‘DMO studies show states’ debts are sustainable’

 Q:Can you talk us through the Euro bond and Diaspora bond that have been planned for this year. Where are we?

A:The focus of the $1 billion Eurobond to be issued in 2013 is to mobilise enough resources to ensure that we address substantial part of the issue of infrastructure that will enable us convert our gas resources to power supply to the people.

This is contained in the Medium Term borrowing programme that Nigeria will raise $1 billion from the international capital market and this has been approved by the National Assembly

As we speak, the DMO has started all the necessary processes for implementation. For us to go to the international capital market, we have to do appropriate documentations, particularly the prospectus which will capture details of the Nigerian reality- our economic, financial, political realities- in fact all the issues relating to Nigeria will be well documented. This will give the true picture of what the Nigerian situation is, the potential, what its agenda is going forward, and this is to encourage investors to subscribe to the Eurobond offer. We are working seriously on that.

Already, the Vice President has given directives to the relevant Ministries, Departments and Agencies (MDAs), including the Ministry of Petroleum Resources, the Ministry of Power, Ministry of Finance, DMO to work collectively and package the necessary project documents. So we assure that the DMO is working with the other stakeholders under the guidance of the CME, the inspiration of the Vice President Sambo and that latest by the end of September, we would have succeeded in raising this money.

The whole essence was to make Nigeria’s name familiar and help establish reference points so that international investors will feel comfortable in case there is a Nigerian company that is coming, they will say yes, we are aware that there is country called Nigeria that it has a sovereign bond and they will check out how that bond is performing.

On the Africa Diaspora Bond being planned by the World Bank and Africa Development Bank, I want to say that we always show interest in anything that is interesting, but the issue is that we as Nigerians always do have our own initiative. We didn’t need anybody to remind us that we needed a diaspora bond, so we are working on a Nigeria Diaspora bond. But if the ADB and any other organisation articulates an Africa Diaspora bond, we will participate to the extent that it will add value to Nigeria and that there is no negative trade off. Yes, they are talking to us about an Africa Diaspora bond and we are interested in collaborating with them in this initiative of which the proceed could be used to fund specific projects in specific countries in Africa or even used to fund trans-country projects.

Looking at the issue of Nigeria’s debt profile, what is the actual position at the moment?

As at today, that is taking a cue from December 31 2012, our external debt is $6.5 billion, and our domestic debt is N6.5 trillion which if you put together in dollar terms, amount to about $48 billion. When you relate the total debt to our Gross Domestic Product (GDP), it will be about 19.4 % which is much lower than the 40% threshold. And this includes the external debts of states and federal government, domestic debts of federal government but not of states because that is the one we have been working on for the past five years. It has just been concluded and will be released soon.

Based on our reconstruction of states’ domestic debt, when you now add what all the different governments owe, Nigeria’s Debt-GDP ratio will still be below 21 percent. I want to say this even before the domestic debt of states is published. So when you take the comprehensive debt of the federal republic of Nigeria which includes the external debts of states and the federal government, domestic debt of states and that of the federal government, we will still be below 21%.

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We continue to emphasise that the debt to GDP ratio is not the only way we measure our debt sustainability, it is not the only solvency ratio, there are others like the debt-revenue ratio, the liquidity ratio, for example, debt service ratio which is your debt service compared to your export earnings. You also have your debt service compared to your total revenue, not just export revenue.

On the report that you concluded last year with regards to the states, even though you say the debt to GDP ratio overall is still below 21%, are there red flags across the states and where are these red flags?

In late 2007 into 2008, we started a programme of helping all states to establish their debt management departments. We thought that it is not responsible enough to be looking for where there is trouble and where there is none. Our challenge was not to look for a state that is not doing well, our challenge was to ensure that every state does well as far as public debt management is concerned. So we started with establishing the institutions, so the good news for Nigerians is that between 2008 and end of 2012, DMO has been able to conclude establishing debt management departments in every state of the federation and the FCT. This means that as at now, we don’t just have one debt management office in the country, but 38. This makes Nigeria, I guess the only country in the world that has so many debt management departments, I stand to be corrected. For us, that is a show of the commitment of DMO to contribute in special ways to the growth and development of the country.

Talking about red flags, if there were areas where the flags were red, I’m sure by now they would have turned green, because even if you had a problem and now have the appropriate institution to handle it, that means your problem is almost solved. So the emphasis should be that things have improved dramatically as long as sub-national debt management is concerned because to have the institution alone for me, is to have more than 60% of the problem solved.

We have finished the first phase of the job, and in a few weeks time, our report should have been presented to various authorities and then be made public. But the important thing I can say is that every state is in a very healthy position, that is the point we have always maintained.

You make it sound so rosy, are you sure will civil society for instance would actually agree because the notion people have is that most states for frivolous reasons take loans whether externally or locally and we need to know the challenges because it is not enough to just say nothing is wrong. We need to get a sense of the trend.

When we say nothing is wrong, you are asking of our debt sustainability and as far as I’m concerned nothing is wrong with our debt sustainability, every state is sustainable if that is what you are asking. But that does not mean that for every state, in terms of use of resources or borrowed funds, there are no challenges, no issues. For those issues to be dealt with , all stakeholders must be involved, including, you as the media, the state governments themselves, the house of Assemblies, the civil society, the students, politicians, lawyers, teachers etc. The DMO is not office of due process.

How do the states’ debts affect the nation’s debts and what is the DMO’s place in Nigeria in the global space?

The state debt is part of the total public debt and it is important to know what each state owes even though they are supposed to pay from their own resources. We have only one economy, so if something goes wrong with one or two states, it will go wrong with the whole economy, and that is why there is fiscal responsibility law. In this law, the sessions that deal with borrowing, debts and indebtedness gives the federal government the power and that is why no state can borrow externally without the approval of the federal government and without guarantee.

No state can borrow domestically from the capital market without following the rules of Securities and Exchange Commission (SEC) and getting the minister’s approval. When SEC and DMO access requirements for borrowing in the capital market, of course, they do it on behalf of the minister of finance and whatever we find we recommend to her to approve or not. This means that no state borrows from the capital market without due approval of the federal government. If you read the guidelines, no bank can lend to a state without clearance from the honourable minister of finance.

The endorsement by JP Morgan and Barclays Capital, what does it mean for our economy, how significant is it?

It is very significant because JP Morgan, Barclays Capital are all independent experts. What that means is that they are telling investors that they endorse Nigeria’s bond market; that it has been well developed, it’s been run well, and so investors are free and safe to go and invest there. Publishing the performance of the Nigerian bonds in their indexes means that when people want to invest, they go to their chat to see how different bonds are performing and which ones to invest in and in what combinations they should choose. Since Nigerian bonds have been included in their portfolio, it means they are encouraging people to even begin to look at them and invest in them. They are telling the international investors that there is a relatively mature, reliable market in Nigeria.

They are talking in terms of the quality of the market, that their guidelines is well regulated. Of course the FGN bond market was established mainly using the DMO in particular working in collaboration with the ministry of finance, SEC, CBN, Nigerian Stock Exchange and the private market operators, prominently the primary dealers and market makers whom we licensed. So what they are saying is that the system, the institutions are strong and the progress they have made, the way they are regulated the way auctions are held, the way the results are published, the way the debt is being managed will encourage you that this is one of the markets that you can go and invest your money, that is what JP Morgan and Barclays Capital are telling investors.

So it is an endorsement, more like a recommendation, you want to look for a job, somebody gives a recommendation to say I know this man well, so those institutions are recommending to say, well, we know the Nigerian market well, you can go there.

A lot of people have spoken about all sorts of bonds- infrastructure bond, housing bond that it now seems as if bonds will help us solve a lot of problems. What are the other strategic bonds that DMO might be considering to tackle some of the challenges we have in the economy?

The important thing is that we can only issue a bond in the context of what is appropriated, either in the annual budget or in the medium term borrowing plan. It is not as if we just wake up and go and float a bond for any purpose. There is a medium term borrowing programme which is a rolling plan and includes the $1 billion eurobond, the $100million diaspora bond, and also other borrowing, from the various multilateral financial institutions, the World Bank, ADB, Islamic Development Bank, the International Fund for Agricultural Development etc. We can only borrow within that context.

But one thing I’m sure is that those who are planning to issue various types of bonds work very closely with DMO at least for the packaging but whether or not such bonds will be raised for the balance sheet of the federal government is another issue. We cooperate with those who want to issue bonds but it does not mean that every bond floated is necessarily a debt burden for the government but may be for the balance sheet of the particular agency or sector issuing the bond. We should not be scared of the issue of issuing bonds,it’s on a case by case basis.

Have you ever turned down a request for borrowing, say from a state government?

When a state wants to borrow, there are certain requirements. So when states approach the federal government through DMO which will also be working according to the guidelines in the law, if such request meets the guidelines in the law, we must approve but if doesn’t fulfill all of them, it must not be approved. There are so many instances, otherwise there will be no need for you to evaluate and approve if you do not have the powers to disapprove. You don’t just tell a state, borrow or don’t borrow, you have to understand what the state wants.

Can you also do an assessment of your office so far ,talk to us about the DMO’s strategic plan, going forward?

We have already done the assessment implicitly. Five years ago, between 2008 and 2012, we set out to achieve a number of things. We looked at our strategic plan and there were about three major components. There was the issue of development of sub-national debt management capabilities. We have relatively established an efficient debt management system at the centre but we have 36-plus other governments in the country which did not have such capabilities.

So, one of our plan was to ensure that over the five years, they have the needed capabilities to manage debts. The second one was that we needed to develop the domestic bond market adequately, and the third one was that we needed to open a new window into the international capital market. These were the three major strategic objectives we have. Using this as yardstick, we have established 37 debt management departments in addition to the one at the federal level. There is no doubt that we need to do more in the next five years to strengthen these young institutions. But the most important thing is that these offices have been established.

For the bond market, going by the commendable assessment by the independent bodies like JP Morgan, Barclays Capital and for the International Finance Corporation (IFC) coming here to issue bonds in our market simply endorses the fact that we have achieved the objective of establishing and deepening our bond market. We were able in 2011 to issue the debut $500 million Eurobond which is doing well in the international market as I have explained. This is a good signal for the performance of the Nigerian economy, making sure that the Nigerian flag is always present in the international scene.

You can also check it how many Nigerian companies have been able to take advantage of this to raise money from the international capital market. And of course, we are riding on the back of that to go back to the market. So I think this a good summary of how far we have come, it doesn’t mean that we have done everything we wanted to do perfectly but these are some of the ones we have gotten between 90 and 100 percent. There are some where we have gotten only 50 or 70 percent and that is the essence of the second strategic plan.

The second strategic plan contain some new issues, challenges which we have to address but also there are remnants of the old challenges we need to complete. Even though we have established debt management departments in all the states, we need to consolidate, so we will now lay emphasis on building their skills. Moreover, we need to continue with them to ensure that they update their data quarterly. For us, the sub-national programme remains very critical in this third strategic plan we have. We believe this is area remains very important for the country. We need to make these institutions as strong as possible. We need to make them be very effective as we are at the centre as far as public debt management is concerned, we need to ensure that in the next five years, many of the debt management offices should be stronger and more skilled than even DMO at the centre, that is the ambition and remains the focal issue to deal with.

In the international capital market, we want to deepen our presence by going back to the market, building a stronger yield curve. This time around, we will attempt, if it is possible to push beyond ten years maturity period so that Nigeria can have a bond in the international market that is more than years.The debut offer we made was ten years but we will try as much as possible to push the frontiers to see whether we can even go beyond ten years to reflect the strength and confidence of the Nigerian economy with this bond issue.

Of course, we are using this period to tap into the Nigerians in Diaspora to make them to become part and parcel of this economy, that is why we are issuing the Diaspora bond.

So within these five years, we want to bring in the Nigerian Diaspora to be very important stakeholders in terms of playing in the Nigerian economy. We don’t want them to be aloof in terms of what is happening in the country, but we want them to be part and parcel of the solution and success story that we would tell in the near future.

In the bond market, we will continue to strategically limit government borrowing and create more space for private sector participation as the market continues to be developed.

We would encourage the private sector to issue more bonds to raise money so that they can invest in agriculture, railway, power, and all that. We will do everything possible to encourage them in this regard, raise money and develop the real sector of the economy.

We will also facilitate the growth of the market to ensure that investors come in. We will attempt, within this period, to introduce inflation-linked bonds such that the coupon is linked to the rate of inflation so that those who want to maintain a minimum rate of return will be encouraged to participate in the market.

Of course, we will introduce some other sophistication, encourage securities lending. DMO is working hard on that to ensure that primary users in the market are in a position to cushion them at any point. It’s just like giving you something you don’t have to sell, you should be able to borrow from somebody in order to make the market always vibrant.

Somebody can come for instance and say he wants to buy FGN bonds today, you cannot say you don’t have once the price is agreed, so there should be securities lending to smoothen the market.

in conclusion, the emphasis will still be on sub-national debt to make sure that state debts are sustainable by building a strong institutions, building strong capability, giving robust training, strengthening our position in the international capital market, introducing Nigeria Diaspora bond to get our people living abroad to be part and parcel of what we are doing here, improving the bond market in such a way that the private sector will be encouraged to issue their own bonds and of course, if there are special type of bonds like mortgage bonds and all that to be introduced, we will ensure that they succeed.

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