Gains Of Restructuring State Loans Into FGN Bonds

Embedded in the objective of maintaining a reliable database of all loans taken or guaranteed by the Federal or State Governments or any of their agencies , the DMO has lived up to its mission.

Recently, the DMO was given a task of managing and restructuring the debt of cash strapped states in the country that could not meet their financial obligations.

This came with the announcement of a bailout package by President Muhammadu Buhari’s led administration after the 36 states of the federation had approached the president in June to ask for a bailout that would enable them pay the backlog of salaries owed workers.

Following this directive, 22 states of the federation applied to DMO for their debts to be restructured into Federal government of Nigeria (FGN) Bonds.

The DMO has successfully concluded the restructuring of N322.788 billion short term commercial bank’s debts of 11 states out of the 22 states to long term domestic bond at 14.83 per cent yield in 20 years.

The Director General of the Debt Management Office (DMO) Dr. Abraham Nwankwo stated that 14 banks were involved in the phase one of the state’s debt restructuring exercise involving 11 states.

He said the restructuring “was effected using a re-opening of the FGN-Bond issued on July 18, 2014 and maturing on July 18, 2034. The pricing was based on the yield to date of the bond at a 30-day average, resulting in a transaction yield of 14.83 per cent.”

With the scheme, he said monthly debt service burden will drop by a minimum of 55 per cent and a maximum of 97 per cent, among the eleven states; and interest rate savings for the 11 states ranging from 3 per cent to 9 per cent per annum.

According to him, “more states are concluding their documentation and reconciliation of balances with banks and their debts will be restructured in Phase II.”

The restructuring Nwankwo explained “is good not only for the states but also for the banking system because: banks’ balance sheets will improve as weak sub-national loan which threatened banks’ assets and balance sheets will be replaced with high quality Sovereign assets; the FGN-Bonds enjoy enhanced liquidity as they are traded in the strong secondary market; and, banks would have improved space to lend to other sectors of the economy as they are free to convert their FGN-Bond holdings into cash in the secondary market whenever they desire.”

Financial analysts have noted that the strategic initiatives by the DMO have not only changed the story of Nigeria’s debt management but also demonstrated their visionary leadership and knowledgeable workforce.

A financial analyst, Mr Uyiosa Asemota, said that the issue of both internal and external debt management has before now been greeted with huge complexities and inefficiencies, largely occasioned by the uncoordinated manner the issue was being handled by multiple organisations and bodies.

He said “As a young mind just starting to develop an interest in the various management approaches in the overall economic landscape, it was difficult to fully appreciate the activities of the pocket of bodies charged with handling our debt burdens at different capacities and level, owing to the relatively insignificant gains that was recorded during their times of operation.

“I have followed the activities of the DMO passively for a while now, and can categorically say that they are living up to their expectation.

“I am particularly impressed by their organisational change initiative which kind of effectively fuse the different vital working arms of the debt management into an effective and result oriented unit,” he said.

Prior to 1999, Nigeria had no reliable information about the amount of its public debt and there was no coordination among the seven different government agencies that handled different components. External payment arrears accumulated due to under-servicing of the debt.

However, today, the DMO has transited from being a user of technical assistance to being a provider of the same to sub-national governments in Nigeria and to other countries on the African continent.

Theses Africa countries are beginning to use the experiences and achievements recorded by the DMO as templates for designing their debt management systems.

Due to these gargantuan achievement and national impact, the DMO has since 2005 been receiving requests from various African countries, some of which include – Uganda, Sudan, Zambia and Zimbabwe for their Debt Management Offices, Central Bank and National Planning to learn from Nigeria’s experience in public debt management practice since the establishment of the DMO.

Only recently, a Kenyan delegation comprising of officials from the Central Bank of Kenya and the Treasury/Debt Management Department, also came on a study tour to unravel the success story of the Nigerian domestic bond market.

The Assistant Director, Central Bank of Kenya, Mr. Eric Mwenda M’Marete, who led the delegation, said Kenya was keen to learning the various strategic plans that DMO Nigeria has in relation to the development of their country.

He said, “The fact that Nigeria’s federal government supports the states through funding of their budget requirements, we were keen to come and learn how states and the federal government here relate in terms of debt management and administration of resources,” he explained.

Commending the DMO on their remarkable growth, Asemota said, I will not fail to commend the DMO for their various debt management innovations that is fast becoming the envy of other neighbouring African countries.

“I was earlier this month excited to read about the Kenyan visit to the Nigeria bond market with a view to study the developmental initiatives that has led to a remarkable growth and development in the market.

“This is an encouraging development and a thing of pride to the nation.” He said.

Asemota added, “I will not fail to mention how perturbed I was when I heard of the bailout that PMB was to give to the states to help their finance their activities. The mixed feelings was due to the fact that such funds were capable of slowing down the future prospects of the states, so I took interest in how the funds will be disbursed and managed.

“Going through the structure document that the DMO have put in place to manage the FGN bailout to the states, I breathe a sigh of relief owing to the very realistic nature both in the short and long run.” He said.

Similarly, a financial expert, Raymond Imoudu said “The intervention of the Debt Management Office (DMO) in the rescue of some of these states by converting the various loans to be given to these into federal government bonds is commendable and a great stress relief to the various state and also the banks.

“These will help drop the debt servicing out flow of these states by a lot of percentage and free resources to meet other obligations”.

“At the end of the day, both the states and various banks are not at risk of either losing their money or are burdened by the repayment of the said loan, as these bonds are traded on secondary market. He said.

Generally, financial experts have commended the legacy of competency and capability the DMO has so far exhibited, plus their ability to have produced worthy results in time past. They however suggest that the Buhari-led government ensures that the DMO has all it requires to keep up with its already commendable standard.