Borrowing Out Of Recession

For one man who should know, Mr. Bismarck Rewane, economist and managing director of Financial Derivaties Company Limited, “The government must inject funds into the system and the executive is fully engaged because they know they cannot hide, they have to deal with the problem. And given the fall in oil revenue, you have to increase the deficit plan for the recovery. You must borrow and President Muhammadu Buhari has said the country will borrow at least $5 billion externally. We must sell some assets because when you are in this kind of situation, you have to sell some assets.”

It is in line with the present and future in mind did the federal government unveiled a new three-year debt management strategy to be managed by the Debt Management Office (DMO). The strategy which runs from this year to 2019 with a marginal increase in external borrowing is expected to increase commitment to capital projects execution. It is also a clear indication that the country’s leadership is taking the right steps to move the economy out of recession and create jobs for the people.

The move by the Federal Government is an indication that it is doing everything to steer the economy out of recession waters. But skepticism still persists and the government has moved to assure Nigerians that the economic team is back to the drawing board not only to avert depression but to ease the pains of the recession. It is a given that Nigeria would not be the only country seeking for eternal borrowing to ease economic birth pangs.

That Nigeria has developed a functional bond market it can take advantage of the greater flexibility and speed which domestic borrowing offers remains a plus for the economy.

Interestingly, President Muhammadu Buhari’s administration recently approved plans for external borrowing. The loans are to be sourced from the World Bank, African Development Bank (AfDB), Japan International Cooperation Agency and Export-Import Bank of China. The DMO is to facilitate access to the funds from the multinational agencies.

Director-General of DMO, Dr. Abraham Nwankwo, believes that a direct measure for reducing the high domestic debt service is to refinance maturing domestic debt with cheaper external debt instead of with domestic debt.

He applauded the Federal Executive Council’s approval of the Debt Management Strategy (2016−2019) assuring that the strategy would be implemented with a clear guide against unsustainable foreign exchange exposure.

For him, the country’s ability to borrow from a domestic debt market also has some strategic value. Besides, domestic debt reduces the exposure of the country to exchange rate risks and the limitations of size of foreign reserves. The independence, he says, lies in the country having the option to exercise the choice to borrow from internal sources, from external sources, or from a mixture of both.

“Sovereign borrowing from the domestic debt market encourages the development of a functional bond market, with the scope to introduce different instruments which will encourage the habit of domestic saving, intermediation and investment. Such a functional domestic bond market will be tapped by the private sector to raise long-term funds for investment in real sector and infrastructure projects. Nigeria has developed a deep and liquid domestic bond market where funds of up to 20 years tenor can be raised,” he said.

Although there are concerns that Nigeria’s public domestic debt has grown over the past decade while debt service outlay remains high but the domestic debt-Gross Domestic Product (GDP) ratio is only about 10 per cent; the total public debt-GDP ratio is 12.25 per cent, and compare favourably with the peer group threshold of 56 per cent.

Nwankwo said that although the debt service-revenue ratio is high, the problem needs to be unbundled, while a decision is taken on the way forward.

“Following the rebasing of Nigeria’s GDP in 2010, the DMO observed that the increase in the GDP did not enhance the country’s ability to service its debts. Nigeria’s tax revenue-GDP ratio is still below six per cent compared to the average for the country’s peer group, which is 18 per cent. Already, the Federal Ministry of Finance and the Federal Inland Revenue Service are collaborating to improve tax collection and expanding the tax net so as to cut the debt service-revenue ratio,” he said.

Interestingly, Nwankwo assured that government is also tackling deficiencies in power supply, transportation infrastructure and ICT infrastructure, guarantee high cost of production, which transmit into high cost of goods and services.
Besides, government is also promoting and increasing funding to agriculture and agricultural value-chains so as to bring down food prices and significantly dampen the overall inflation momentum.

“Post harvest preservation, for example, through activation of the grain silos is also being given priority. Beyond optimizing on the existing revivable production capacity, the Federal Ministry of Agriculture and Rural Development, Federal Ministry of Water Resources and the Central Bank of Nigeria are collaborating effectively to stimulate more agro-businesses –cooperatives, clusters, as well as mega-scale investments,” he said.

Nwankwo, said the country’s low debt to GDP ratio has cleared the road for the country to borrow more to fund its budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.

Regarding foreign debt, the strategy is to borrow on non-concessionary terms for projects with self-paying capacity, and/or job creation potential, and on concessionary terms and grants for social sector projects.

The DMO boss explained that the focus of the new initiative is to develop a debt management strategy that would ensure that in the face of macroeconomic and other financial constraints, the cost and risk profile of the public debt portfolio remains within acceptable limit over time.

The plan is also in line with President Buhari’s vision to generate maximum employment, reduce poverty and increase the living standard of Nigerians. Nwankwo further stated that for this to be effectively achieved, the government is making positive efforts in diversifying the economy as against the backdrop of structural collapse in oil prices and oil revenue.

“The Debt Management Strategy we are going to pursue over the next four years takes into account the fact that for now, Nigeria’s public debt portfolio is dominated by domestic debt. After the Paris and London Club exits between 2004 and 2006, the country took a deliberate decision to develop its domestic bond market and to do most of the public borrowing from domestic sources so as to develop the domestic bond market, that objective has been sufficiently achieved.

“And therefore taking into account that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources. Therefore, one of the major elements of this strategy is that over the medium, term we will strive to remix the public debt portfolio from 84 per cent domestic and 16 per cent external to 60 per cent domestic and 40 per cent external,” he said.

The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, also explained that budgetary allocations alone may be inadequate to finance the infrastructure deficit with dwindling oil revenue.

Prof. Ekpo described the debt option as the most viable, pointing out that Nigeria’s rebased GDP economy has given it the leeway to borrow more to bridge infrastructure gap.

To him, the DMO had in the past, demonstrated good negotiation skills in dealing with the country’s debt matters, either with internal or external creditors, saying that it will not be out of order for the government to borrow from the World Bank or the AfDB to fund the key developmental projects.

Government can also borrow internally to achieve the feat, he said, even as he disclosed that internal borrowing is always short-term while external borrowing has longer tenor.

Ekpo said the DMO has the capacity and constitutional role to advise the government on the available choices. “The World Bank rates are cheaper with longer repayment term. The DMO can also leverage on the Nigeria Trust Fund with the AfDB to get a better deal on the loans needed to fund developmental projects” , he said.

Head of Macroeconomic & Fixed Income Research, FBNQuest, Gregory Kronsten, hinted that crude oil price will end the year on a low note. He said although the oil price has picked up from its recent floor in January and the budget assumption of $38/barrel has started to look conservative, but the global supply/demand balance for crude is set to remain low until late next year.

The thinking is that despite the marginal recovery in crude oil prices, borrowing is still needed because oil will remain low for a long time and may even crash below $40 in the face of production politics.

A Currencies’ Analyst with Ecobank Nigeria, Olakunle Ezun, said although funds from the domestic bond market are more expensive than the international bond market, investing in the local bond market is also in the best interest of the economy.

The FGN Bonds, he added, helps the government in the funding of its deficits in a non-inflationary manner while providing benchmark yield-curve for pricing other securities/bonds. It also engenders rational management of government’s fiscal and monetary operations. He said that if the debts are well spent, they will help to boost liquidity in the economy and investment in key sectors like agriculture and mining, among others.

A report by FBNQuest titled: ‘A planned pick-up in FGN external borrowing’, said: “The DMO has set a medium-term target of a 60/40 blend for the FGN’s domestic and external obligations in its Debt Management Strategy, 2016 to 2019. The blend as at end-2015 was 84/16. The target is unchanged from the previous strategy for 2012-15, and is driven by relative servicing costs and the DMO’s determination not to crowd out the private sector.”

President Buhari had earlier in the year announced a N6.1 trillion spending plan for this year to stimulate the economy. According to him, the government has a plan to raise about $5 billion from Eurobond market and multinational and bilateral lenders.

In June, Finance Minister, Mrs. Kemi Adeosun, had told bond investors in London that Nigeria was close to securing about $3 billion facility from World Bank and AfDB.

According to Mrs. Adeosun, the loans will come from the World Bank, AfDB, China Exim Bank, and other development agencies like the Japanese International Cooperation Agency (JICA). She said the plan to borrow externally was in line with government’s strategy to focus on concessional debts, low-cost loans, particularly from multinational agencies.

The loans are to come with average interest rates of 1.25 per cent, between four to seven year moratorium and 20-year repayment schedule. The minister said the loans will be disbursed on the development of strategic sectors which government believes will help to revive the economy.

She listed power and agriculture as the sectors that will get significant chunks of the loans to take care of projects, especially those militating against efficient power generation, citing transmission.
Senate key into debt management advocacy

The Senate has equally called for more advocacy on debt management and servicing to enable Nigerians understand the benefits and impact of government’s plans to raise funds from the capital and bonds’ market for development purposes.

The Chairman, Senate Committee on Local and Foreign Debts, Senator Shehu Sani, spoke during a three-day retreat organised for members of the committee by the DMO in Minna, Niger State.

Sani said if there was aggressive advocacy on what such debts were taken for, Nigerians would support such initiative aimed at driving development and engendering development.

According to him, it was imperative for the DMO to develop a framework in the major languages in the country to get the citizens to understand why debts are taken, for what purpose and what the society stands to benefit from such borrowing.

He said: “There is need for strategy mix anchored on proper advocacy on what debt management is all about. Nigerians want to know why governments borrow, to what purpose such debts are taken and I can say that once it is well explained, the people will key into the programme.”

Overall, Nwankwo was upbeat that in the next few years, there will be significant improvement in employment generation, poverty reduction and living standard of the people, adding that as part of the new strategy, the DMO will develop new products particularly the federal government saving bond and also diversify the sources of raising funds domestically.

Omokwe writes from Abuja