted to believe the problem lies not in the strategies DMO put forward but rather in the way a profligate government handles the borrowed funds, diverting them to non-productive sectors (such as financing recurrent expenditure). There should be some legal framework that will control how borrowed funds are utilised and the public should be well informed for transparency and accountability. Up-to-date information on public debt is the right of every citizen. In the last 10 years US Department of Treasury provides daily update on the country’s outstanding public debt on its website (which is $18.160trn as of May 25, 2015).

As a modern nation, we cannot run away from borrowing, but we need to put in place a mechanism that will ensure that funds are not diverted to other sectors not originally planned for and that we direct the funds to the productive sectors of our economy that will generate revenues to pay back the loans. And we, as a nation, must not make the mistakes of others, but rather learn from them. It is not a secret, for example, that the US’ spiralling debt portfolio is clearly as a result of that country borrowing to finance wars and wasteful conspicuous consumption. Savings rates in Japan, another developed country, have enabled the state to borrow from its citizens and recycle their money on their behalf. In contrast, the US government, due to low savings rates, owes about half of its public debt to foreigners. With the poor rate of account holders commensurate to our population, we should be more circumspect about how we utilise our borrowed funds.

The stakeholders in the management of our debt are formidable enough—the CBN, Ministry of Finance, Bureau of Statistics, the Budget Office, etc. So there is no shortage of regulation. What we need is the political will to apply the rules or to reform and make them more effective.

Bashir Ibrahim Hassan