Anxiety over Nigeria’s N22tn public debt

In the view of economic and financial analysts, the nation’s rising debts portfolio does not bode well for an economy in dire financial straits fueled in part by depleting oil revenues and other sources.

To say the alarming rate at which the nation’s public debt is growing has become a source of worry to many is certainly stating the obvious. Truth is, the public debt has literally gone south again, barely few years after the country exited the much contentious debts bobby trap.

Domestic debt is defined as debt denominated in local currency. The management of domestic debt in Nigeria has hitherto been conducted by the Central Bank of Nigeria (CBN) through the issuance of government debt instruments

According to analysts, Nigeria has relied much on public debt to finance its development projects in the past two decades ago with public debts which put its debt profile so high. Thus, before the debt write-off by the Paris-club and London club the result shows that the impact on Nigeria economy was much compared to present time. Though, the exit from the Paris club and London club actually reduced Nigeria’s external debt, whereas the domestic debt and the effect created by the huge debt before the debt write-off still have lag effect on the economy. Therefore, based on the above findings we recommended that Nigeria should not borrow now either internally or externally.

DMO’s alarm

According to the Debt Management Office, Nigeria’s total public debt rose marginally by 4.52% to $74.28 billion (N22.71 trillion) as at March 31, 2018.

The DMO said the Q1 2018 increase was accounted for largely by the increase in the domestic debts of the 36 states of the federation and the Federal Capital Territory (FCT), as well as the $2.5 billion Eurobond issued in February 2018 by the federal government whose proceeds were still being deployed to redeem maturing domestic debt.

The DMO made this known in its first quarter 2018 public debt data released penultimate Wednesday, in Abuja, the nation’s capital.

Further analysis by DMO

The DMO said a total of N643.6 billion was spent on servicing the nation’s domestic debt within the period.

It said N239.8 billion was spent on domestic debt servicing in January, N144 billion in February and N259.7 billion in March 2018.

N223.4 billion was an interest accruing on Nigeria Treasury Bills/Bonds (NTBs), while N411.7 billion was interest on federal government bonds.

Interest on the federal government of Nigeria savings bond was N241.8 million while Sukuk bonds stood at N8.167 billion.

A sum of N279.6 billion of NTBs was redeemed in Q1 2018.

The Debt Management Office said the debt figures showed that the implementation of the debt management strategy, which entails an increase in the external debt stock through new external borrowing and the substitution of high cost domestic debt with low cost external debt, is achieving the desired results in several areas.

As at December 2017, the country’s debt stood at $70.92 billion, several months after the largest economy in Africa emerged from its worst recession in over 20 years.

Also in April 2018, Christine Lagarde, the IMF Managing Director, opined that Global debt stood at $164 trillion which were 25% of global GDP. She lamented that the rising debt levels presented a risk to low-income countries.

Lagarde said such countries may face hardship and be unable to repay these debts if they do not look for alternative measures to borrowing but Nigeria’s finance minister, Kemi Adeosun dismissed the insinuation, saying Nigeria is not among low-income countries.

While commenting on the country’s Debt Management Strategy (DMS), Oniha said the Federal Government’s domestic debt at the end of 2017 was N12.589 trillion. The 36 states and the Federal Capital Territory (FCT) have a domestic debt overhang of N3.348 trillion.

The combined external debt of the Federal Government and the states is N5.787 trillion.

The new DMS, Oniha said, has brought about the restructuring of the debt portfolio, which “has resulted in reduction of debt servicing costs, lowering interest rates in the domestic market and an improved availability of credit facilities to the private sector.”

The recent spate of borrowings the DMO boss said, is essentially “for financing capital expenditure and stimulating the economy. The funds injected through the borrowings strongly supported the implementation of the Federal Government’s budget, which helped the country to exit recession in 2017.”

The figures showed that Nigeria’s Debt Management Strategy is achieving its objective of reducing the ratio of Domestic Debt in the portfolio, with a target of 60% Domestic and 40% External.

The composition of the Debt Stock as at the end of 2017 showed that External Debt was 26.64% of the portfolio, up from 20.04% in 2016. Domestic Debt was 73.36%, down from 79.96% in 2016.

The key benefits of the restructuring of the portfolio, Oniha explained “are the reduction of the Government’s Debt Service Costs, lowering of interest rates in the domestic market and improved availability of credit facilities to the private sector.”

The DMO repaid N198 billion Nigerian Treasury Bills in December 2017 with the proceeds of Eurobond issuances and the DMO has continued further implementation of the strategy in 2018, with the issuance of the USD2.5 billion Eurobonds in February 2018, the proceeds of which is being used to repay maturing domestic debt, starting with N130 billion NTBs repaid on March 1, 2018.”

“The Total Public Debt as at December 31, 2017 represents 18.20% of Nigeria’s GDP for 2017. This shows that Nigeria’s debt continues to be sustainable and is well within the threshold of 56% for countries in Nigeria’s peer group,” Oniha stated.

Ms. Oniha assured Nigerians that the most important consideration for these borrowings was that the proceeds were being prudently applied to bridge infrastructure gaps occasioned by the decline in revenues.

She also promised that “the rate of increase of debt servicing would reduce, going forward, given the Federal Government’s attention to raise revenue through the Voluntary Assets and Income Declaration Scheme (VAIDS), as well as targeted efforts to increase local production of some of the goods responsible for high foreign exchange demand.”

She also noted that Nigeria borrows from other countries, such as Japan, France, India and Germany, “based on Nigeria’s needs, interests and conditions considered favourable to the nation.”

Meanwhile the research team at Proshare noted that the public debt (total of both external and domestic debt) in Nigeria has been increasing over the last five years and the issue of the sustainability of the debt level has generated a lot of debate.

The increase in external borrowing and the impact of exchange rate depreciation were the main reasons for the reduction in the proportion of the domestic debt stock. The FGN has set what it believes to be an optimal domestic debt to external debt ratio at 60:40. At the current (external to domestic debt) level of 78:22, it appears that there is still room to increase the external debt component of the total debt stock.

The major stress point is the rising level of interest payment relative to government revenue. The ratio of interest payment-to-government revenue increased from 24.48% in 2012 to an estimated 35.32% in 2016.

“In the short-to-medium-term, government will need to borrow both from external and domestic sources in order to augment the low revenue facing the country as a result of the current economic challenges. The FGN needs to improve critical infrastructure in the country to increase the competitiveness of the economy to attract investments. This requires more money than current government revenue.”

The FBNCapital Research team is also on the same page with Proshare. “In our second commentary on the DMO’s data release for end-2016, we highlight the alarming increase in FGN domestic debt service (see chart). Payments have soared from N354bn in 2010 to N1.23trn last year.”

Besides, the researchers inferred that the focus on the domestic payments because they comprise close to 90% of the total burden, and because the FGN’s external debt obligations are overwhelmingly concessional and far less costly than its naira borrowing.

“The strength of the message on the successful Eurobond roadshow in February was based on the FGN’s external balance sheet.”

According to the team, to highlight the strains on the public finances, total debt service in 2016 represented a projected 35.4% of total FGN revenue. The ratio is so dire, of course, because the record of revenue collection has been poor. The Economic Recovery and Growth Plan 2017-20 has the ratio deteriorating to 38.1% in 2018, and improving marginally to 34.5% in 2020.

“The explanation is twofold. Firstly, the projections assume stronger revenue collection and spending discipline, such that a primary surplus (before the deduction of interest payments) is achieved from 2019.”

Secondly, they have financing of the deficit predominantly external from next year (66% in 2018, rising to 72% at the end of the plan period in 2020).

The test of the plan is successful delivery, above all the use of the borrowed funds to create growth, employment and diversification of the economy. This administration has to set far higher standards than its predecessors.

Whereas the Debt Management Office has assured that the seeming rising public debts is nothing to worry about other experts believe there is serious cause for alarm.

According to Paul Ndubuisi, a researcher, the act of borrowing creates debt. Debt therefore, refers to the resources of money in use in an organisation which is not contributed by its owners and does not in any other way belong to them, it is a liability represented by a financial instrument of other formal equivalent.

Echoing similar sentiments, Chris O. Udoka of the Department of Banking & Finance University of Calabar, Calabar, Cross River, and his counterpart, Samson Ogege, at the Department of Finance, Faculty of Business Administration University of Lagos, Lagos, in a joint paper titled, ‘Public Debt and the Crisis of Development in Nigeria Econometric Investigation,’ while noting that national debt consists of all securities issued by the federal government and held by the Central Bank of Nigeria, individual and foreigners, government agencies and trust funds, private sector as well as those held by commercial banks, however said, increase in the debt stock was largely as a result of the interest component of additional payment arrears that accumulated, and continued depreciation of the US dollar against other currencies in which the debts were denominated.

Domestic Debts

It also identified external debt relief as a good option for poor unsustainable indebted countries as a way of making resources available for economic growth with the real sector being the focal point where value is created rather than impeding it with mismanagement and servicing debt. Udoka and Ogege examined the extent of external debt crisis and its consequences on, economic development using data on the Nigerian economy for the period 1970 to 2010.

Rewane’s fears over servicing external debts

Expectedly, the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane has expressed concern over the nation’s foreign debts.

Rewane who spoke during a presentation at a breakfast session sponsored by Rand Merchant Bank in Lagos, said the forecast for the nation’s economy showed a mixed outcome of positivity and negativity.

“The pressure on the exchange rate will build up due to increased liquidity and demand pressures, and there would be a temptation to appreciate the naira for political expediency. Key policy reforms will take the back burner for politics. Nigeria’s foreign debt service will become a potential problem. Nigeria’s external trade will be more balanced between Asia, the European Union and America.”

Alarming States ‘debts

The debt stock data released by the National Bureau of Statistics (NBS) revealed that the smallest state in Nigeria- Lagos, with a landmass of 3,345km, has the largest debt burden among all states. The state’s debt stock is 35.61% of the country’s foreign borrowings. Kaduna (5.79%), Edo (5.64%), Cross River 4.08% and Enugu 3.23%, are all clustered behind Lagos.

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