Nigeria’s debt restructuring plan amidst overspending raises fiscal policy questions

From Washington DC || A disclosure by Zainab Ahmed Nigeria’s minister of finance that the government intends to restructure it’s debt to enable flexibility on repayment, while planning to spend an unprecedented N20 trillion next year has raised critical questions about the country’s fiscal policy.

On Wednesday, on the sidelines of the ongoing 2022 annual meeting of the International Monetary Fund and the World Bank, Ahmed told a few reporters about the government’s plan to restructure its over N42 trillion debt (CBN ways and means). She also said consultans have already been appointed to facilitate the move.

According to the minister, the government also plans to refinance domestic debt obligations that are due this year and next, while the country’s N20 trillion naira in outstanding borrowings from the central bank will be converted into government bonds.

“It is a fact that Nigeria’s debt has increased over the past three to four years and this was occasioned by different kinds of exogenous shocks that the country has faced which are not unique to Nigeria,” the minister in charge of budgeting and planning said.

“The situation we have right now is that at least by the 2023 projection, we will be needing about 65 percent of our revenues to service debt.

“Unfortunately the cost of debt service is rising because of the rising interest rate globally, which is resulting also in higher debt service cost.

“We’ve been engaging the financial institution to look at the opportunity of how we can restructure our debt to further stretch our debt service period to give us more fiscal relief.

“Those are one of the things we are trying to achieve in these meetings.”

Ahmed insisted Nigeria is able to cope with its debt service in 2022 and 2023, but may not be able to tap the Eurobond market anytime soon except, perhaps, if yields improves to levels close to where they were when it last tapped international markets.

Nigeria sold a seven-year bond in March at a yield of 8.375%, far higher than a similar maturity it raised eight months earlier at 6.125%. It later shelved plans to borrow another $950 million in May after yields on outstanding bonds spiked to mid-double digits.

“As it is right now, it’s too expensive for us to borrow from the international capital market,” Ahmed said.

Read also: IMF laments Nigeria’s widening fiscal deficit

But government may look towards the IMF’s recent food security package for countries, which is equivalent to about 50% of the Special Drawing Rights (SDRs).

“We have not taken a decision to draw on that because we have to examine the requirements to see if it will be safe for us to draw because we don’t want to be drawn into an IMF programme,” the minister said.

“And as it is, we are studying the terms and conditions and if it works for us, we might decide to take it because the funds can certainly be useful in terms of adding to our reserves and also helping us to cope with the challenges that the country is facing especially as the recent floods could strain our food system.

“We realize that the floods that are happening currently are destroying crops and therefore harvest will be much less and will mean that more of our people will struggle to afford food.”

With N42.84 trillion already accumulated in debt, Nigeria plans to borrow additional N8.80 trillion to fund 2023 budget.

As contained in the proposed 2023 budget presented by President Muhammadu Buhari last Friday, fiscal deficit will widen to 4.78% of estimated GDP in 2023 as the government plans an unprecedented N20.51 trillion spending for the year. The projected deficit is above the 3 percent threshold set by the Fiscal Responsibility Act 2007.

Some experts who spoke with BusinessDay are concerned that renegotiating debt without a plan to stop overspending will lead to a crisis like what UK is facing right now.

“[Liz] Truss does tax cuts and increased spending of £65b at end of September. Market reacts violently. BOE, which Truss criticised, steps into market to provide liquidity from unwinding till Friday. Yields (borrowing costs) on U.K. government securities going up (prices go down) because investors see reckless fiscal policy. This impacts securities as far as the U.S,” Kabila Bilala, a financial advisor & founder of Tanabit, a financial data services company noted.

“Fast forward to Nigeria, Zainab, with no appreciation of financial markets or contagion, announces, what typically should be a bombshell, overseas that the FG is speaking with advisers to restructure all its debt (DMO & CBN). She does not consider the ramifications neither does she put the option of spending cuts.

“The image is just to show you the arrogance associated with our policy makers. The FG has a ready source of buyers – Pension funds – for its local debt. And because they tend to hold to maturity, there is no impact or change in the yield. As proof, the security mentioned in the article which will mature in 27 years, for instance, has a coupon of 14.8% at a time when the short term rate (MPR) is 15.5%. This in an environment where inflation is above 20%.

“So not only is the FG enjoying access to ready buyers at an ‘affordable cost’, it is also debasing its own currency by contributing to inflation. Simple words when it pays back the money to you and I (RSA owners) the value of what we can buy with it in the market has gone, & continues to go, down.”

According to another analyst, this was very predictable. The only question is the absence of realistic measures to curb our deficits. The analyst noted that it is a good thing that the issue is receiving attention before the country defaults on its debt.

However, the analyst pointed out that “restructuring” will likely have to come with measures that the government has been trying to avoid – deficit reduction, which means cutting costs like subsidy, governance and civil service costs etc, tax increases and a devaluation to encourage more dollar inflows.