The restructuring of the debt owed to the Central Bank of Nigeria (CBN) by the Federal Government is expected to reduce the debt pressure awaiting the incoming administration of Bola Tinubu, who emerged as President-elect at the end of the February 25 election.
The National Assembly has approved the request by President Muhammadu Buhari to restructure the N22.7 trillion loan from the CBN.
According to the Debt Management Office (DMO), the loans will be securitised with a tenor of 40 years, a moratorium (on principal only) of three years, an interest rate of 9 percent per annum, and repayment (amortising) to ne be done in 37 years.
“As a banker to the Federal Government of Nigeria, the CBN also advises on loan structure and management but the DMO is vested with the responsibility to manage the debt of the country and it is the DMO that is restructuring the loan,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.
The DMO said in a statement that the securities will be issued to the central bank by the Federal Government and will not be issued to the public by the government to raise funds.
It said the securitisation would improve debt transparency as the securitised ways and means advances will be included in the public debt statistics.
It said it will reduce the debt service cost, considering the new interest rate of 9 percent per annum compared to the Monetary Policy Rate plus 3 percent, which translates to 21.0 percent per annum (MPR – 18.0 percent + 3 percent) currently being charged on the ways and means advances.
“The large savings arising from the much lower interest rate will help reduce the deficit in the budget and expectedly, the level of new borrowings,” the debt office said.
The securitisation of the ways and means and advances does not involve new money being given to the Federal Government as the CBN had already provided the funds to the government, the DMO said.
It added that based on statutory provisions, the approval of the Senate and the House of Representatives are required for the securitisation.
Tope Fasua, CEO of Global Analytics Consulting Limited, said the securitisation would the next government and those to come “some breathing space”.
He said: “However, it means that they have to look elsewhere but the CBN for short-term finance because the Buhari administration has totally overdrawn that facility for at least the next 12 years.
“Further implication is that incoming administrations must be ingenious in tapping into other revenue sources and get serious about accruing Nigeria’s taxes, rents, rates, dues, duties, fines, fees and levies wherever they may be. However, there are still great opportunities for raising finance local and foreign. I personally favor grounding our debts locally.”
Akinwunmi of FSDH Merchant Bank said the costs of running government, businesses and families have increased significantly without a corresponding increase in revenues, profits and incomes, thereby necessitating taking in more loans to keep up with the increase in expenses.
He said: “So the securitisation of the N22.7 trillion ways and means advances from the CBN will improve the transparency of the loan of the FGN. In addition, the benefits of the drop in the interest rate on the loan will be good for the country going forward.
“It is good for the incoming administration to be led by Senator Bola Tinubu to implement policies that will be friendly for businesses so that businesses can improve and income will accrue to the government, businesses and households.”
Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said: “In respect of the securitisation of CBN’s ways and means advances, the government debt restructuring arrangement affords it a breather in terms of debt service burden in view of the fact that repayment of the over N22 trillion will now be spread over 40 years with a three-year grace period on the principal sum.”
He said the cost of annual debt service will reduce, given the concessional rate of 9 percent as against the current 20.5 percent interest rate charged on CBN loans.
Uwaleke said the cumulative effect of these would be a reduction in government budget deficit and freeing up resources that could be applied to more productive areas.
He said: “It’s also important to note that since the securities will only be taken up by the CBN and not the public, the fear that it will crowd out the private sector is no longer there.
“It’s important that going forward, adequate safeguards are put in place to ensure that CBN’s ways and means advances are curtailed due to its negative impact on the general price level. The relevant provisions of the CBN Act should clearly stipulate the conditions under which debt limits can be breached, the process which should involve approval by the National Assembly as well as stiff sanctions for breach of the limits provided in the Act without following due process.”