…As FG proposes $3.3bn Eurobond
Emeka Okoroanyanwu
Nigeria is reported to be considering issuing a Eurobond of about $3.3 billion to help fund the 2020 budget and refinance an earlier Eurobond that is maturing in 2021. The country’s 2020 budget of N10.58 trillion has a deficit of about N2.18 trillion or 1.52 per cent of the country’s GDP. Foreign and domestic borrowings are expected to finance the deficit.
The country has in recent times been going cap in hands to fund its expenditure, especially in infrastructure. Recently, the government asked the National Assembly to approve a request for $23 billion in foreign borrowings for infrastructure projects.
In 2019, the country’s debt office said it did not tap the international debt market because of time constraints before the end of its budget cycle and this has largely informed the decision to return to the loan market now.
Nigeria held its last Eurobond sale in 2018, its sixth, and raised $2.86 billion. The debt office has said it would first seek concessionary loans for its 2020 external borrowing of around N850 billion ($2.8 billion), and any shortfall might be raised from commercial sources. The government is reported to be considering concessionary loans.
President Muhammad Buhari in December 2019 signed the country’s N10.594 trillion 2020 Appropriation Act into law. He had proposed a capital expenditure of N2.465 trillion, recurrent expenditure of N4.842 trillion, statutory transfer of N560.4 billion, debt servicing of N2.72 trillion and fiscal deficit of N2.18 trillion.
But according to the DMO, the Act provided N850 billion as external borrowing to finance part of the budget deficit of N2.18 trillion. The proceeds, it said, would be used to finance projects in the budget, including power.
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The office also noted that the Federal Government plans to refinance a $500 million Eurobond maturing in January 2021 hence will need $3.3 billion to carry out the plans.
Said DMO, “In furtherance of the government’s commitment to develop infrastructure, the proceeds of the $2.786 billion will be used to finance Capital Projects in priority sectors of the economy that are included in the 2020 Appropriation Act.
“The projects include those in power, transport, works and housing, aviation, health, education, agriculture, and rural development.
“Mindful of the need to moderate Debt Service Cost, the plan for the raising of the $2.780 billion capital is to first maximize financing from relatively cheaper concessional and semi-concessional external sources where available, and the balance, if any, from the International Capital Market (ICM) through the Issuance of Eurobonds.
“In addition to the $2.780 billion for the Budget, Nigeria has a $500 million Eurobond which will mature on January 28, 2021 (6.75 percent $500 million 2021). Given that the Eurobond will mature early in the year 2021, the plan is to refinance it through the issuance of a Eurobond in 2020.
“Thus, the new external capital raising for the year 2020 to part-finance the 2020 Budget Deficit and refinance the Eurobond maturing in January 2021 is $3.3 billion.”
Nigeria’s rising debt has been a source of concern to many some of who were of the view that it was not sustainable going by the debt to GDP ratio or debt to income ratio.
Director-General of the Debt Management Office (DMO), Ms. Patience Oniha recently reported that Nigeria’s debt profile as of December 31, 2018 stood at N24.387 trillion. The debt grew by 12.25 per cent from N21.725 trillion in 2017, which is about N2.66 trillion in just one year. According to her, Nigeria’s domestic debt accounted for 68.18 percent of the figure, which consisted of debts owed by both the federal and state governments.
Going by the figure presented by the DMO, the huge addition was recorded in the fourth quarter of 2018, which came with N1.96 trillion or 8.03 per cent increase against the N22.428 trillion recorded at end of September 2018.
The rising national debt became noticeable when the current administration came into power. The new borrowings made by the regime so far included N1.457 trillion in 2015; N2.321 trillion in 2017; N 1.643 trillion in 2018 and N1.649 trillion in 2019.
States’ debt analysis of the presentation by the DMO indicated that the federal government debt stock was N17.117 trillion as of December 2017 but increased to N19.234 trillion at the end of last year, representing an increase of 543.65 or 11.80 per cent.
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Financial experts at the International Monetary Fund (IMF) and the World Bank (WB) have advised that the revenue-to-debt ratio is unsustainable and portends a serious danger for the future generation of Nigerians.
While the effect of the increasing debt may not be immediately felt in totality, it could be catastrophic in the long-term with a chunk of revenue consumed by debt servicing to the detriment of infrastructural development. This, sadly, is the current reality as N2.140 trillion from the N8.8 trillion proposed 2019 budget, has been earmarked for debt servicing, representing about 25 per cent of the total budget allocation.
The size of government borrowing in the domestic financial market also continues to be a major source of concern as this has in no small measure, affected the chances of the real sector to access funding at a reasonable cost.
On October 15, 2019, the Debt Management Office released the debt profile report of the country. According to the report, Nigeria’s debt stock increased by 3.11 per cent from $81.27 billion recorded in the first quarter of 2019 to $83.88 billion (N25.70 trillion) at the end of June 2019. Overall, total external debt stood at $27.16 billion.
One thing, however, stood out, the debt rose by an astonishing N3.32trn in one year, which is almost a third of the country’s annual budget.
This development, according to experts is worrisome. President of the African Development Bank, Dr. Akinwumi Adesina, had remarked that Nigeria was currently using 50 per cent of its revenue to service its debts, compared to the average of 17 per cent for other African countries. This, he said, is unsustainable, adding that the situation is part of an economic malaise that has consigned millions of Nigerians to “multidimensional poverty” even as a few favoured ones continue to enjoy the nation’s wealth. Also worried by Nigeria’s growing debt stock, members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria had at the end of the 126th Monetary Policy Committee meeting last year noted that despite momentum increase in private sector lending, rising Nigeria’s public debt remains a headwind to economic growth.
“The huge concerns expressed by the MPC about the increases in total public debt remain unabated. Based on the Bond Issuance Calendar of the Debt Management Office (DMO), there were three additional FGN Bond Auctions in July, August and September to raise money to part-finance the 2019 Federal Budget while additional Issuance of Eurobond is expected in the late part of 2019 or early 2020.
“As the threat of debt vulnerability continues, a coordinated domestic revenue expansion with simultaneous fiscal prudence as suggested in the last MPC meeting remains the key to addressing the weak fiscal position of the economy” the MPC noted.An even more alarming statistics were given by civil society organisation, BudgIT. According to Atiku Samuel, Head of Resear6 ch at BudgiT, Nigeria’s debt is larger than what’s reported by the debt office.
“What you see at the Debt Management Office is just a fraction of Nigeria’s debt, there are special accounts that are dedicated by law, but unfortunately the federal government has been taking funds from [them] to meet its budgetary obligations”
Samuel further said that the government had been drawing from “funds like the ecological fund, even borrowing from the excess crude account. Another big component is the debt to contractors and the overdrafts it takes from the central bank – which is now about N4 trillion – and there are also judgment debts,” he lamented.
These, he said, would add to the debt “if you look at debt from the globally accepted definition, as these are still obligations to the government” he added.
Multilateral loans from the World Bank Group, African Development Bank at the end of June 30, 2019, stands at over $12bn, commercial loans from Eurobonds and Diaspora Bonds stand at over $11bn while bilateral loans from Exim Bank of China, Exim Bank of India, The Agence Française de Développement, AFD and the likes of them stands at $3.27bn. In all, the country’s debt profile stands at an astonishing $83.88 billion.
Analysts are however, worried that most of the money being borrowed by the government may not have been put into productive use. Questions are being raised, for instance, on the proceeds of bond sales, from which the country has reaped bountifully in recent years. Other areas for which money has been borrowed and little done are electricity, water and road infrastructure.
“They have borrowed quite a bit, but where is the money being spent?” asks Andrew Roche, managing partner of Finexem, a Paris-based financial consulting firm. He worries that the government has been using borrowed cash to patch up holes in budgets rather than investing in infrastructure or industry, or in efforts to diversify the economy.
Nigeria has been among the big beneficiaries of a global hunt for yield. For instance, the country sold its sixth eurobond November last year, raising $2.9 billion in maturities of seven, 12 and 30 years in an issue that was more than three times oversubscribed. On April 25, the government raised 100 billion naira ($326 million at the official rate) in an auction that included a debut 30-year local currency bond that was four times oversubscribed. In a presentation to investors in Washington DC, United States of America recently, Finance Minister Zainab Ahmed stressed that Nigeria’s debt while it has risen in recent years, was still equal to just 19 percent of gross domestic product in 2018. But the same presentation shows that the amount spent on servicing government debt, while it has fallen as a share of the government’s gross revenue collection, has risen to an alarming two-thirds of revenues retained by the federal government after it has allocating funds to the states.
Nigeria’s debt profile, disaster waiting to happen –Experts
Ike Brannon, a senior fellow at the Jack Kemp Foundation had recently posited that Nigeria’s biggest economic problem is her growing public debt.
“Nigeria’s biggest economic problem, though – and the issue that requires real political acceptance from Buhari’s new government – is the country’s growing public debt. Since assuming office in 2015 President Buhari’s government has added considerably to the nation’s debt, which now exceeds $85 billion.
“In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a program coordinated by the Paris Club, IMF, World Bank and the African Development Bank. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing. Another problem is that having a plethora of Nigerian banks holding substantial portions of Nigerian sovereign debt represents a systemic risk,” he said.
If the country does not put her financial house in order, he added, it would undoubtedly face some sort of fiscal crisis in the next few years.
“If Nigeria does not get its financial house in order it will undoubtedly face some sort of fiscal crisis in the next few years. In the long run, the Buhari government must make a concerted effort to diversify the country’s economy away from oil as well as take steps to widen and increase the revenue base, and it should look to settle its major contingent liabilities sooner rather than later,” he added. On his part, Paris-based sovereign debt expert, Andrew Roche pointed out that while the country’s debt as a proportion to GDP is a reasonable twenty per cent, debt servicing costs make up fully two-thirds of retained government revenue, a startlingly high figure and a situation government goes some lengths to de-emphasize.
“Without an honest and frank government acceptance of the situation, Nigeria’s chances of escaping its self-inflicted debt trap are vanishingly small,” he said
FG borrowing more than they have the means to repay –Stakeholders
To Gabriel Idahosa, the Vice President of the Lagos Chambers of Commerce and Industry, LCCI, in a recent interview, though the country’s debt to equity ratio gives it room to borrow more, borrowing was not going to be a problem, but the real problem lies in the ability to repay the debt.
“What the government has been doing is to base the budget significantly on debts rather than revenue, the revenue capacity of the budget is at about 30 to 40 per cent, so a lot of the budget is predicated on borrowing, so as long as you keep borrowing, you are going to have your debt profile going up higher and higher which translates to having to borrow more and more.’’
‘’The government might be saying that our debt position relative to the Gross Domestic Product, GDP is not much to worry about at this time. The international benchmark for debt-equity is about 40 per cent, if you are at less than 40 per cent, then you have room to borrow more. This is why the government is saying that they have enough room to borrow, but that presumes that they are also able to generate enough revenue to meet the debt repayment obligation. The real concern for Nigeria is not that the debt to equity ratio is high but the fact that we do not generate enough revenue to meet the repayment obligation of those debts significantly. As long as we continue to maintain the level of our current revenue generation as it is, then our capacity to repay will be going down,” he said.
Similarly, the Managing Director of Kairos Capital, Sam Chidoka had lamented that Nigeria’s debt sustainability was precarious.
“One fact that Nigeria has always looked at is our debt to GDP ratio which is in and around 20 per cent and still looks good, but one thing which should worry us as a country is the debt to revenue. In terms of debt to revenue, we are not doing too well. In the situation that we are using 63 per cent of our revenue to service debts, this is precarious. The challenges are numerous, firstly, we have a revenue challenge, we are not making enough money, and we need to fix that. Secondly, we have an infrastructural gap that needs to be funded and of course, our ballooning debt situation,” he said.
Debt level not worrisome –FG
For the umpteenth time, however, handlers of the Nigerian economy have reassured Nigerians that the debt profile of the country is not as precarious as it is being made to look.
Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had in August last year said that the country did not have any debt challenge but a challenge with generating sufficient revenue.
“There is a lot of insensitivity around the level of our debt. I want to restate that our debt is not too high what we have is a revenue problem. Our debt is still very much within a reasonable fiscal limit. In fact, among our comparative countries, we are the least in terms of borrowing,” she had said.
It is hoped that the Federal Government will heed the advice of Professor Sheriffdeen Tella, a senior lecturer in the Department of Economics, Olabisi Onabanjo University, Ogun State who called on the National Assembly to stop the Federal government from further borrowing.
