Turning Debt To Wealth

The fall in crude oil prices has affected the revenues accruing to all the tiers of government. It has not only led to significant reduction in the statutory revenue allocation due to state governments, but created a huge fiscal imbalance between revenue and expenditure.

For states which have borrowed from banks to pay salaries and settle other obligations, drop in revenues portend grave dangers until the Federal Government and Debt Management Office (DMO) stepped in to restructure the N576 billion debts overhang of 23 states.

Its Director-General Dr. Abraham Nwankwo said: “The fiscal implications of the fall in revenue on states include the fact that after deductions of contractual commitments, such as Irrevocable Standing Payment Orders (ISPOs) and other debt service obligations due to banks, little or nothing is left to run the affairs of the states.”

Speaking during the Association of Issuing Houses of Nigeria (AIHN) fourth quarter meeting in Lagos, he said there were accumulation of salary arrears, structured benefits and other contractual obligations.

“Salaries and pension arrears ranging from three to nine months and would require special intervention to achieve fiscal balance,” he said.

It was, therefore, expected that when, early July, this year, President Muhammadu Buhari approved a package of short-term stabilisation interventions which included the sharing of special revenue (N2.1billion) among the governments.

The Vice President, Prof. Yemi Osinbajo closely worked with the DMO team on the debt restructuring project.

Besides, the lending of between N250 billion and N300 billion by the Central Bank of Nigeria (CBN) to the states on long-term, single digit interest terms, there was also the implementation of a proposal by the DMO to restructure state loans from commercial banks to long-tenored FGN Bonds.

Dr. Nwankwo explained that while the first two measures produced cash directly on a one-off basis, the third indirectly made cash available by reducing debt-service outflow but on a continuous basis over a long-term and thereby continue to moderate the fiscal imbalance.

He said the restructuring of the loans was an immediate stabilisation measures to enable the governments, particularly state governments clear arrears of salaries, pension obligations and other short-term liabilities.

Dr. Nwankwo said DMO commenced the implementation of the strategic objective of assisting the states to develop debt management institutions and capabilities in the last quarter of 2007, as part of its five-year strategic plan.

The DMO chief, who spoke on the theme: “Restructuring States’ Short-Term Bank Loans Into Long-Term Federal Government of Nigeria (FGN) Bonds” said the fall in crude oil prices led to significant reduction in the statutory revenue allocation due to state governments. This created huge fiscal imbalance between revenue and expenditure of most states.

“We restructured what each state owed to the banks into FGN Bonds for 20 years. What that means is that instead of the states owing the banks, they now owe Federal Government, which now pays the banks,” he said.

CBN speaks on bailout funds

The CBN said 19 out of the 27 states of the federation have accessed the bailout funds, and are expected to repay the loans in 20 years.

Its spokesman, Ibrahim mu’azu, said the decision was approved by the National Economic Council (NEC) and that the beneficiary states which had benefitted from the workers’ salary bailout package are expected to deploy the funds to pay the workers’ salary arrears.

He said contrary to reports that Ogun State had accessed N20 billion, N18.9 billion was accessed. On the tenor of the bailout facility, he said all the states had a 20-year tenor except Ogun which opted for a 10-year tenor.

Earlier, states such as Kwara, Zamfara, Osun, Niger, Bauchi, Gombe, Abia, Adamawa, Ondo and Kebbi had applied for and received various sums from the bailout facility. Other states included Ekiti, Imo, Ebonyi, Ogun, Plateau, Nassarawa, Sokoto, Edo and Oyo which were granted in the week.

CBN Governor Godwin Emefiele earlier told the NEC meeting that 18 states – up from 11 as at last month – had benefited from the Special Intervention Fund aspect of the presidential relief package.

Impact of debt restructuring

Dr. Nwankwo said the debt restructuring boosted state cash flow, making it easier for them to meet their obligations. He said the debt restructuring also cut the interest paid on the loans between three to nine per cent.

He said the current drop in crude oil prices is different from what obtained in the past, because the prices are not likely to rebound soon.

Dr. Nwankwo said: “There is not going to be oil boom again. And the impact is that many states were unable to meet both their capital and recurrent obligations including workers salaries, pensions among others. A peculiar challenge is that all or most of the states borrowed from banks, which demanded irrevocable standing order against states’ incomes”.

He said although the banks had irrevocable standing order from the states, and were taking back their loans from states’ earnings, the possibility of sustaining that approach declines after the states’ income dropped by over 50 per cent over oil price decline.

He said all the states were affected by the oil price burst, prompting the Federal Government to decide on the way forward.

“If you are allowing crises in some states, it also means there will be crises in the entire economy,” he said.

He said the revenue decline has caused more than half of the 36 states to owe salaries adding that salaries and pension arrears ranging from three to nine months would require special intervention to achieve fiscal balance.

Dr. Nwankwo said the debt restructuring was to forestall a relapse into debt un-sustainability, as was experienced by the country before its successful exit from the Paris and London Club debts over-hang.

The step was also meant to redress the very weak debt management institutions, structures and practices in different states of the federation and achieve a more effective coordination of public debt management.

He said: “The fact that after deductions of contractual commitments, such as Irrevocable Standing Payment Orders (ISPOs) and other debt service obligations due to banks, little or nothing is left to run the affairs of the states. It also led to the accumulation of salary arrears, structured benefits, and other contractual obligations.”

On the economy, he said government has no choice than to diversify the economy away from oil. “There is still a broad resources base for diversifying and industrialising the economy. With appropriately structured financing, Nigeria should be able to programme a trajectory of long-term fiscal stability and self-sustaining growth,” he said.

DMO operations

The DMO commenced the implementation of the strategic objective of assisting the states of the federation to develop debt management institutions and capabilities since the last quarter of 2007, as part of its five-year strategic plan.

The goal was to forestall a relapse into debt un-sustainability, as was experienced by the country before its successful exit from the Paris and London Club debts over-hang. The strategy was to redress the very weak debt management institutions, structures and practices at the state levels towards a more effective coordination of public debt management. The DMO has also established Domestic Debt Data of States of the 36 states, with framework in place for regular updates.

The debt office has also helped in the passage by 18 states of appropriate laws (Fiscal Responsibility/Public Debt Management Laws) to govern debt management and engender fiscal discipline.

Restructuring states debts

The loans were secured with statutory allocations and Internally Generated Revenues (IGR), which are now inadequate to meet debt service obligations for most States – and leaves little or nothing for paying salaries and meeting other recurrent obligations.

From debt management perspective, the plausible short-term restructuring option would be to refinance the commercial bank loans with bonds of up to 20 years tenor. This makes the repayment schedules of the loans much friendlier to the current cash flow of the states, and hence, free up resources for paying salaries and other recurrent obligations.

He said 15 banks were involved and that the restructuring was effected using a re-opening of the FGN 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.

He said the debt service burden after the elongation of tenor and reduction in interest rate has dropped substantially ranging from about 55 per cent for some states to about 97 per cent for others.

“Debt Service of the Bonds has been structured in the same way it would have been, if the States had accessed the market directly – with appropriate arrangement between the FG and each State concerned, on the collection and remittance of debt service obligations – but over a longer period,” he said.

Way out

Chairman of AIHN Victor Ogiemwonyi said diversification and industrialisation of the economy remains the answer to Nigeria’s economic woes. He said issuing houses also play a major role in growing the economy and called for collaboration between AIHN members and the DMO.

The DMO chief believes restructuring of bank loans to FGN Bonds could only contribute to short term fiscal stabilisation adding that measures for long term fiscal stabilisation are necessary.

He said government should explore opportunities in agriculture, manufacturing, solid minerals, petrochemicals. “Every state to work towards dependence on IGR, while considering federal allocation funds as exceptional inflows. There is also need for improved infrastructure like power, roads, railways, critical to support a globally competitive industrialisation,” Nwankwo said.