DMO explains Nigeria’s debt profile

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The Debt Management Office (DMO) recently held a meeting with journalists during which it presented the public debt figures for 2021 and answered some questions on Nigeria’s public debt data, in Abuja.

In a presentation by the director-general of the DMO, Patience Oniha, Nigeria’s total public debt as at December 31, 2021, was put as NGN39.556 trillion (2020: NGN32.915 trillion). This includes the total external and domestic debts of the Federal Government of Nigeria, the 36 state governments and the Federal Capital Territory (FCT). Debt to GDP ratio as at December 31, 2021, stood at 22.47% compared to 21.61% in 2020. At this level, the ratio is within Nigeria’s self-imposed limit of 40%, the World Bank/IMF’s recommended limit of 55% for countries within Nigeria’s peer group and 70% for ECOWAS countries.

Major highlights at the presentation were that governments across the world borrow for various reasons. Rising debt levels globally, in sub-Saharan Africa and Nigeria are not a new trend, as debt levels were growing even before the COVID-19 pandemic. It was recognized that Nigeria had a double challenge of a low revenue base and a huge infrastructure gap. While the government has remained committed to infrastructure development with significant improvements recorded over the years, the country’s revenue to GDP ratio has remained low at 9.0% compared to comparable countries like Ghana, 12.5%, Kenya, 16.6%, Angola, 20.9%, and South Africa, 25.2%.

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The ratio is even higher for advanced countries such as the United States of America, 30.6%. This low revenue base makes the debt service to revenue ratio high. In response to this challenge, the Nigerian government has instituted strategies and legislations to increase and diversify revenues, all of which are being implemented. It is expected that these ongoing revenue generating drive will further strengthen revenues and reduce debt service to revenue ratio over time. Government has also introduced initiatives to encourage private sector participation in infrastructure development, reducing the need to borrow directly. Meanwhile the DMO continues to deploy the World Bank and International Monetary Fund-approved tools such as an annual Debt Sustainability Analysis (DSA) and a Medium Term Debt Management Strategy (MTDS) to monitor debt levels and sustainability. Various questions were posed at the media interaction.

What is the justification for the rising debt levels of Nigeria? How risky is it to manage the rising debt?

The rising public debt level stems from new borrowings to fund recurring budget deficits in the appropriation acts over the years. These new borrowings are approved by the Federal Executive Council (FEC) and the National Assembly (NASS) as required by the Fiscal Responsibility Act, 2007, and the Debt Management Act, 2003.

If we critically look at the Federal Budget over many years, it will be observed that successive governments have run budget deficits, which have been financed 80% or more by new borrowings. These successive new borrowings have resulted in debt accumulation and, by extension, an increase in the debt stock. Budget deficits have arisen from shortfalls in revenues required to meet the government’s expenditure. For many years, Nigeria has been dependent on crude oil for revenues, a commodity whose price is prone to volatility. This volatility and challenges with production have often times been responsible for deficits in the budget. A look at Budget deficits show that the range between 2015 and 2022 was NGN1.616 trillion to NGN6.449 trillion, while new borrowings to finance the deficits ranged between NGN1.457 trillion and NGN5.489 trillion.

It must be stated that the crash in crude oil prices in 2016 affected Nigeria significantly, leading to a recession in 2017. To bring the economy out of the recession, the government prepared an Economic Recovery and Growth Plan (ERGP) 2017-2020. One of the strategies in the ERGP was that the government would borrow domestically and externally to fund infrastructure and strengthen external reserves. With the exit from the recession in Q2, 2017, the level of new borrowings reduced to NGN1.6 trillion in 2018 from NGN2.3 trillion in 2017. The higher levels of new borrowings since 2020 are the effects of the COVID-19 pandemic, which further constrained revenues while at the same time increased the need for government spending. 

In managing the risks associated with public debt, the DMO uses World Bank/IMF debt management tools such as the Debt Sustainability Analysis and the Medium Term Debt Management Strategy. Also, maturities in the public debt portfolio are well spread out to avoid bunching of maturities and to ease repayments of maturing obligations. Similarly, the government’s sources of funding are well diversified externally and domestically. Furthermore, in the domestic market, the DMO offers a wide range of products such as the FGN Savings Bond, Sovereign Sukuk, Green Bonds and FGN Bonds to grow the investor base, and meet the needs of diverse investors.

Is the DMO able to advise government regarding the size of budget deficit?

There are already legislations and policies that control the size of the budget deficits and the level of debt. The Fiscal Responsibility Act (FRA), 2007, for example, stipulates a maximum budget deficit to GDP ratio of 3%. This Act only allows for exceptions that can be justified by the President. Furthermore, the Medium Term Debt Management Strategy (MTDS), which is a policy document approved by the Federal Executive Council, has a maximum self-imposed debt to GDP ratio of 40%.

In addition to these, the DMO carries out an annual DSA, and from the outcome and approved debt limits, advises the government on the amounts to borrow.

What safeguards or measures can the DMO put in place to ensure that borrowings are deployed to capital projects?

The fiscal authority ensures that borrowed funds are deployed to capital projects. Moreover, this is what is provided for in the Fiscal Responsibility Act, 2007. The DMO has on its own part introduced two project-tied products: Sukuk and the Green Bond. Funds raised through these sources can only be used for pre-identified and eligible capital projects. As a demonstration of the DMO’s support to project-tied financing, the volume of Sukuk has increased over the years from the debut issuance in September 2017 of NGN100 billion to another NGN100 billion in 2018, NGN162.557 billion in 2020 and NGN250 billion in 2021. The proceeds of the NGN362.557 billion Sukuk issued between September 2017 and June 2020 have been fully deployed by the Federal Ministry of Works and Housing to the construction and rehabilitation of economic road projects across Nigeria’s six geopolitical zones. The NGN250 billion Sukuk raised in December 2021 is also for road projects in all the six geopolitical zones, but this time, it includes the Federal Capital Territory (FCT) and the Ministry of the Niger Delta Affairs. This shows that increasingly, borrowings are being deployed to fund capital projects.

Also, a total of NGN25.69 billion has been raised through Green Bonds since December 2017 when NGN10.69 billion was raised and then NGN15 billion in 2019. These funds have been deployed to eligible projects in agriculture, water, renewable energy and afforestation.

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What is the borrowing plan for the year in view of the expected Supplementary Budget occasioned by the PMS subsidies? What volume of additional borrowings are expected?

In view of the draft amendment of the 2022 budget submitted to the National Assembly on account of the suspension of the removal of PMS subsidies, the incremental borrowing is about NGN1 trillion. This would take the total new borrowing for 2022 to NGN6.154 trillion from NGN5.139 trillion in the subsisting Appropriation Act. The process is still on-going.

Have the CBN overdrafts been converted yet?

The process of converting the CBN Ways and Means, which is the government’s overdraft at the Central Bank of Nigeria into long tenor bonds, is still ongoing and related parties, that is, the monetary and fiscal authorities, are still in discussions. 

The yields on Nigeria’s Eurobonds rose in February 2022, which seemed abnormal with the rise in crude oil prices. Why? What does this mean for us as a country?

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The capital market is sensitive to news across the world and this reflects in the yields of securities. While this is the case, from the data we have received from our international financial advisers, the increase in the yields of Nigeria’s Eurobonds in general has been lower than increases in the yields in the Eurobonds of similar countries in Africa. It is not unusual for markets to be volatile.

In view of debt sustainability, at what point do you envisage that the ‘spending spree’ of government will end?

Perhaps, we should not describe this as a “spending spree,” since borrowings are undertaken within relevant laws and are oftentimes a fall out of the annual budgets. To avoid new borrowings, which in itself may be difficult, the government needs to have a balanced or surplus budget. This is a function of revenue relative to expenditure.

It should be noted though that, apart from borrowing to finance budget deficits or infrastructure, government borrowings through the issuance of securities can be used to develop the domestic financial markets and attract foreign capital into the economy. The domestic borrowing activities of the FGN through the issuance of a wide range of securities of tenors ranging from 91 days to 30 years have been the major driver in the development of Nigeria’s fixed income securities market.

Oil prices in recent times are taking an upward trend, why does it seem we are not excited about rising crude oil prices?

To benefit from the rising crude oil prices, Nigeria has to produce more and take full advantage of its OPEC quota. The other side of rising crude oil prices is that Nigeria imports most of its refined petroleum products. This means importation costs increase with higher crude oil prices.

Is it true that China says it is no longer willing to lend to Nigeria? How dangerous is this, if it is true?

There is no official communication from China stating that it is not willing to lend to the Nigerian government. However, even if China discontinues lending to Nigeria, Nigeria’s sources of funding are well diversified.

The contribution of China’s loans of about US$3.6 billion as at December 2021, to Nigeria’s external debt stock was only about 10%. Nigeria has other external funding sources like the World Bank Group, African Development Bank (AfDB) Group, African Export-Import Bank and the Islamic Development Bank. These are in addition to bilateral lenders such as Germany and France. The DMO also raises external funds from the issuance of Eurobonds.

Domestic or external debt, which of these is more attractive to government?

Each of the borrowings from domestic and external sources have their peculiarities and benefits. Consider, for instance, the size of the new borrowing of NGN5.489 trillion in 2021; assuming it were possible for the Federal Government to raise all the funds from the domestic market, it would have been accused of crowding out other borrowers. This could also have resulted in higher borrowing rates for government.

With external funding, government is able to access long tenors and increase Nigeria’s external reserves, particularly with Eurobonds. External financing through the issuance of Eurobonds has also opened up access to the international capital market for Nigerian entities. Since Nigeria issued its first Eurobond in 2011, many Nigerian banks and corporates have issued Eurobonds. In the case of the banks, it enabled the banks to shore up their capital base to strengthen their balance sheets and meet regulatory requirements.

Indeed, the issuance of securities by the Federal Government in the domestic and international capital markets has enabled the government to raise much needed funds whilst also providing platforms that have enabled the private sector to access stable, long term capital.

It is said a lot by the public that government is accumulating liabilities for the future generation to manage. How would the DMO respond to this?

Governments borrow to finance capital projects which have long term benefits, but require large capital outlay that current Revenues are insufficient to outrightly finance. If we think about it, the present generation is benefitting from investments in infrastructure and other projects that were made by previous administrations, in some cases, many decades ago. It is not advisable to say that one administration is accumulating liabilities for the future generation because the future generation will benefit from the investments in capital projects that are made today.

Also, with such infrastructure investments, economic growth is improved and the Revenue generating capacity of the country will strengthen in future, thereby supporting the ability to service the debt.

A report by the International Monetary Fund (IMF) projected that Nigeria’s Debt Service to Revenue Ratio will rise to 93% in 2022 and further to 135% in 2023. What is your opinion about these projections?

While the IMF may have projected those Debt Service to Revenue Ratios, it is important to consider the IMF’s position against the background of the various initiatives being made by the Government to generate Revenues such as the Strategic Revenue Growth Initiative and the annual Finance Acts. Some initiatives include the increase of Value Added Tax to 7.5% from 5%, the introduction of sin taxes on alcohol and cigarettes as well as taxes on electronic money transfers, among others.

Still on Debt Sustainability, the DMO has been actively canvassing that the Government should focus on Revenue growth and use of Public Private Partnership arrangements to finance capital projects, for Public Debt to be sustainable. Statistics for 2020 from the World Bank show that the size of Nigeria’s Debt relative to GDP at 22.47% is low when compared to advanced countries like the United States of America, Canada and the United Kingdom with Debt to GDP Ratios of 133.92%, 117.46% and 104.47% respectively. However, because these countries generate Revenues even with high debt levels, their debt is sustainable. It comes as no surprise therefore, that with Revenue to GDP Ratios of 30.6%, 41.9% and 36.6%, Interest Payments on Debt as a percentage Revenue were only 7.1%, 0.6% and 3.0% respectively.

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