Following the expiration of the first Debt Management Strategy for Nigeria spanning 2012 through 2015, the Debt Management Office (DMO) has published a new Debt Management Strategy for the financial years 2016 through 2019. The strategy covers federal and state governments’ external debts as well as the federal government’s domestic debt and financing needs and is primarily concerned with ‘’how to optimally fund federal government’s primary balance’’ which is the difference between revenue and expenditure excluding debt service.
The federal government’s total debt portfolio as at end of December 2005 stood at N10.65 trillion (USD54.06 billion) equivalent to 11.11 percent of GDP. This is comprised of external debt of about N2.11 trillion (USD10.73 billion) representing 2.20 percent of GDP and domestic debt of about N8.54 trillion (USD43.34 billion) or 8.91 percent of GDP. While the country’s relatively low debt levels compared to total output show some fiscal space, this space is shrinking over time in the face of dwindling revenue. As disclosed by the DMO recently, Nigeria projects to spend 35.32 percent of its revenues servicing debt in 2016, up from 28.1 percent in 2015 and ‘’if measures are not taken to structure the portfolio in line with current economic realities, the significant drop in revenue poses a substantial risk to the public debt portfolio’’.
Consequently, the key driver of the new strategy is the desire to minimize the cost of debt service by lengthening the maturity profile of the domestic debt portfolio. The strategy also has an increased focus on slowing down the uptake of domestic borrowing with a view to rebalancing the public debt portfolio in favour of long-term external financing. It therefore envisages a significant reliance on external debt to meet the federal government budget financing requirement. Against the backdrop of public discourse which revolves around the sustainability of Nigeria’s ‘appetite for debt’, there is the need to interrogate the current debt strategy designed to guide federal government borrowing over the next four years.
In view of the fact that the current Debt Management Strategy was published in June 2016 and is expected to cover the periods from 2016 to 2019, two quarters after its commencement, would the time lag between the application of the strategy and its publication not affect its outcomes? Also, since the level of public debt is expected to be consistent with the overall fiscal framework as contained in the Medium Term Expenditure Framework (MTEF)/Fiscal Strategy Paper (FSP) which provides the basis for annual budget planning, why was the Debt Management Strategy not submitted to the National Assembly alongside the MTEF/FSP in December last year as is the practice elsewhere?
Another striking observation is the scope of the current Debt Management Strategy which does not tally with the scope of the MTEF/FSP approved by the National Assembly. While the former is for 4 years (2016-2019); the latter covers 3 years (2016-2018). Mindful of the fact that the Budget Office would have provided the requisite data for the preparation of the Debt Management Strategy up to 2019, it could be argued that any reliance on additional fiscal projections should only be based on estimates approved by the National Assembly in line with the Fiscal Responsibility Act (FRA) 2007 which provides in Section 41 (b) that “government shall ensure that the level of public debt as a proportion of national income is held at a sustainable level as prescribed by the National Assembly from time to time on the advice of the Minister’’.
Furthermore, if the ‘’optimal debt composition’’ for the planning period is 60:40 for domestic and foreign debt respectively as indicated in the current Debt Management Strategy, why are the borrowing projections in the MTEF and FSP 2016-2018 inconsistent with this set target? In 2016, for instance, a total of N1.836 trillion is projected comprising domestic debt of N1.2trillion and external debt of N636 billion representing 65.4 percent and 34.6 percent respectively. In 2017, a total of N1.417 trillion, made up of domestic debt of N1 trillion and foreign debt of N417 billion, is projected which translates to 70.6 percent and 29.4 percent respectively while in 2018, a total of N1.514 trillion is projected comprising domestic debt of N1.08trillion and external debt of N434 billion which is equivalent to 71.3 percent and 28.7 percent respectively. These projections are clearly at variance with the set objectives in the current strategy with regard to ‘’targeting an optimal debt composition of 60:40 for domestic and external debt respectively’’ which would be achieved by ‘’progressively increasing the percentage share of external financing’’. The projections for external financing in the MTEF/FSP of 34.6 percent, 29.4 percent, and 28.7 percent for fiscal years 2016, 2017 and 2018 respectively are not only many points shy of the target of 40 percent but also represent a progressive decrease in contradiction of the strategy.
Moreover, the country’s experience with the previous debt strategy casts some doubt on the optimality of the debt composition of 60:40 for domestic and external debt respectively. A cursory analysis of the implementation of the 2012-2015 debt strategy reveal that it was fairly adhered to especially with respect to the mix of domestic and external debt which was equally set at 60:40. Despite an actual outcome of 84:16 at the expiration of the strategy in 2015, a wide deviation from the target, it is surprising that the thrust of the 2016-2019 strategy remains unchanged at 60:40. Given the fact that the actual debt mix moved slightly from 88:12 as at end of 2011 to 84:16 as at end of 2015, shouldn’t this have informed a more realistic target of say 70:30 rather than the radical shift in favour of external debt?
While the Strategy makes the point that “the direct exposure to exchange rate risk is limited due to the low share of debt denominated in foreign currencies and low interest rate at concessional terms that apply to most of external debt’’, the sustainability of this narrative is doubtful in the light of current realities. Having attained a middle- income status, Nigeria is likely to have limited access to concessional funding which currently constitutes a larger proportion of the country’s external debt. Therefore a constrained access to concessional borrowing is a more realistic outlook over the medium term. In addition, the new forex policy of the Central Bank of Nigeria (CBN) which has left the local currency at the mercy of market forces is sure to trigger external vulnerabilities. The fact that the public debt portfolio is characterized by a relatively high share of domestic debt falling due within the next one year implies a relatively higher exposure to an interest rate risk since maturing debt will have to be refinanced at market rates, which could be higher than interest rates on existing debt. Be that as it may, even the current strategy recognizes that this can be mitigated by ’’further lengthening of the maturity profile of the domestic debt portfolio through reduction in the issuance of new short-dated debt instruments’’ with a view to reducing roll-over risks and the associated debt servicing costs while not sacrificing the ‘’need to maintain liquidity in the short-end of the government domestic securities market’’. These considerations provide a strong ground for a gradual rather than a radical switch away from domestic to external resources.
Joseph Uwaleke
