Getting Nigeria out of the woods


How can Nigeria get out of the woods? It is through debt option – borrowing to finance capital projects – says the House of Representatives Committee on Aid, Loans and Debt Management. The panel wants the Debt Management Office (DMO) to pursue that option in the face of falling oil price. COLLINS NWEZE writes.

The falling oil price is affecting the Federal Government’s ability to discharge its obligations. Oil revenue accounts for about 85 per cent of Nigeria’s earnings.

During a visit to the Debt Management Office (DMO) the House of Representatives Committee on Aid, Loans and Debt Management said the DMO has a vital role to play on getting the country back on economic track. The panel noted that with debt option – borrowing to fund capital projects – the government would be able to fulfil its obligations.

The panel Chairman, Adeyinka Ajayi, described the debt office as the engine room of the economy, adding that it is expected to come up with sustainable debt management models for the country.

He said the DMO initiatives have often prevented the economy from going into recession, noting that with the prevailing challenges, the DMO is again, expected to play a pivotal role in steering the economy out of trouble.

DMO Director-General Dr. Abraham Nwankwo said the committee’s disposition to its activities showed it has a grasp of how a well structured debt can galvanise the economy.

He said more information would, on regular basis, made available to the people on what benefits that come from borrowing to fund capital projects.

Nwankwo also stressed the need for Nigerians to face the reality that oil boom was over and may not reoccur anytime soon – by making wise decisions to invest in infrastructure, revamp agriculture, improve power supply and focus on the real sector. This, he said will make the economy more productive and competitive.

Nwankwo recounted the background to the DMO’s establishment and outlined its achievements since its inception.

He reviewed the successes recorded by the debt office in revamping the hitherto moribund Domestic Debt Market and the successful launch of the Nigerian flag in the International Capital Market with its debut 500 million USD Eurobond issuance in 2011 and subsequent issuances in 2013 to raise funds towards financing the deficits in the national budget.

Dr Nwankwo said the DMO assisted the 36 States of the Federation and the FCT to establish their own Debt Management Departments (DMDs) and the fiscal stabilisation intervention of the DMO which led to the restructuring of the debts owed to banks by some states into long tenured bonds.

Fundamentals of 2016 budget/ funding plans

Despite the slide in oil revenues, the Federal Government is proposing an expansionary fiscal policy in 2016 in a bid to boost the economy through investment in key infrastructure and social welfare spending. Thus, a total expenditure of N6.1 trillion for the year 2016 budget, 20.2 per cent jump relative to the N5.1 trillion budgeted in 2015.

Dr Nwankwo said Nigeria’s low debt to Gross Domestic Product (GDP)  ratio means the country can borrow more to fund budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.

Data obtained from DMO shows that Nigeria’s domestic and external debt stocks currently stand at N12.11 trillion as at June 30, 2015 which also puts the country in a good stead to borrow more.

Regarding foreign debt, the strategy is to borrow on non-concessionary terms for projects with self-paying capacity and/or job creation potential, and on concessionary terms and grants for social sector projects.

Experts believe that with the continued slide in government revenues from crude oil, its plan to provide tangible assets like housing, power (electricity), transport, education, communication, and technology, may be hampered by paucity of funds.

To finance the N2.2 trillion deficit, Federal Government of Nigeria has proposed an increase in domestic and foreign borrowings to N984 billion (from N502 billion in 2015) and N900 billion (from N380 billion in 2015) respectively in 2016. The remaining N350 billion is anticipated to be financed using recoveries from misappropriated funds.

Managing Director, Afrinvest West Africa Plc, Ike Chioke explained that to fund the budget, expected revenue is estimated at N3.9 trillion (up 11.8 per cent from N3.5 trillion approved for 2015 budget) while deficit is projected at N2.2 trillion (up 114.9 per cent  form the N1.0 trillion approved from 2015).

He said the revenue projection is based on a crude oil price benchmark of $38.0/barrel, average daily production of 2.2mbpd and exchange rate of N197 to dollar. Oil revenue is thus expected to contribute N820 billion (21.2 per cent to total estimated revenue) compared to N1.6 trillion projected for 2015 budget and an actual figure of N981 billion as at September 2015.

He said non-oil revenue comprising of Company Income Tax, Value Added Tax, Customs and Exercise duties and Federation account levies will contribute N1.5 trillion (up from N1.2 trillion assumed for 2015 budget and an actual of N606 billion as at September 2015).

According to him, revenue from independent sources (operating surpluses of MDAs) would contribute the bulk of FGN’s retained revenue, estimated at N1.5 trillion (representing 39 per cent of total revenue projection) from N489 billion approved in 2015 and N401 billion actual in September 2015.

The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo agreed with Dr. Nwankwo. He explained that with declining government revenues from oil, budgetary allocations alone may not be enough to finance the infrastructure deficit in the country.

Prof. Ekpo admitted that the debt option is still the most viable at this time. He said Nigeria’s rebased  $510 billion Gross Domestic Product (GDP) economy gives it more room to borrow more to bridge infrastructure gap.

For instance, Nigeria’s current available power generation capacity is about 4,000 megawatts, which is far less than the estimated demand of 10,000 to 12,000 megawatts. This has resulted in frequent and unpredictable load shedding and a heavy reliance on generators by consumers.

With the current political will to tackle corruption and the desire to find a solution to the infrastructure problem in the country, analysts believe new funding is crucial. They insist on the need to channel fresh investments into power supply, roads, the railway and other social amenities.

For Prof. Expo, Nigeria could borrow up to 40 per cent of its GDP externally, adding that the DMO has in the past, demonstrated good negotiation skills in dealing with the country’s debt matters, either with internal or external creditors.

He believes the viable option for government to take is to borrow from the World Bank or African Development Bank (AfDB) to fund the key developmental projects.  Government can also borrow internally to achieve the feat, but disclosed that internal borrowing is always short term while external borrowing has longer tenor.

Besides, the Nigeria Trust Fund with the AfDB can be used as leverage while borrowing form the bank, adding that borrowing from the International Monetary Fund (IMF) will be expensive because Nigeria is now classified as a Middle Income Country on the Fund’s list.

Prof. Ekpo said the DMO has the capacity and constitutional role to advise the government on these choices and urged the debt office to see that over N1 trillion used for debt servicing is reduced with the reclaimed fund channeled to funding developmental projects.

“The World Bank rates are cheaper with longer term. The DMO can also leverage on the Nigeria Trust Fund with the AfDB to get better deal on new loans needed to fund developmental projects,” he said.


Lifeline for states

A final report on the restructuring of banks’ loans to states into FGN bonds released by DMO said the decision was in line with President Muhammadu Buhari’s commitment to strengthening the economy.

It said the government has attached high priority to addressing the fiscal imbalance faced by most states of the federation. The immediate cause of the fiscal imbalance was the structural drop in the international price of crude oil and the resultant drop in the revenue allocation from the distributable pool for all governments in the Federation.

The DMO had last year, put forward a proposal for restructuring the short-term bank loans of states into long-term Federal Government of Nigeria (FGN) Bonds. The purpose was to reduce the debt-service outflow of states and free resources for meeting other obligations, particularly, clearance of arrears of salaries and pensions.

The debt office said a total of 23 states had submitted requests for the bank loan-to-FGN bond restructuring. Phase I consisted of 11 states which had completed and submitted all necessary documen-tations, including the submission of jointly authenticated balances with banks. These states had their bank loans restructured into 20-year FGN bonds effective August 17, 2015. Phase II of the restructuring consisted of 12 states whose bank loans were restructured into 20-year FGN bonds effective September 16, 2015.

It disclosed that the second phase, which concludes the restructuring exercise, showed that 14 banks were involved in phase I debt restructuring operation and their total loans to the 11 states which were restructured amounted to N322.788 billion.

Also, 12 banks were involved in Phase II of the restructuring operation and the total loans restructured for the 12 states amounted to N252.728 billion bringing the total restructured amount for the 23 states to N575.516 billion.

Other stakeholders speak

Chioke said the financial market is currently going through a turbulent time, reflecting the intensity of instability in the global and domestic environment. For him, the slowing growth concerns in China and plunging commodity prices in the global market to fiscal and currency crises in the domestic economy, is a sign that a dark cloud seems to overshadow the investment landscape.

He said the performance of the global economy in 2015 was largely dragged by growth concerns in China, tumbling commodity prices and monetary policy normalization in the US. “The cumulative effect of these factors is expected to further dampen the activities in emerging and frontier economies in 2016 as tanking commodity prices and strengthening dollar hurt output growth,” he predicted.

Chioke said that on the contrary, lower commodity prices which has propped up savings and discretionary spending, supported by easy monetary policy is anticipated to bolster output growth across advanced economies.