Uche Uwaleke, a Professor of Capital Market has warned the Nigerian Government against further breaching of the permisible limit which the Central Bank of Nigeria funds the government as enshrined in the CBN Act.
Nigeria’s total debt has risen 32.5 per cent from N46.25trn ($103.1bn) to N68.9trn ($153.7bn) after poor management of ways and means borrowing given to the Federal Government by the Central Bank led to the securitasation of the debt against the law establishing the apex bank.
The Debt Management Office said the Ways and Means, which is N22.7trn ($50.6bn), will be issued as a 40-year bond, a move approved by the legislatures.
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Although it is against the CBN Act that prohibits the securitisation of Ways and Means, the debt manager says it is a wiser alternative.
DMO wrote, “Tenor: Forty (40) years Moratorium (on Principal only): Three (3) years Interest Rate: 9% p.a. Repayment: Amortizing over thirty-seven (37) years
“The Securities will be issued to the Central Bank of Nigeria (CBN) by the Federal Government of Nigeria (FGN). The Securities will not be issued to the public by the FGN to raise funds.”
On the benefits, the Debt Office said, it would improve debt transparency as the securitized Ways and Means Advances will now be included in the public debt statistics.
“It will reduce the Debt Service Cost as the new Interest Rate is 9% p.a. compared to the Monetary Policy Rate plus 3%, which translates to 21.0% p.a. (MPR – 18.0% + 3%) 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,” it added.
However, new borrowings from the CBN will not be securitised, DMO said.
Checks show as of December 2022, Nigeria’s debt managed by the DMO was N46.25trn or $103.1bn.
Domestic debt made up N27.5trn or $61.4bn while foreign debt was N18.7trn or $41.68bn.
However, with the securitisation of the N22.7trn ($50.6bn) debt, domestic debt will balloon to N50.2trn or $112.03bn from N27.5trn ($61.4bn).
This is a significant rise of 82.5 per cent.
“In respect of the Securitisation of CBN’s Ways and Means, 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.
Similarly, the cost of annual debt service will reduce given the concessional rate of 9 per cent as against the current 20.5 per cent interest rate charged on CBN’s Ways and Means,” Uwaleke said in a response to THE WHISTLER.
Uwaleke believes that the move would free 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.
“There’s equally the issue of debt transparency that it engenders. Before now, CBN’s Ways and Means did not form part of the public debt stock reported by the Debt Management Office. Securitization would entail including it as part of the country’s public debt, which makes for transparency.
“Be that as it may, it’s important that going forward, adequate safeguards are put in place to ensure that CBN’s Ways and Means 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.”