FG defends N35.5Trn debts as scepticism about impact rises

Clara Nwachukwu

Despite outstanding public debt portfolio of over N35.465 trillion, as at the end of June 2021, the Federal Government insists that the borrowings are necessary, to enable it execute specific activities, including financing its deficit budgets, funding specific projects, and refinancing maturing debts obligations.

This follows rising scepticism about the sustainability of such a huge exposure and the impact or benefit to Nigerians and the economy, even as President Muhammadu Buhari, Tuesday, sought lawmakers’ approval for a fresh N2.2 trillion loan.

This is in addition to an earlier authorisation to borrow $8.3 billion and €490 million loans, as contained in the initial 2018-2020 borrowing plan.  

These also come ahead of the offers for subscriptions by auction for N150 billion FGN Bonds for 10, 20 and 30 years of N50 billion each, respectively, open from September 20-24, 2021 at the primary Dealer Market.  

Defending the need for the borrowings during a presentation on Public Debt Management, yesterday, the Director-General, Debt Management Office (DMO), Ms. Patience Oniha, also argued that the loans are backed by the enabling laws.

She listed the legal backing to include the Constitution of the Federal Republic of Nigeria; Debt Management Office Act, 2003, Sections 21, 22, 24; Fiscal Responsibility Act 2007, Sections 41–45; and the Investment and Securities Act 2007.

There are also regulations such as the National Debt Management Framework (2018-2022), and the Fiscal Sustainability Plan – Framework for Sub-nationals, she added.

Additionally, she said the loans undergo due process through the Annual Budget and MTEF Process; the Medium Term External Borrowing Plan; as well as from Stand-alone Requests from MDAs routed through the Federal Ministry of Finance, Budget and National Planning.

High Public Debt is the result of huge infrastructure deficit, recession, consecutive budget deficits, and low revenue base, compounded by dependence on one source – crude oil.

Not enough to make desired impact

However, despite Oniha’s explanations and defence for the continuous borrowings, there are persistent concerns about the government’s ability to repay, since the Nigerian economy is dependent on crude oil as its major source of revenue.

As such, the usual excuse about the country having a low debt-to-GDP ratio compared to other African or developed countries become highly suspicious, as the more important consideration is the revenue-to-GDP as well as the debt service ratio.   

The DMO boss put the debt-to-GDP ratio at 21.92% as of June end, up from 21.61% in December, while admitting that between December 31, 2020 and June 30, 2021, the Total Public Debt grew by 7.75%.

The Total Public Debt is made up of the Domestic and External Debts of the Federal Government, 36 State Governments, and the Federal Capital Territory (FCT).

Experts argue that with majority of the loans going into deficit budgeting and debt servicing, as indicated by Oniha, very little is left for capital projects that will create economic value and act as buffers for the loans.

Already, it was estimated that debt servicing obligations gulped about 97% of the government’s total revenue in 2020, or as BudgIT, a non-profit organisation, put it, N3.34 trillion of the N3.42 trillion revenue generated last year.

With oil and gas accounting for about 65% of the government’s revenue, according to the Nigeria Extractive Industries Transparency Initiative (NEITI), analysts insist that the revenue base cannot support the high debt portfolio the country is currently exposed to.

The situation is further compounded by what they describe as high rate of profligacy in government and public institutions, and poor oversight by the National Assembly to contain wastes.

These systemic challenges, experts say, increase pressure on the foreign exchange reserves leading to further devaluation of the Naira, which exchanged for N557/$ at the parallel market yesterday.

Agreeing, the DMO admitted that Nigeria’s Public Debt is weighed down by a number of issues such as fast growing; high debt service to revenue ratio; and use of proceeds. It added that these are results of huge infrastructure deficit, recession, consecutive budget deficits, and low revenue base, compounded by dependence on one source – crude oil.

Benefits of borrowing, securities issuance

Notwithstanding Despite these criticisms, Oniha listed a number of benefits derived from the loans, including, supporting the implementation of the Budget; and enabling the financing of critical infrastructure with multiplier benefits (job creation, movement of persons and goods (trade) and overall GDP growth).

For the securities, the benefits are:

  • Safe investment opportunities with regular returns.
  • Vehicle for mobilizing large pools of funds from domestic and international sources for investments in capital projects.
  • Development of the domestic financial sector.
  • Liquid assets for banks and other institutions who need to hold such assets.
  • Attracting foreign investors into the domestic markets.
  • Providing sovereign yield curves in the domestic and international markets, against which other issuers such as state governments, private sector entities and multilaterals can issue securities to raise capital.

Furthermore, Oniha said the Eurobonds offer several benefits to the economy and markets, as they showcase Nigeria in a positive light in the international financial markets where large pools of capital is available.

They also serve as a benchmark on the back of which several local banks have issued Eurobonds like Zenith Bank, Access Bank, UBA, FBN, Ecobank Nigeria and Fidelity Bank. This window opened by the sovereign enabled these Nigerian banks to raise Tier 2 Capital to meet regulatory requirement, and enhanced their capacity to lend to, and, support local borrowers.

Building up Nigeria’s External Reserves – Issuing Eurobonds has been a potent tool for building up Nigeria’s External Reserves. A healthy level of External Reserves supports the Naira Exchange Rate and Nigeria’s sovereign rating.

Boosts local participation as the Eurobonds are also listed in Nigeria’s two securities exchanges – The Nigerian Exchange Limited, and FMDQ Securities Exchange Limited. This increases the size of these exchanges and diversity of instruments listed.

Finally, the Eurobonds are actually issued as part of approved Government Borrowing Plan usually in the FGN’s Annual Budgets, for financing capital projects thereby reducing the infrastructure gap.

In view of the foregoing, the DMO said the way forward is to diversify the government’s revenue stream through increased economic activities across sectors, which will require Public, Private Partnership (PPP), to achieve desired impact and economic growth.

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