Borrowing money, accessing credit facilities and eventually being in debt are all part and parcel of the modern economy and way of living. It is as true of individuals as of nations. Borrowing in itself is not a problem when it enables individuals and nations to acquire what they desperately need without having to wait till they can save the amount. Borrowing only becomes an issue when people or nations take on too much or have trouble meeting their commitments or there is mismanagement of the borrowed funds due to personal indiscipline or corruption in high places at the national level. Therefore, what individuals and nations need is proper management of their debt profiles.
The history of debt can be traced to some 5,000 years of human history. But it remains a serious and complex issue. Many wars have been fought over indebtedness. Nations and economies have been grounded on account of debts, while many companies are driven into bankruptcy due to poor handling of their debts. David Graeber, in his 2011 award-winning book Debt: The First 5,000 Years even argues that debt has often driven revolutions and social and political changes. The “Occupy” Wall Street uprising in the US recently may readily come to mind.
However, no modern nation can avoid incurring public debt. The free market economy that drives the world is a debt-based economy. True, in the past, debt was often issued to finance wars and other extraordinary events, but most recently Public Debts have been used for more peaceful ends, such as real investments, health care, education and communication systems and the establishment of a social security system.
Perhaps this explains partly why the most technologically advanced and most productive economies, represented by the United State and the rest G20 countries, account for the biggest public debt in the world today. In fact indebtedness has been the norm in United States financial history, as indeed most Western European and North American countries for the past 200 years. It is on record that the US has been in debt every year since its formation in 1789, except for 1835. Similarly, it is on record that every President since Herbert Hoover has added to the national debt. This indebtedness led the US government and the Congress to introduce debt ceilings at one point in history. But recent history shows the debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Regan, eight times under Bill Clinton, seven times under George W. Bush, and five times, so far, under Barack Obama.
Does this mean we don’t have to fear debt? Yes, in so far as we equip ourselves with policies and instruments that will help us manage it. Even then, despite our management prowess, things cannot go out of balance. So coming home, how is Nigeria managing its debt profile?
A little insight can help us understand and put into perspective what is happening at our Debt Management Office (DMO), currently led by Dr. Abraham Nwankwo, a 1985 winner of the outstanding prize in Economic research and first Ph D candidate of Economics to graduate from the University of Nigeria in the first 25 years of its establishment. Prior to 4th October, 2000, when the Debt Management Office was established for the first time in the country, Nigeria’s debt was handled by a myriad of establishments in an uncoordinated manner. Such diffused debt management strategy led to gross inefficiencies. In those days you could find four different departments in Federal Ministry of Finance alone handling different types of our foreign debts portfolios; not to talk of a number of departments in the Central Bank of Nigeria also managing the same debt.
However with the establishment of the DMO to centrally coordinate the management of the country’s debt a path to sanity, the path of professionalism and efficiency was being boldly taken. The functions DMO are clearly are spelt out in detail in Sections 6 and 7 of the DMO Act, 2003 (as recently amended). They include advising the Government on Terms and Conditions of Loans, Restructuring and Refinancing; Maintaining a complete and accurate database of all FGN Borrowings (Domestic and External) including contingent liabilities (guarantees) and Preparing and submitting to the Government, annually, a forecast of debt service and borrowing capacity.
Other functions are efficient management of Nigeria’s Domestic and External Debt Stocks, including the financial and currency risks; managing relationships with local and international creditors and investors issue; issuing and managing FGN securities issued publicly and publishing Debt Data.
In its fourteen years of existence, seven of which have been under the leadership of Dr. Nwankwo, the DMO has revolutionized how Nigeria manages its debts. Debt stocks are now more accurate, up-to-date and regularly published. Nigeria proudly flaunts its debt management credentials around the world and was readily admitted into the international capital market (ICM) with much respect. Its debut USD 500 million bonds issued in ICM in 2011, for example, were oversubscribed. This was closely followed by the successful issuance of a USD 1 billion dual-tranche bond offering on July 2, 2013, of USD 500 million 5-year Bond and USD 500 million 10-year Bond at Coupons of 5.125% and 6.375% p.a., respectively.
Dr. Nwankwo, who had a stint at the Board of the World Bank where he served as Senior Advisor to the Executive Director (Africa Group II Constituency), has won the confidence of the International Capital Market operators. The thorough-bred economist enjoys the same confidence at home from President Jonathan. He joined the DMO as Assistant Director a year after it was established and, by 2007, was appointed its Director-General for a five-year term, which was recently renewed for another term.
The passion with which Dr. Nwankwo approaches his work has had a profound impact on the net results we are seeing in the management of the country’s debt stock. His efforts to create opportunities for the Private Sector and sub-nationals have been yielding results. This was achieved through the resumption of market-based funding of Federal Government financing needs, which was made possible through tenor elongation and establishment of sovereign yield curves of 3 months to 20 years, thereby creating a market for long-term funds.
The diversification of the holding structure of FGN securities is aimed at achieving about 93 percent non-CBN holding. DMO has also streamlined and restructured the different types of outstanding debt instruments. It ensures regular issuance of Bonds and development of active secondary market for FGN Bonds.
The achievements recorded in the development of the domestic debt market led to the recognition and endorsement of the FGN Bond market by reputable international financial institutions, notably: JP Morgan, which included FGN Bonds in its Emerging Markets-Government Bond Index (EM-GBI) on October 1, 2012; and, Barclays Capital, which also included FGN Bonds in its Emerging Markets-Local Currency Bond Index (EM-LCBI), effective March 01, 2013.
Debt is an important component of fiscal policy of any country and, therefore, has implications for its economic growth and development. Governments of both emerging and developed economies will continue to borrow. And this will have implications for the future cash flows of Government Debt Service and on their domestic financial market. What is imperative is not a panic due to rising debt profile of domestic and foreign nature but a prudent debt management strategy to meet government’s borrowing needs at minimal costs and a degree of risks in funding the nation’s budget deficit in a non-inflationary manner, without recourse to monetary financing. All of these strategies have already found their proud place in Dr. Nwankwo’s governance of the Nigeria’s Debt Management Office.
By: Phillip Isakpa
Contributed by Bashir Ibrahim Hassan