Experts express fears over Nigeria’s mounting debts

Amidst worry by experts in and outside government about the rapid growth rate of Nigeria’s debt- domestic and external, the Federal Government, through the Debt Management Office (DMO), last week spoke of plans to borrow $25 billion between now and election year 2015.

Only recently, Abuja signed a US$600-million (about N94.8 billion) loan deal with China’s Export-Import Bank, the lion’s share of which would be used to finance the building a rail line servicing the federal capital territory.

The loan obtained at 2.50 per cent over a 20-year period, with a 7-year moratorium, ahead of plans by government to also issue a second Eurobond of about $600 million open to Nigerians in Diaspora in 2013.

Addressing members of the House of Representatives’ joint committees on finance, legislative budget and research, national planning and aid, loans and debt management, Director-General of DMO, Dr Abraham Nwankwo, insisted that there was nothing untoward about the plan to borrow more.

Briefing the Reps on the 2013-2015 Medium Term Expenditure Framework and Fiscal Strategy (MTEFF), a document that would guide the House in assessing 2013 budget proposal when presented to the joint session of the National Assembly by President Goodluck Jonathan, Nwankwo put Nigeria’s total debt at about $45 billion, comprising $6 billion (external) and $39.6 billion (domestic).

The nation’s current debt level, he stressed, can accommodate more borrow, with a debt to gross domestic product ratio of 18.65 per cent today, compared with the global standard of 40 per cent.

“For 2012, Nigeria’s external debt is projected at $9,021.53 billion; 2013, $12,165.10 billion; 2014, $14,585 billion and 2015, $16,765 billion, adding that “a breakdown for domestic debt is projected at 2012- $6,483.81 billion; 2013- $7,125.93 billion; 2014- $7,792.41 billion and 2015- $8,4441.86 billion,” he stressed.

Reps, experts react

Members of the joint committee were however alarmed by the growing rate of the nation’s debt, as Opeyemi Bamidele, chairman, House Committee on Legislative Budget and Research, lamented the continued crowding out of private sector borrowers by government.

“We are now aggressively borrowing in such a manner that the private sector is now being stifled as the government is now the only big spender in the economy. The private sector cannot access funds domestically and that means they cannot create jobs that is expected of them.”

In its September 17 edition of “Bond Watch,” analysts at Lagos-based Donn Loren Merrifield, a fixed income and equities investment firm, lamented that at N7.1 trillion in June 2012, Nigeria’s total debt was about 1.7 times its level in 2005, before the nation got debt forgiveness from its creditors in 2006.

The growing external debt, according to the report anchored by Tola Odukoya and Jide Nwaogwugwu, “has increased by 132 per cent to about N1.1 trillion (about $6.6 billion, including China Ex-IM’s $600 million) as at September 2012, from about N451 billion in 2006.”

In an area report following the announcement of the second Eurobond, Dunn Loren argued that the move could take the nation backs to the era of bloated international debt.

The bond is part of efforts to significantly reduce the country’s high debt service payments in view of the prevailing high interest rates in Nigeria, and in line with the administration resolve to reduce domestic borrowing from the current N744 billion to about N500 billion in the medium term. Already, the 2012 debt level was reduced from N852 billion, just as there are efforts to bring it further down to N500 billion “in the medium term.”

Coordinating Minister of the Economy and Finance Minister, Dr. Ngozi Okonjo-Iweala, in a chat with members of the Organised Private Sector in Lagos, some weeks ago, lamented the 15 per cent interest rate, which she described as too high, hinting that the Eurobond is part of efforts to “raise debt at zero or one percent.”

Rather than seeking to refinance domestic debt at about 12 per cent interest with the Eurobond, the Dunn Loren analysts called “for a concerted approach to Nigeria’s economic management by both fiscal and monetary authorities.”

The Minister called for an expansion of the tax base, which is presently too narrow and the biggest challenge being faced with the recurrent side of the 2012 budget, hence the need to bring in many more people into the tax net.

Unperturbed still, the DMO boss told the panel that “every country in the world borrows, even the most financially prudent countries like Germany, United States and other borrow.”

Nwankwo said government could only borrow money in 2013, with approval from the National Assembly, maintaining that “Nigeria intends to borrow externally in 2013.”

This despite a similar warning by the Central Bank of Nigeria (CBN), in its recently published “Development in the External Sector,” the first for the year, noting that the nation’s external debt profile rose by 5.64 per cent from $5.67 billion in the fourth quarter of 2011, to $5.99 billion at the end of March 2012.

The report published by the CBN’s Economic Policy Directorate reported that the private sector external debt stood at $0.27 billion, down from $0.39 billion in the corresponding period of last year, and $0.44 billion in the 2011 fourth quarter.

The growth in external debt in the review period was blamed on additional loans incurred within the period, following which the CBN warned that “the continued increase in the public sector external debt may constitute a threat to the existing debt sustainability position of the country if future loans are not project-tied and self sustaining.”

Gradual build-up

Addressing the OPS meeting, Okonjo-Iweala had expressed worry at the growing rate of Nigeria’s domestic debt, rising by $32 billion from $12 billion when she left government in 2006, to $44 billion on her return last year.

She absorbed the Debt Management Office (DMO) of blame in the 266.66 per cent growth.

“If there is anybody who will be allergic to accumulation of debt, it is me. When I left, domestic debt was about $12 billion; I came back and found it at $44 billion. It is not the DMO that caused it. It is the choices made by the society.

“You all should have been lamenting this when you saw it happening,” she noted, arguing however that the debt ratio is “is alright and sustainable at this moment,” hence the upgrade by the rating agencies at the time others were being downgraded.

“Our debt-GDP ratio, if you just take federal debt, it is about 17 per cent-both domestic and foreign. If you add what we have from the states, we could get up to 21 per cent as opposed to a standard of 25 to 30 per cent, which we have set for the country.”

What Nigeria should worry about, the Minister continued, is the cost of servicing the debt, and that “even if we are okay internationally, we have to look at the composition.

“It is true that domestic debt (N5.9 trillion) is worrying. I have said that before. Our problem is not external debt; our external debt is very low, two per cent of GDP. But we really need to slowdown the rate of borrowing domestically.”

Okonjo-Iweala lamented the interest rate at which the Federal Government and States are raising debt, which she insists is too high at 15 per cent, in the face of having to finance expenditure and capital.

She asked the gathering: “But if you can raise debt at zero or one percent somewhere else, which one would you go for?”

Aligning with Nwankwo’s argument on the sustainability of the debt, she lamented the cost of servicing the loan, which remains a challenge. This, she stressed, calls for the need to slow down the rate at which domestic debts is accummulated, stressing that the external component of the debt remains very low at 2 per cent of GDP.

Alternatives

Specifically, Dunn Loren called for a situation where on the fiscal side, there is “a wider tax net with a view to raising more revenues and significantly diluting the contribution from the oil sector to total revenues to government.

“This is in addition to the current widespread knowledge of the need to diversify the domestic economy from being a mono-product economy. We would equally like to see an aggressive drive for Nigeria to have a budget surplus in the medium term as a result of the current fiscal consolidation effort.

“These should then be complemented with single-digit interest rate levels on the monetary side with the preoccupation being to stimulate domestic production, output and real growth with a positive impact on individuals, households and firms.”

Okonjo-Iweala, also agreed on the need to expand the tax base, which is presently too narrow and the biggest challenge being faced with the recurrent side of the 2012 budget, hence the need to bring in many more people into the tax net.

Since returning to the Finance Ministry, she said attention has been focused on decelerating “the rate of accumulation of domestic debt because since you rammed up expenditure in the past three or four years, you cannot just bring it down overnight, otherwise the country will come down.

“What we can do is to bring down the trajectory. And we have done that sharply. 2011 budget, we borrowed N852 billion. We brought this down to N744 billion in the 2012 budget and we are going to take it down in 2013 budget.

“What we are aiming at is to bring it down to a level of about N500 billion in the medium term,” stressing the need to deal with the flow, because debt is two things-stock and flow.

Continuing, the Minister said government is also beginning to retire the stock, so that we don’t continue to keep the debt and making it accumulate, resulting in the proposal to open “a sinking fund, where we are going to take a chunk of our money and put it there in the fund and we are going to take money and retire one or two of the bonds. So we begin to be responsible. We are not going to just keep on refinancing our debt. The budget is going to be tight. We are going to use money upfront, with Mr. President’s permission to pay our debt.”

State governments too

Four states governments- Rivers, Lagos, Osun and Gombe, are currently seeking to raise N260 billion cumulatively in fresh capital to fund development projects in their various domains.

The states have so far filed applications with the Listings Regulations Department of the Nigerian Stock Exchange (NSE) for their bonds to be trade-able on the bourse.

The much awaited Rivers State N100 billion bond represents the is the bulk N100 billion Series 1 Bond due 2017 at N1,000 under its N250 billion Debt Issuance Programmes, which has BGL Securities Limited as stockbroker. The capital raising exercise is being undertaken through ongoing book building process, has Zenith Bank as issuing house.

Lagos State is returning to the sub-national debt market for N80 billion offer for subscription of N80 billion Series 1 bond due in 2019 at N1,000 under its N167 billion debt issuance programme, also through book building.

According to the details published by the NSE on its website at the weekend, the State of Osun is offering for subscription N30 billion under its N60 billion bond programme at 14.5 per cent, with FCSL Asset Management Limited and Chapel Hill Advisory Partners Limited as issuing house.

The Gombe State N20 billion 7-year, Series 1 bond due 2018, with a coupon of 15.5 per cent, at N1,000 under its N30 billion debt issuance programme, for subscription, for which Approval in Principle has been received, has Marina Securities Limited as stockbroker, while Access Bank is issuing house.

Nine per cent of the bond proceeds will be used to refinance existing loans, with the rest going to road and schools construction projects.

The four states are joining their peers- Lagos, Niger, Kwara, Ebonyi, Imo, Benue, Kaduna, Bayelsa, Ekiti, Delta, Niger, Ondo, and Edo, which have so far raised N367.5 billion with a tenor and coupon of between five and seven, and 12.5 and 15.5 per cent respectively. The bonds have maturity dates of between February 2014 and December 2018.

Of the amount, Lagos has raised N107 billion raised in two tranches, which when added to the new one to be issued, brings its total bonds in the market to N187 billion, according to data by Dunn Loren.

Borrowing by state government is not limited to the bond market only, as many of them take bank facilities, which are backed by irrevocable standing payment orders (ISPO), like the bond issues, to meeting pressing obligations and often go to the capital market to refinance them.

On October 25, 2011, the Imo State government approval of the state’s house of assembly to obtain a N12 billion bank loan to settle the debt incurred by the immediate past administration of Chief Ikedi Ohakim. The money was also to help the government make counterpart funding to secure development grants from Federal Government Agencies.

Of the amount, N6 billion each was borrowed from Diamond Bank Plc to pay inherited debt, and Zenith Bank Plc, to assist provide counterpart funds.

 

 

 

 

 

 

Source: Daily Independent