Explanations by the Federal Government that its plan to borrow $5.5 billion is in line with its debt management strategy of rebalancing the public debt portfolio in favour of long-term external financing, are cutting no ice with critics who insist that the move will further increase the country’s debt burden.TONY CHUKWUNYEM writes
President Muhammadu Buhari’s letter to both chambers of the National Assembly early last month seeking approval for $5.5billion external loans to finance the 2017 Appropriation Act continues to generate reactions from analysts and various interest groups in the country.
Although the President stated in the letter: The Senate may wish to refer to the 2017 Appropriation Act, which has a deficit of N2.356 trillion and provision for new borrowings of N2.321 trillion, respectively,” adding, : “The Act also provides for domestic borrowing of N1.254 trillion and external borrowing of N1.067 trillion (about $3.5 billion), critics continue to urge the government to shelve the plan because, according to them, it would increase the country’s debt burden.
However, the Minister of Finance, Mrs. Kemi Adeosun, has equally not relented in her efforts to convince the critics. Appearing on a television programme in Abuja last week, the Minister, according to a statement made available by her Special Adviser on Media, Mr. Oluyinka Akintunde, explained that the proposed $5.5billion loan was made up of refinancing of heritage debts to the tune of $3billion and new borrowing of $2.5billion for the 2017 budget.
She said : “Let me explain the $5.5billion borrowing because there have been some misrepresentations in the media in the last few weeks. The first component of $2.5billion represents new external borrowing provided for in the 2017 Appropriation Act to part finance the deficit in that budget. “The borrowing will enable the country to bridge the gap in the 2017 budget currently facing liquidity problem to finance some capital projects.
For the second component, we are refinancing existing domestic debt with the $3billion external borrowing. This is purely a portfolio restructuring activity that will not result in any increase in the public debt.” Besides, she stated: “Under this dispensation, we are not borrowing to pay salaries. If all we do is to pay salaries, we cannot grow the economy. This administration is also assiduously working to return Nigeria to a stable economic footing. In the light of this, the government adopted an expansionary fiscal policy with an enlarged budget that will be funded in the short term by borrowing. “Nigeria’s debt to Gross Domestic Product (GDP) ratio is still within a reasonable threshold.
This dministration will continue to pursue a prudent debt strategy that is tied to gross capital formation. This will be attained by driving capital expenditure in our ailing infrastructure, which will in turn, unlock productivity and create the much needed jobs and growth.” She pointed out that the $5.5billion loan was consistent with Nigeria’s debt management strategy that was mainly aimed at increasing external financing with a view to rebalancing the country’s public debt portfolio in favour of long-term external financing.
60:40 borrowing template
Indeed, on June 20, 2016, the Debt Management Office (DMO) unveiled a new four-year borrowing plan Debt Management Strategy (2016-2019), that it said was appropriate for the country’s debt going forward. Unlike under the previous 2004/2006 debt management strategy, where it was felt that the best way to manage Nigeria’s debt profile was to reduce the level of external borrowing and increase the rate of domestic borrowing (ratio of 84 per cent domestic borrowing to 16per cent external borrowing), the new strategy had a ratio of 60:40 borrowing template.
According to the DMO, the new strategy is intended to keep money in the hands of private investors in order to spearhead a private sector driven economy. Shedding further light on the document at an interactive session with journalists, the then Director General of the DMO, Dr. Abraham Nwankwo, noted that the new four-year borrowing plan was appropriate for the challenges that the country was facing.
He said: “The Debt Management Strategy we are going to pursue over the next four years takes into account the fact that for now Nigeria’s public debt portfolio is dominated by domestic debt. After the Paris and London Club exits between 2004 and 2006, the country took a deliberate decision to develop its domestic bond market and to do most of the public borrowing from domestic sources so as to develop the domestic bond market, that objective has been sufficiently achieved.
“And therefore taking into account that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources. Therefore one of the major elements of this strategy is that over the medium, term we will strive to remix the public debt portfolio from 84 per cent domestic and 16per cent external to 60per cent domestic and 40per cent external.”
He further explained: “In addition, taking into account other factors, the fact that over the next four years public borrowing proceeds will be devoted to capital expenditure an element of the strategy is to ensure that we remix the current status of about 31 percent short-term and 69 percent long-term to a maximum of 25per cent short-term and a minimum of 75per cent long-term. So we are remixing between external and domestic and we are also remixing within the domestic, between short and long-term.”
Interestingly, responding to concerns about the justification for increasing the level of external borrowing especially at a period of uncertain exchange rate regime and lower reserves, Nwankwo said: “One of the major advantages of remixing in favour of external debts is that first, we will be able to achieve cheaper cost of funds, therefore lower debt servicing but more importantly, we will be avoiding the risk of crowding out the private sector from access from the domestic markets.
“As you know, within the context of government’s economic programme, which requires massive investment in infrastructure and diversification of the economy, the private sector is still expected to play the lead role so that as government makes its own expenditure in infrastructure and improving the business environment, you expect the private sector to key in, in developing the various sectors of the economy including agriculture, solid minerals, manufacturing among others.
“Therefore, given the momentum government is bound to create in resuscitating the economy, the private sector would be expected to require massive resources as well and it becomes necessary to leave more space for the private sector to mobilize the resources they require to be able to complement government’s initiatives,” he added.
The views of the ex DMO D-G were echoed by his successor, Ms Patience Oniha, when she represented the Finance Minister at a defence session organised by the Senate Committee on Local and Foreign Debts in Abuja recently.
She disclosed that out of Nigeria’s debt current stock of N19trillion, 77 per cent was from the domestic market through the various products issued, including treasury bills, the Federal Government of Nigeria Bonds, the Federal Government Savings Bonds and the FGN Sukuk. Oniha explained: “The implication of having that large amount in domestic debt is high debt service because the costs of – meaning interest rates – are high.
If the government is so visible and prominent in the local market, it means that we have taken some of the money that should go to the private sector. “Banks should be able to have large amounts of money to extend to the real sector. If we are not too prominent in the domestic market, there should be more room for banks and other financial institutions to lend to the private sector and, thereby, contributing to economic growth,” she stated.
However, financial experts, who commented on the issue, argued that while government needs to borrow in order to fix the nation’s broken down infrastructure, it should step up revenue generating efforts so that servicing and repaying debts would not be a major problem for the country in the future.
In a chat with our correspondent, a financial analyst and Principal Consultant, Henates and Associates, Mr. Henry Atenaga, said: “Our roads are in a bad shape, power is still a problem, so there is no doubt that government needs money to fix these things. But my worry is that if we take this loan I cannot see the strategy for ensuring that the projects that the money will be used to finance will generate the revenue to pay off the debt.
” He stressed that government would have to tinker with its tax policies to ensure that more Nigerians pay their taxes. Similarly, a financial consultant, Mr. Okey Agu, contended that while the present administration needs to borrow to fund its budgets, it should not use the country’s currently very comfortable debt to Gross Domestic Product (GDP) ratio as an excuse to take huge loans that future governments will not be able to repay.
He said: “There is no doubt that compared to most countries Nigeria has a low debt to GDP ratio. But many experts and international organisations, including the International Monetary Fund(IMF) and the World Bank, have warned that the country’s current debt to revenue ratio makes our debt profile unsustainable. Before government takes any fresh loans it should clearly state how the funds for repaying them will be generated.”
In fact, as a financial analyst, who did not want to be identified stated, “this administration has already borrowed a lot during the period it has so far spent in office. While it is doing the right thing by trying to reduce domestic borrowing, it must clearly explain what it has done with the previous money borrowed before it should be allowed to take new loans.”
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