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Reality dawns as debts wobble under sustainability test


Ms Patience Oniha, Director-General, Debt Management Office, Nigeria

Nigeria failed the test conducted to determine its ability to sustain ongoing borrowings and their repayments in the next five and 10 years, an affirmation of the growing fears over increasing level of borrowings and huge costs incurred in servicing them.

The revelation, by the Debt Management Office (DMO), which appears too big to be covered up, was contained in the routine yearly Fiscal Sustainability Analysis. The development simply means that going by the level of borrowings, expected revenue and interest payable, the country would give more in meeting its obligations in the next five years and get worse in the next 10 years from now. This also shows the near impossibility of ending deficit budgeting through retained earnings.

Specifically, the analysis, which covers the domestic and external debt of the Federal Government, states and Federal Capital Territory, as well as their respective revenues, including Internally Generated Revenue (IGR), were declared vulnerable, despite being below international threshold.

“Total public debt-to-revenue and total debt service-to-revenue do not have international thresholds, but they rose from 290.4 per cent in 2017 to 345 per cent in 2022 and 44.9 per cent in 2017 to 62.8 percent in 2027, respectively, after which they trended downward to 280.9 percent and 55.0 percent in 2037,” Ms. Patience Oniha-led DMO, noted.

Assuming that the economy records sliding fortunes within the period under review, like a fall in Gross Domestic Product, weaker exports and non-debt creating flows such as Foreign Direct Investments, these would snowball into the most extreme shocks. These would further weaken the ratios of total public debt-to-revenue and total debt service- to-revenue.

“In the light of the foregoing, it is very evident that Nigeria’s total public debt portfolio is highly susceptible to revenue shocks. Therefore, there is the need for concerted efforts to ensure faithful and effective implementation of the various on-going initiatives and interventions aimed at diversifying the sources of government’s revenue away from oil,” DMO’s analysis stated.

The Head of Research at FSDH Merchant Bank, Ayodele Akinwunmi, while discussing the bank’s monthly economic outlook, observed that there is an obvious reason to believe that the country’s debt profile is under valued. The observation, which showed that the country might owe more than everyone is made to believe, sheds more light to the understanding of the vulnerability of the economy to huge obligations and revenue flows.

Noting that the last Eurobond proceeds, worth about $2.5 billion, were converted at N340 per dollar, he explained that it might be questionable to discount the national debt at N305 per dollar by authorities, even when the prevailing rate in the open market is at N360 per dollar, while all rates are averaging N352 per dollar.

2017 debts’ trajectory
The Director-General of DMO, Oniha, said the observed increase in total public debt derived its strength from the borrowings in 2017, by the government to stimulate the economy, exit recession and create jobs. “The exit from recession in the second Quarter of 2017 is a testament to the success of the increased spending by government to stimulate growth and the various economic policies and initiatives introduced by the government.”

According to her, Nigeria’s total public debt stock as at December 31, 2017, at N21.7 trillion ($70.999 billion), rose from N17.4 trillion ($57.391 billion) a year earlier, growing by N4.36 trillion ($13.607 billion) representing 25.15 per cent growth.Through the DMO, Nigeria accessed the market for a total of $4.8 billion through Eurobonds and a Diaspora bond. Specifically, Between February and April 2017, $1.5 billion 15­year Eurobonds were issued to part finance the overlapped 2016 budget. This was followed by the issuance of a $300 million 5­year Diaspora bond in June 2017 for the financing of the 2017 budget .

In November 2017, Nigeria approached the international market and raised a dual tranche $3 billion Eurobonds for tenors of 10 years and 30 years, which it received excess subscriptions valued at $11.3 billion or 400 per cent of the amount offered.

The 2017 appropriation Act provided for N1.25 trillion as new domestic borrowing, which DMO said was successfully raised 100 per cent through the issuance of Federal Government bonds in three to 20 years tenors; a debut Sovereign Sukuk of N100 billion; FGN Savings bond and Sovereign Green Bond.Admitting that the total public debt actually rose up, she said the composition of the portfolio improved as the share of external debt rose to 27 per cent by December 31, 2017, from 17 per cent in 2015 and 20 per cent in 2016, an achievement that was delivered through the deliberate policy of increased external borrowing in efforts to get a ratio of 60:40 between domestic and external debt stock.

“Notwithstanding the increase in the level of debt stock in 2017, compared to the previous years, the debt portfolio still remained sustainable in the medium to long-term,” she said, but added the long standing controversy: “The ratio of total public debt to GDP grew moderately from 16.27 per cent in 2016 to 18.20 per cent.”

That statement has remained controversial because the challenge is not about reaching the threshold, but what it takes to service the already contracted debts- the revenue capacity and the implications on implementing development projects without necessarily resorting to further borrowings.It is a well-known fact that Nigeria’s debt at 18.20 per cent of its GDP, remains within the Country-Specific Debt Limit and the World Bank/International Monetary Fund’s threshold of 56 per cent, as well as West African Monetary Zone Convergence Threshold of 70 per cent. But stakeholders have continued to ask if this has been without effect.

The result of the 2017 Debt Sustainability Analysis has shown a clear vulnerability of the nation’s obligations to shocks in revenue and exports, as well as substantial currency devaluation. Surprisingly, the DMO said the 19.39 percent debt limit is “self-imposed” and called for an upward review.For the debt manager, a more prudent and optimal level of 25 per cent in the medium-term of 2018-2020, would afford the government an ample room to mobilise additional resources to fund investment projects that would facilitate the turnaround of the economy, in line with the aspirations of national growth plan.

What next?
The Lead Director of Centre for Social Justice, Eze Onyekpere, said borrowings, expected to be spent on the stock of capital that improves the ease of doing business, livelihoods and upgrade of social indicators are not reflecting so far.According to him, in a space of three years, the debt stock has increased by over 90 per cent. “It is not sustainable. The administration should rethink this strategy of purportedly funding capital projects. We would appreciate a situation where the government attracts more investments rather than enhancing the accumulation of sovereign debt.”

It is expedient now, than ever, to level up the efforts at boosting non-oil revenue, with sustenance of the on-going initiatives aimed at broadening the tax base, collection and blocking of leakages, as well as the diversification of the economy.As part of the long-term initiatives for diversifying the economy and boosting non-oil revenue, the Federal Government should fast-track the implementation of its reforms in the Solid Minerals sector, such as the establishment of sector-specific fund and to formalise Artisanal and Small-Scale Mining activities by automating operations.

The President of Bank Customers Association of Nigeria, Dr. Uju Ogubunka, said the country has no much option to avert the looming fiscal crisis than to deepen the diversification of the economy with urgency.He said it is good the debt manager’s analysis is showing what lies ahead for the country, especially with regards to revenue implications of the huge borrowings. “We need to generate more revenue to meet our expenditure profile as a nation. Our revenue sources are still not reliable now.

“We also need to ‘cut our coat’ according to our size. This will involved prioritizing our projects in order of importance, particularly, how they fit into the diversification plans. This is important because, if we continue to borrow this way, with revenue generation exposed to shocks, we will continue to incur more costs.”

As part of the on-going initiatives at attracting new investments into the economy and create new jobs, the Government is further encouraged to sustain its current efforts at implementing the Ease of Doing Business reforms, under the Presidential Enabling Business Environment Council (PEBEC).This will help to boost non-debt creating investments such as FDIs, which will enhance the generation of tax revenue, and thus, a reduction in government borrowing in the long-term.

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