The Debt Management Office
The attention of the Debt Management Office (DMO) has been drawn to the Editorial on Page 12 of BusinessDay Newspaper Edition of Wednesday, July 25, 2018 titled “As Nigeria marches into another debt peonage”. The Editorial attempts in its own understanding to highlight the challenges of increasing external debt stock and external borrowing at high rates and advised Nigeria to approach the International Monetary Fund for cheaper funding.
Firstly, it is important to state that, in line with the provisions of the law, Domestic and External Borrowings by the Federal Government are approved by the National Assembly. The borrowings, which are typically a function of the deficit in the Budgets(which by definition is the difference between revenue and expenditure), are approved through the Budgetary Process. The New Domestic and New External Borrowings required to be sourced by the DMO on behalf of the Government are expressly provided for in the Appropriation Acts, which also includes expenditure items, and are therefore transparent. The public should be guided by the fact that borrowing is not an ad-hoc activity, rather it is determined jointly by the Executive and Legislative arms of the Government.
Also, borrowing by the Government is governed by legislations, principal of which are the Fiscal Responsibility Act, 2007 and the Debt Management Office (Establishment, Etc.) Act, 2003. For instance, the Fiscal Responsibility Act specifies that the Budget Deficit must not exceed 3% of the Gross Domestic Product in any particular year. This already and directly imposes a limit on the size of the Budget Deficit and consequently, the level of new borrowings that can be undertaken by the Government.
Regarding the utilization of borrowed funds, it is on record that the present administration has spent more on capital projects than any previous administration in any fiscal year. As an example, whereas the sum of USD2.80 billion (equivalent of N854 billion at the CBN Exchange Rate of USD/N305) was raised in 2017 in the International Capital Market (ICM) to finance the 2017 Budget Deficit, a total of N1.58 trillion, almost double the size of the external borrowing, was released by the Government for capital projects. The Government also released about N1.2 trillion for capital projects in 2016.
It shows that the Government is committed to bridging the infrastructure gap in order to improve the business environment and create more jobs.
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Furthermore, to judiciously utilize the New Domestic Borrowing in 2017, the DMO introduced two (2) new products in the Domestic Market, whose proceeds were project-tied. In this regard, the N100 billion Sovereign Sukuk issued in September 2017, was used to finance twenty-five (25) key economic road projects across the six (6) geo-political zones of the country.
The works on the twenty-five (25) road projects are visible to the public, and indeed the Government has received commendations for reconstructing and rehabilitating these roads, some of which had either been abandoned for many years or were unusable. Also in that direction, the N10.69 billion Green Bonds issued in December 2017 was tied to specific environment-friendly projects, which were certified eligible by Climate Bond Initiative. The Sukuk and Green Bond received international accolades; the Sukuk received the EMEA Finance Achievement Award of Best Naira Bond in 2017, while the Green Bond was rated GB1 Excellent by Moody’s Investors Service.
The BusinessDay Editorial also made reference to Government borrowing from external sources at ridiculous interest rates. Nothing could be further from the truth. For each capital raising in the ICM, Nigeria has secured the best pricing relative to its peers, that is, countries with similar sovereign ratings.
Any keen follower of securities issuances by emerging markets and frontier countries would have observed that the pricing obtained by Nigeria were very competitive compared to its peers. A good example is the 30-year Eurobond that was priced at a Coupon of 7.625%, whereas Ghana and Kenya which issued 30-year Euro bonds did so at Coupons of 8.625% and 8.25%, respectively. Indeed, in terms of security issuances in the ICM, Nigeria has been a pacesetter of some sort in Sub-Saharan Africa (excluding South Africa). For instance, Nigeria was the first to issue a 30-year Eurobond, which made it possible for other African countries to access the ICM for the same tenor.
It should be remembered that the ICM has enabled the Sovereign to access long-tenored funds (up to 30 years) which is most appropriate for financing infrastructure, while also enabling the Government to create more borrowing space in the domestic market for the private sector and reduce the level of interest rates. External capital raising has also contributed to External Reserves. The increase in Nigeria’s External Reserves from USD26.09 billion on January 1, 2017 to USD38.77 billion on December 31, 2017 was attributable in part to the USD4.80 billion external borrowing in the ICM in 2017.
The Editorial also alluded to high Debt Service Ratio, but ignored the fact that the Government has also embarked on several revenue boosting initiatives with a view to increasing the size of the revenue available to finance the Budget and reduce the Debt Service to Revenue Ratio. Some of the initiatives aimed at widening the tax net and improving collection efficiency include Voluntary Assets and Income Declaration Scheme (VAIDS); Intensive Registration of Tax Payers and Extensive Nationwide Tax Audit Exercise; and, Revision of National Tax Policy.
A keen observer of the Domestic Market would have observed that the Rates at the Federal Government of Nigeria Bonds and the Nigerian Treasury Bills Auctions, which represent the rates at which the Government borrows in the Domestic Market have dropped significantly from over 18.50%in January 2017 to 13-14% in December 2017 and about 11-14% since May 2018. This positive development is the outcome of the implementation of the Debt Management Strategy which entails substituting high-cost Domestic Debt with External Debt, and it has helped to moderate Debt Service Costs.
The advice in the Editorial that the Government should approach the International Monetary Fund (IMF) for cheaper external funds displayed poor understanding of the lending policies of the IMF. This is because the IMF only lends to countries which have Balance of Payment crisis.
Since Nigeria is not in a Balance of Payment crisis situation, it has no reason to approach the IMF for support. Nigeria’s current External Reserves of over USD47 billion, which is about 16 months import cover, is far above the minimum threshold of 6 months import cover prescribed by the IMF.
