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Why Nigeria is still in debt after exiting Paris and London Clubs in 2006

A country’s sovereign debt is a macro-economic variable, just as the gross domestic product (GDP), savings, investments, money supply, employment and unemployment. As variables, they are dynamic, and must be looked at in context, relating only to themselves, in attempting to know how appropriate their levels or rates of growth affect the economy.
Public debt stock has to be related not just with the statics of the economy, but its dynamics, particularly economic growth rates and the GDP. After exiting the Paris and London Clubs debts, Nigeria’s debt stock got to a very low and sustainable level.

However, though the country’s debt stock has been growing after that, particularly on the domestic front, it is in context, within the capacity provided by the overall growth of the economy. The GDP figures since then has maintained a commendable growth rate till date, averaging between 6 and 7 per cent. The country’s debt-to-GDP ratio at the end of 2010 was about 17 per cent, which is within the 40 per cent threshold, like countries in her peer group.

Revised debt management strategy

Though the DMO is a public service organisation, it appreciates that its job is essentially an investment banking job – to manage, perhaps, the biggest financial investments in the country. The DMO believes it can do its job effectively and efficiently only if there are clear guidelines, goals, vision and mission statement as well as broad strategic objectives.
Between 2002 and 2006, the DMO rolled out the first five-year strategic plan, with the central objective of making the country’s debt sustainable. The strategic plan was to help define the minimum goals as well as specifying the ways, cost and resources, institutional framework, organization, manpower and training that would be required to achieve them within the period.

After 2006, a new strategic plan became necessary, to enable the country play a more proactive role in contributing to the growth and development of the economy. Therefore, in 2007, a new 5-year strategic plan was finalised, to run between 2008 and 2012, with the vision of utilising debts as assets for the country’s growth and development.

The goals specified in the new plan included the development of the domestic debt market, to enable the private sector access long term funds to develop agriculture, mining, solid minerals, transportation, manufacturing, power, and so on.

Within this period, we have created the type of market envisaged. Now, there are funds of up to 20 years in the Nigerian capital market, through the issuance of FGN bonds, to encourage the market to begin thinking, acting, saving and investing long term. Today, if any private entity wants to issue a bond to raise five, seven, 10, 20 years money for investment in agriculture, manufacturing, power sector or other infrastructure will succeed.

Similarly, the vision under the new plan was to ensure that every state of the federation has a debt management department. Today, we are at the stage where every state has advanced towards the final stage of having a fully functional debt management department.

We are democratizing public debt management, institutions and capacities, to ensure that in the next two to three years Nigeria would be ranked among the strongest countries in terms of public debts management knowledge, not just because the DMO knows about public debt management, but because there are 36 other institutions with similar capacities. Part of the democratisation process is also to make every Nigerian very knowledgeable about public debt management issues.

State’s accumulation of debts

In a fiscal federalism, such as Nigeria’s, where every state has very strong powers of fiscal autonomy, the Constitution does not prohibit states from taking loans. Rather, it provides terms and conditions under which they can access loans.
With that constitutional reality, the DMO decided to help states in building appropriate capacities as well as establish and develop the necessary institutions, including the legal framework, to help them be prudent in their procurement and utilisation of borrowed funds. The DMO provides them with the information that would enable states take informed decisions at the right time and the right sources to borrow, if they have to.

In the next two years, when effective public debt management institutions would have been established in the states, they would be in a position to understand and accept DMO’s advice on when and when not, how and how not, where and where not to borrow. It will not be a situation where the DMO, from the centre, is imposing itself on them, but that they, on their own, appreciate the need to borrow from sources in a manner that would enable them apply to projects that would generate maximum value in terms of better standard of living for their people, while being able to service their debts as and when due.
So, the issue is not about dissuading states from borrowing, but to help them make optimal and efficient decisions about borrowing for the right purposes.

DMO’s role in the Asset Management Company of Nigeria (AMCON)’s objectives

AMCON is to buy over the non-performing assets (loans) of banks. So far, it is issuing paper bonds to the affected banks at a price in exchange for those bad loans, so that in future it would be in a position to realise value from them and be able to redeem the issued bonds.
For the bonds to have the impact and improve the bank’s balance sheets, they need to be backed up by a sovereign guarantee by the DMO, which is the country’s agency responsible for managing the country’s crystallized, direct debts or contingent liabilities.

In other countries, the government faces a risk with such guarantees when non-performing loans are taken over, to the extent that when the asset management company wants to realize value from the assets, it may not be able to do so 100 per cent, and would not be able to pay fully for the bond issued without some money coming from government.
But here, the Central Bank of Nigeria (CBN), Federal Ministry of Finance and AMCON, based on the DMO’s position, have arranged it in such a way that there is virtually no risk on the taxpayer, because the CBN and the banks are contributing into a sinking fund that would ensure that if, at the end of the period, the value realised by AMCON from the sale of the loans is not enough, it will be made up from these contributions.

Economic impact of the $500million Eurobond on Nigeria

First, the benefit of the Eurobond for the country is that it helps Nigeria establish its presence in the international capital market as a benchmark to facilitate private sector borrowing. Currently, Nigeria has a huge infrastructure deficit, which requires a huge financing gap, taking into account investments required in the power, agriculture, transportation sectors, and so on.

Even with all the country’s oil wealth, Nigeria is no way near having all the resources to close the deficit and grow her economy, to become one of the top 20 world economies by the year 2020.

Therefore, government desires an active role by the private sector in this direction. What government has done through the Eurobond issue is to open a new window to facilitate Nigeria’s private sector to go into the international capital market to issue their own debt instruments and raise long term monies to fund the country’s various needs in the real sector and infrastructure.

What this means is that it will help government to avoid excessive borrowings, since the private sector could take over the funding of most of the projects the government has been borrowing money to do when they did not have access to the capital market.

Today, because the country is there at the international capital market, it would become conspicuous to investors all over the world as an option for foreign direct investment (FDI), in terms public-private partnerships (PPPs).

Similar, because Nigeria appreciates that she belongs to the centre stage, the country is under obligation to adopt international best practices in all its activities, from politics and economic management to social development, to help accelerate her growth and development as well as establish a path for sustainable prosperity.

Diaspora Investment Fund and national economic growth

Details on the initiative are currently being worked out. But, the broad outline is that Nigeria appreciates that she has a huge Diaspora population. Most Nigerians living in Europe, United States, Latin America, Asia and South Africa are high net worth professionals and individuals in various businesses, including schools, hospitals and so on. Some are working in the biggest multinational companies and foreign governments. They have huge capacities to repatriate part of their savings to invest in Nigeria.

In terms of debt management, rather than encouraging government to borrow to solve the myriad of infrastructure and development challenges, government could be saved the pressures by encouraging other economic agents, like Nigerians in the Diaspora, to lead the way in investment.

Therefore, the DMO wants to design appropriate funds that Nigerians in the Diaspora can pool their resources together to target the development of various sectors of the economy, like agriculture, specialized educational and medical institutions, housing projects, which they would own, in order to meet the challenges of a growing population like Nigeria’s.

That way, they would be own businesses in Nigeria and contributing to the growth and development of the country as well as helping to reduce the pressure on the government to continue borrowing for these projects.

Tangible impact of a sustainable debt profile

It is important for Nigerians to see convincingly the impact arising from the use of borrowed funds by government. That is the way government is looking at the issue of debt going forward. In the past, much of what was borrowed was used in the execution of tangible projects.

About 92% of the country’s total external debts of $4.5billion as at December 31, 2010 are as a result of borrowings from the World Bank and other multilateral sources, like the African Development bank (ADB) for specific projects, like the FADAMA agricultural scheme that enables farmers to farm all the year round.

Over the years, several initiatives in the education and health sectors, like the Universal Basic Education (UBE) and anti-malarial campaigns, were funded with monies borrowed from these institutions.

In the domestic front, such programmes as the N200billion commercial agricultural credit programme by the CBN and commercial banks, revival of the cotton and jewelries industries by the Bank of Industry (BOI), the ongoing reactivation of the country’s rail transportation system, are funded from monies borrowed from the domestic bond market.

But, going forward, government is insisting on getting greater value from the use of borrowed funds. That is why the Ministry of Finance has not only established a very strong monitoring group to regularly monitor these projects once they commence, but also established a risk management desk as well as introduce performance budgeting process as a strategy to ensure maximum value for borrowed monies.

The DMO is committed to ensuring that the country does not stray into a situation of debt unsustainability again. DMO’s advice to government is to avoid borrowing beyond the threshold of 40% of GDP by limiting it to not more than 25% in the next 4 to 5 years.