• Friday, April 12, 2024
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Public debt burden: Dollar-backed t-bills as a breather


In an apparent move to ease the country’s huge debt service burden following the rising cost of servicing domestic debt, the federal government plans to refinance $3billion worth of naira-denominated short-term Treasury bills with dollar borrowing of up to three years’ maturity.

According to the Finance Minister, Mrs. Kemi Adeosun, who made the disclosure recently, the plan, which is tantamount to ‘’debt restructuring’’ involving borrowing in dollars instead of naira, will go a long way in halving the cost of borrowing thereby reducing the pressure on domestic debt service considering that ‘’the average rate at which we borrow internationally is at seven per cent; whereas on our Treasury bills, we are paying between 13 per cent and 18.5 per cent’’.

Expectedly, not a few have voiced opposition to the plan, not least because the country’s experience with foreign creditors especially prior to 2005 (when Nigeria pulled free from the yoke of the Paris and London clubs) was nothing to write home about. There is the fear that despite the fact that foreign loans may be relatively cheaper, the debt burden will become more severe in the event of another oil price shock given the country’s over reliance on oil for foreign exchange. It is also argued that an additional $3 billion will add to the existing stock of foreign debt and since this will not be used for any productive investment, interest and principal repayments will be at the expense of investment in critical infrastructure.

Be that as it may, the merits of the plan far outweigh the demerits.  Treasury bills are short term debt instruments with a maturity profile of a maximum of 364 days. The refinancing arrangement will ensure that instead of rolling over the debts as they mature, the government is in a position to repay by borrowing for up to three years in the expectation that as the economy recovers and grows, the country will be in a better position to make repayment.  It is equally expected that by reducing government’s borrowing by $3bn, more room is created for banks to lend to the private sector which may translate to downward pressure on interest rates. Furthermore, the immediate impact on the foreign exchange market will be positive since dollar denominated loans will typically increase the nation’s external reserves, thus helping to strengthen the naira

Indeed, a cursory look at data from the Debt Management Office provides some justification for this initiative. As at March 31, 2017, the domestic debt stock of the federal government was about N12 trillion while the total external debt stock stood at $13,807.59 or about N4.3 trillion. Of the domestic debt stock, Nigerian Treasury Bills constitute 30.08 percent while FGN Bonds account for 68 per cent. Actual external debt service in 2016 was $353,093.54 (about N108 million)with the bulk of the obligations (47 per cent) to Multilateral Institutions (mainly the World Bank Group and African Development Bank); while actual domestic debt service in 2016 stood at N1.3 trillion with Nigerian Treasury Bills taking up N336 billion and FGN Bond N839billion. In the 2017 budget, over N1.8 trillion is allocated for debt servicing alone the bulk of which is meant to service domestic debt.

So the challenge really comes more from coping with domestic debt service than meeting foreign obligations. This is further confirmed by the 2016 Debt Sustainability Analysis report which stated that ‘’the liquidity ratio revealed gross weaknesses in the structure of the economy, as the ratio of Public Debt Service-to-Revenue of 28.10 percent as at end of December, 2015, breached the Country-Specific threshold of 28 percent. This highlights a potential risk to the debt portfolio, which could be exacerbated by the developments in the international oil market, as further decline in global oil prices would exert undue pressures on the already fragile economy, including the debt position in the medium to long-term’’.

Consequently, the Debt Management Strategy, 2016-2019, provides for the rebalancing of the debt portfolio from its composition of 84:16 as at end-December, 2015, to an optimal mix of 60:40 by end-December, 2019 for domestic to external debts, respectively. The key policy recommendation of the 2016 DSA is to the effect that given ‘’the Country-Specific threshold of 19.39 percent for NPV of Total Public Debt-to-GDP ratio (up to 2017), the borrowing space available is 5.89 percent of the estimated GDP of US$374.95 billion for 2017.  To this end, the maximum amount that could be borrowed (domestic and external) by the FGN in 2017 without violating the country-specific threshold will be US$22.08 billion (i.e. 5.89 percent of US$374.95 billion). It is proposed to be obtained from both the domestic and external sources as follows:  new Domestic Borrowing US$5.52 billion (equivalent of about N1,600 billion); and new External Borrowing: US$16.56 billion (equivalent of about N4,800 billion)’’.  It is pertinent to note that these are recommended maximum amounts that could be sourced, taking into cognizance the absorptive capacity of the domestic debt market and the options available in the international debt market. This policy stance has been reinforced by the recent economic headwinds and the rising cost of domestic borrowing. Hence, the shift of emphasis to external borrowing would help to reduce debt service burden in the short to medium-term and further create more borrowing space for the private sector in the domestic market. 

Now that the government has concluded with the prospective lenders and waiting for the nod of the National Assembly as disclosed by the Finance Minister, it is vital to put in the public domain detailed information regarding the sources and cost implications to enable the National Assembly reach a well informed decision which provides assurance that the plan is in sync with the government’s Economic Recovery and Growth Plan.

To be sure, not even the Finance Minister is under any illusion that the $3 billion debt refinancing plan is a panacea to the country’s rising debt burden. But it does provide the much needed breather while the government concentrates on current efforts aimed at diversifying the country’s economy.

Uche Uwaleke