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Local debt servicing gulps N1tn in one year

By on August 2, 2016

The cost of servicing the Federal Government’s increasing domestic debt hit the N1tn mark for the first time in 2015, statistics obtained from the Debt Management Office have shown.

According to statistics obtained from the DMO, the Federal Government spent N1.02tn to service its domestic debt last year. This comprises of N25bn spent on repayment of the principal and N993.13bn on interest payment within the year.

As of the end of December 2015, Nigeria’s total public debt stock stood at N12.6tn, compared to N11.25tn in 2014. The difference represents an increase of 12 per cent (or N1.37tn) within the one-year period.

External debt accounted for N2.11tn or 16.75 per cent of the total, while domestic debt took the remaining N10.49tn or 83.25 per cent. Out of this amount, the Federal Government’s domestic debt was N8.54tn.

In a report on the cost of the domestic debt, the DMO attributed the increasing cost of debt servicing to an equally increasing domestic debt profile and rising interest rate.

The report stated, “The FGN’s domestic debt service as of the end of December 2015 amounted to N1,018.13bn compared to N865.81bn in the corresponding period of 2014, representing an increase of N152.32bn or 17.59 per cent.

“This amount comprised principal repayment of N25bn and interest payment of N993.13bn. By instrument type, the FGN bonds debt service accounted for 62.41 per cent of the total debt service payment, while payments in respect of the Nigerian Treasury Bills and Treasury Bonds were 31.83 and 5.76 per cent, respectively.

“The trend analysis shows a continued rise in FGN’s domestic debt service payments from 2011 to 2015, which was attributed to the increase in domestic debt stock, as well as the higher interest rates, which led to the rise in the cost of borrowing in the domestic debt market.”

As of December 31, 2010, the cost of servicing the domestic debt of the Federal Government stood at N334.66bn. This means that between 2010 and 2015, the cost of domestic debt servicing to the Federal Government increased by N685.34bn. This reflects an increase of 204.79 per cent within a period of five years.

The increase reflected the rise in the size of the country’s domestic debt portfolio from N4.55tn as of December 2010 to N8.54tn as of December 31, 2015, an increase of 87.69 per cent.

This means that while the domestic debt rose by 87.69 per cent within the period, the cost of servicing the debt rose by 204.79 per cent. Some of the debts that had fallen due within the period, however, had been liquidated.

As of December 31, 2010, the domestic debt of the Federal Government was classified in terms of types as the FGN Bonds, accounting for N2.9tn; Nigerian Treasury Bills, N1.28tn; Treasury Bonds, N372.9bn; and Development Stock, N220m.

However, by December 31, 2014, the FGN Bonds accounted for N4.79tn; Nigeria Treasury Bills, N2.82tn; and Treasury Bonds, N296.22bn. By this time, the Development Stock had been phased out.

In terms of interest payment in 2014, the FGN Bonds accounted for N511.78bn; Nigeria Treasury Bills, N300.27bn; and Treasury Bonds, N34.59bn.

In the previous year, the FGN Bonds accounted for N464.67bn of the total interest payment; Nigeria Treasury Bills, N293.88bn; while Treasury Bonds accounted for N35.55bn. The total interest paid on domestic debt for the year was N794.1bn.

In 2012, with a total domestic debt service of N701.38bn, the FGN Bonds accounted for N354.08bn; Nigeria Treasury Bills, N310.79bn; and Treasury Bonds, N36.5bn.

For 2011, interest payment on domestic debt amounted to N518bn, with the FGN Bonds accounting for N293.79bn; Nigeria Treasury Bills, N186.72bn; and Treasury Bonds, N37.47bn.

The interest payment for 2010 showed that the FGN Bonds gulped N231.11bn; Nigeria Treasury Bills, N65.07bn; while N38.43bn was paid as interest on Treasury Bonds.

Within the period, some domestic debts that were due for payment were either redeemed or refinanced. In 2014, Treasury Bonds, amounting to N865.81bn, were redeemed. In 2013, N94.17bn of the domestic debt was redeemed.

In the previous year, a total of N456bn of domestic debt was refinanced. In 2011, a total of N223.67bn of the domestic debt was refinanced, just as N317.76bn was refinanced in 2010. Debt redemption means that the principal sum of a debt that is due is paid off, while refinancing means that a fresh loan is taken to pay off a debt that is due.

The interest payment in 2014 as a percentage of the total domestic debt showed that the average cost, or interest of the domestic debt for the year, stood at 10.71 per cent. In 2010, the rate stood at 7.35 per cent.

The DMO had in a document, titled ‘Nigeria’s Debt Management Strategy 2016-2019’, stated that at least 30 per cent of the nation’s domestic debt would fall due within a one-year period.

Given the country’s diminishing revenue profile, as a result of dwindling oil and gas revenue, liquidating the debt seems out of the question and refinancing also comes with its own challenge.

According to the DMO, refinancing the 30 per cent component of the domestic debt posed high risk to the economy because of high interest rate.

“The interest rate risk is high, since maturing debt will have to be refinanced at market rates, which could be higher than interest rates on existing debt. The foreign exchange risk is relatively low given the predominance of domestic debt in the portfolio,” it said.

A former President of the Nigerian Economic Society and Executive Director, African Centre for Shared Development Capacity Building, Prof. Olu Ajakaiye, said with low revenue profile, the government might not have a better option than to reschedule the debt so that it could have a breather within the next two to three years.

Ajakaiye said this would come with the added risk of higher interest rates, because the holders of the instruments of debt would have to be offered some carrot that could persuade them to hold for a longer period of time.

However, the Abuja Head of Social Action, a Non-governmental Organisation that is committed to eradicating indebtedness, Vivian Bellonwu-Okafor, said debt servicing was compromising the nation’s development.

“Even as the present administration has spared no medium to gloomy-sermonise over deep governance decay and empty treasury claims it inherited from the past administration, it seems to be bent on hoisting and bequeathing an even greater burden of debt weight on innocent Nigerians and future generations,” Bellonwu-Okafor said.

She contended that refinancing the domestic debt would once more take Nigerians into another debt trap.

 

[Punch]