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Managing rising debts amid infrastructure gap

Determined to fix infrastructure gap, government is contracting N4.686 trillion via domestic and foreign sources in the 2021 fiscal year. The newly approved debt management guideline is a tool for managing debt affairs, ABDULWAHAB ISA reports

The size and management of Nigeria’s debt stock came under scrutiny recently. Given the steady rise in size of the country’s debt stock dating back to the last five years, informed citizens are keeping tab on debt progression in relation to budget, expenditure and revenue stream available to government. The conversations trailing rising debt stock, its prudent management or otherwise, will remain an integral item of discussion whenever the issue of budget management and economy are being examined. With revenue sources available to government (majorly from oil related sources) receding due to interplay of factors, government’s propensity to borrow to close the budget deficit gap is irresistible. There are concerns about sustainability of mounting debt stock amid Nigeria’s fragile economy.

Debt stock update

The Debt Management Office (DMO) is the agency charged with managing the nation’s debt affairs. In a recent debt stock update, the agency put the country’s total debt (federal and state governments, including Federal Capital Territory) at N32.223 trillion ($84.574 billion). The figure dated September 2020 was higher than N31.01 trillion debt figure of June 30, 2020.The agency attributed a spike in debt stock to borrowing by various tiers of government to contain COVID-19 outbreak. A breakdown of the public debt stock showed that 37.82 per cent was external, while the balance of 62.18 per cent was domestic. Compared to the total public debt stock of N31.009 trillion as at June 30, 2020, the debt stock in Q3 of 2020 increased by N1.214 trillion or 3.91 per cent. DMO said both the federal and state governments and the FCT recorded increases in their debt stock due to borrowings to enable them respond appropriately to COVID-19 and to meet revenue shortfalls. There were also issues of Promissory Notes to settle inherited liabilities. The settlement of inherited liabilities, DMO said, contributed to the growth in the public debt stock since the year 2018 when they were first issued. While N20.136 billion of Promissory Notes were issued in Q3’20, as at September 30, 2020, the Promissory Notes outstanding, which are all included in the domestic debt stock, stood at N971.878 billion. For sure, more debts would accrue in the 2021 fiscal year. This is because the current 2021 budget of N13.5 trillion signed into law on 31st December, 2020 by President Muhammadu Buhari has a budget deficit of N5.60 trillion borrowing plan. There is a borrowing plan totaling (N4.686 trillion) split equally between domestic and external sources.

FG justifies debt on infrastructure uplift

In the 2021 budget outlay, the Federal Government made provisions for additional borrowing to finance her expenditure plans. Government hinged the plan on low revenue from traditional sources. Minister of Finance, Budget and National Planning, Zainab Ahmed, amplified government’s position recently, saying that based on existing approvals, the country’s total public debt may hit N38.68 trillion by December 2021. Ahmed spoke when she appeared before the Senate committee on local and foreign debts. According to her, total public debt stock comprising the external and home debts of the federal and state governments and the Federal Capital Territory stood at N31.01 trillion ($85.90 billion) as of June 30, 2020. “It is projected, based on existing approval, to rise to N32.51 trillion by December 31, 2020 and N38.68 trillion by December 31, 2021.” The minister added that the proposed N4. 28 billion borrowing was broken down equally between domestic borrowing of N2.14 billion and external borrowing of N2.14 billion. According to her, government was saddled with more projects, including but not limited to construction and rehabilitation of roads across the country. This, she said, was in addition to other infrastructure projects. Government cited various construction of roads via Sukuk bonds and others being rehabilitated using proceeds of borrowed funds. The China loans are exclusively dedicated to the construction and rehabilitation of railway tracks across the country.

Concerns mount on rising debt stock

Debt contraction is unavoidable. Developing and developed nations procure debts. In Nigeria, however, concern centers on the fast pace rise in Nigeria’s debt profile. Some Nigerians and organisations have expressed concerns on this aspect. For instance, a former Vice President, Alhaji Atiku Abubakar, last year, expressed concern over the rate the Federal Government was acquiring foreign loans and called for restraint. Similarly, a few other voices from structured bodies cautioned the government on procurement of foreign loans. The Lagos Chamber of Commerce and Industry (LCCI) last year in the face of raging debate about fresh foreign loan bids by the Federal Government cautioned on the continuous use of debt to meet its fiscal obligations especially at a time the country is struggling to generate adequate revenue. The chamber advised that the option of equity financing should be rigorously explored since it is a better and more sustainable financing strategy that could be deployed to bridge fiscal deficit.

Subjecting debt to MTDS rule

Procuring debt and its management is guided by rule, Medium Term Debt Management Strategies (MTDS). Nigeria has had two in series, 2012-2015 and 2016-2019. The Debt Management Office, last week, announced approval for the recently developed MTDS. The Federal Executive Council at its meeting last week approved (MTDS 2020 to 2023). DMO explained in a statement that the new strategy policy had to be reworked to reflect the global and local economic impact of the COVID-19 and incorporates data from the revised 2020 appropriation Act and the Medium-Term Expenditure Framework 2021-2023. The new MTDS, DMO said, adequately reflected the current economic realities and the projected trends. The fresh debt guidelines were prepared in collaboration with relevant stakeholders, which include the Federal Ministry of Finance, Budget and National Planning, Central Bank of Nigeria, Budget Office of the Federation, National Bureau of Statistics and the Office of the Accountant-General of the Federation). MTDS is recognised as one of the best practices in public debt management and is recommended by the World Bank and International Monetary Fund (IMF) to ensure that public debt management is driven by a well-articulated strategy that is structured to meet a country’s broader macroeconomic and public debt management objectives. For 2020- 2023 MTDS, DMO said: “Based on the current public debt stock, government’s borrowing needs in the mediumterm (as stated in the 2021 appropriation Act, MTEF, 2021- 2023), as well as future global trends, Nigeria’s 2020-2023 MTDS can be summarized as follows: Borrowing will be from domestic and external sources but a larger proportion of new borrowing will be from domestic sources using long-term instruments while for External Borrowing, concessional funding from multilateral and bilateral sources will be prioritised.” For instance, from 2020 to 2023, the agency provides a borrowing target of 40 percent maximum compared to the previous 25 per cent. The increment to 40 per cent from 25 per cent was done “to accommodate new borrowings to fund budget deficits and other obligations of government; promissory notes to be issued to settle government arrears; and, the ways and means advance at the Central Bank of Nigeria. “This ratio is still well below the WB/IMF’s recommended threshold of 55 per cent for countries in Nigeria’s peer group,” DMO clarified. Similarly, it explained that portfolio composition pegged at maximum of 70 to maximum of 30 (external and domestic respectively) is to further strengthen the domestic debt market and optimize access to both concessional and commercial sources of funding. DMO noted that implementation of the Medium-Term Debt Management Strategies over the years, has helped in managing the structure of the growing public debt, and ensured debt sustainability, as well as effectiveness in public debt management.

Last line

With ratification of new debt policy guidelines, it’s expected that procuring and managing the nation’s debt stock should be guided by rules and provisions of MTDS 2020 to 2023.

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