Home Analysis How far can Okonjo Iweala go with managing Nigeria domestic debt?

How far can Okonjo Iweala go with managing Nigeria domestic debt?

by Business News Report

By Omoh Gabriel, Business Editor

The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo Iweala, yesterday as expected unveiled the priority sectors with which to drive the economy. In her maiden pres briefing, in Abuja, she identified job creation, building critical infrastructure especially electric power and roads/ rails, anti corruption, agriculture, manufacturing, fiscal discipline, investment climate reforms, housing, entertainment, as well as, oil & gas as sectors to focus on to drive the economic transformation agenda of the government. All of these are good intentions. But they have to be financed. The nation need huge resources it does have at the moment to implement and bring this policy framework to fruition. Well will the financial resources come from. Debt financing or massive borrowing? Dr Okonjo Iweala is already averse to domestic borrowing.

She said yesterday that Nigeria Awould critically review the borrowing processes with a view to reducing the rate, especially of domestic debt. One of the things we would do is to pay attention to the debt situation. I know that many Nigerians are looking at it with concern, and you know my stand on debts. AWe have about N5.2 trillion in domestic debts and about $5.3 billion in external debts. Bringing total debt figures to $39.7 billion which is about 20 per cent of GDP, Gross Domestic Product@. Nigeria borrows to finance recurrent expenditure. Will the finance minister cut the recurrent allocation to Ministries, Department and Agencies of Government as well as the National Assembly? Where is she going to start the cut from, the Presidency in order to stem the rising borrowing?

The minister noted that the total debt figure as a percentage of GDP was not worrisome, as according to her, debt/GDP ratio could become of concern if it hits the 60 per cent threshold, in line with international norm. She said the external debt was Aextremely low@ and all concessionary but that the domestic debts mainly in Federal Government Bonds and Treasury Bills would be brought down through a systematic approach.

The Minister has chosen a path that if followed carefully will lead to economic recovery. The nation has for long neglected infrastructure and Nigeria trade and commercial policy have lagged behind. A review that will ensure sanctity of contract has become imperative. Sovereign debts in recent months have become a global problem raising serious concern on the health of the international economy. The United States of America had almost a political crisis as a result of the debt ceiling the congress refused to allow. In Europe Greece, Italy, Spain and others are facing economic crisis at home because of huge debt which they can not service leading to the need for bail out.
Many may argue that the state has ability to borrow. But there is always a limit to which the resources available to a country can permit it to continue to borrow. As recent experience has shown, no country can continue to borrow ad infinitum as interest has to be paid on such debt and the principal also must be paid. When a country gets to the level that the internally generated revenue can not service domestic and external debt, the country is broke and has to look for a bailout.

Looking back at Nigeria debt profile and services in the last five years for which data are available, a total of $2.335billion was spent by the federal government to service both internal and external debt in 2009. This amounted to about 50 per cent drop in the amount used for debt service in the previous year 2008 which amount stood at $4.055billion. Before the debt relief of 2006, Nigeria spent $8.0429 billion to service debt in 2006 and $10.1072 billion in 2005. Figures released by the Debt Management showed that in 2005 Nigeria used $8.940 billion to service its external debt paying only $1.1662 billion to residents in Nigeria as domestic debt service. Nigeria=s obligation to foreign creditors in terms of debt service dropped slightly in 2006 to $6.729 billion while what it used to settle due domestic debt and interest on outstanding loans inched up to $1.3137 billion.

With debt relief in 2006 its obligations to foreign creditors in terms of debt service nose dived south ward paying only $1.022 as external debt service and $2.1629 billion as domestic debt service. From the Debt Management official data the external debt obligations of the country further went south with a payment of $464.63 million but the domestic figure shot up to $3.590 billion in 2008. In 2009 for which complete records are available external debt service obligations of the federal and state governments stood at $428 million while domestic debts service stood at $1.907 billion.

A break down of the debt service payment showed that the Paris club was paid $8.070 billion in 2005; non Paris club members received $11.39 million while multilateral institutions were paid $471.67 million thus adding up to $8.553 billion. London club made up mainly of oil warrants were paid $169.86 million, promissory notes $213.55 million and others including non Paris Commercials were serviced with $3.67 million thus giving a total debt service figure of $8.940 billion in 2005.

According to the Debt Management Office figures in 2006 while the sum of $4.51987 billion was paid to the Paris club of creditors as debt service, $25.56 million was paid to non Paris club creditors, $426.62 to multilateral institutions, $1.5845 billion to London club, $170.84 to redeem promissory notes and $1.60 million to non Paris commercials thus giving debt service figure of $6.729 billion in 2006.

In 2007 debt management office data suggest that northing was paid to the Paris club of creditors as Nigeria had successfully exited the clutches of the club but the sum of $27.48 million was used to service debt owed non Paris club of creditors. Multilateral were paid $392.77 million as debt service, London club of creditors members in 2007 were paid from the federal government coffer the sum of $102.59 million as debt service while payment to redeem promissory notes stood at $476.6 million and others were paid $22.6 million thus giving a total debt service obligation to $1.022 billion.

For the fiscal year 2008, Paris club had no single amount paid to it, non Paris club members of sovereign debts were paid $6.63 million, $380.63 million to multilateral, while London club of creditors were paid the sum of $41.72 million, $35.65 million was paid to other creditors thus making up the $464.63 million that was used to service external debt in 2008.

The trend for 2009 was not too different from that of 2008 and 2007 as northing was paid to the Paris club of creditors while the sum of $12.66 million was used to service non Paris members; Multilateral institutions were paid from the nation=s coffer $260.52 million, London club $41.72 million and others $113.13 million bring the total debt service paid out in 2009 to $428.04 million.

Nigeria debt management Office Director General says Nigeria is not any where near the 40 per cent threshold of allowable debt to gross domestic product ratio. But the federal government in 2008 used a total of N238.753 billion to service its domestic debts. This rose to N281.540 billion in 2009.

A breakdown of the debt service showed that N149.2 billion was paid as interest on FGN bond and N193.787 billion for the same in 2009. In 2008 the government paid N916.72 million as call premium on local contractor=s debts. Interest paid on treasury bills in 2008 amounted to N43.555 billion but dropped to N38.788 billion in 2009. Government in 2008 paid interest of N39.22 billion on treasury bonds and N38.711 billion for the same in 2009. Principal payment of Treasury bond was N5.670 billion in 2008 and N10.187 billion in 2009. Interest paid on Federal Government Development stocks in 2008 was N69.88 million as against the N65 million paid in 2009. Principal payment for the development stock in 2008 was N100 million.

As at 2009 the ratio of external debt service to total debt stock was 18.33 per cent as against domestic debt which was 81 per cent of debt service payment. In real terms for every one naira the government spent on debt service 18.33 kobo went out of the country while 81.67 kobo was used to pay local debt that fell due and the interest on such facilities.

The Minister=s concern is that there has been a steady rise in domestic debt stock from 2005 to date, except for 2008 when a marginal decrease was recorded. The domestic debt in 2005 was $11.83 billion, 2006 $13.81 billion, 2007 $18.58 billion, 2008 $17.69 billion and $ 21.87 billion in 2009, $32.5 billion 2010 and N5.4 trillion in 2011. The figures for the external debt stocks, however, showed that $20.48 billion was recorded in 2005, $3.54 billion in 2006, $3.65 billion in 2007, $3.72 billion in 2008, while $3.95 billion was recorded as external debt in 2009. A cursory look at Nigeria debt stock showed that while in 2005 the total debt stock was $32.306 billion, it dropped to $17.349 billion in 2006, $22.229 billion in 2007, $21.398 billion in 2008 and $25.817 billion in 2009.

Dr. Ngozi Okonjo Iweala, while at the World Bank had warned that the rate at which domestic debt is rising will hurt the nation=s economy if not arrested. In her view AThe problem we have is with domestic debt. We have accumulated, I do not want to quote the figure, I believe it is up to $26 billion equivalent in domestic debt. That is debt we are taking within the country. That is what we need to focus on. Any time we talk about debt in Nigeria people start shouting about external debt. The external debt is very low. Nigeria has to pay attention to domestic debt and stop accumulating that.

AThey think because it is domestic it cannot come and harm the economy that is not true, if you accumulate lots of domestic debt, you start clouding out the private sector, when the public sector enters in all the time. I think the level we are now if we can sort of level off there, that is okay. Nigeria should not accumulate any more domestic debt because it is going to lead to the some ills we came out from.

It is not only external debt that leads to choking off economic growth and clouding out the private sector. We have exited the debt trap; we owed $30 billion to the Paris club at that time that has been taken care of okay, so we have exited those who are saying that external debt is the problem that is not the case. Internal debt is the problem@.
But Dr. Ibrahim Nwankwo Director General Debt Management office thinks differently. He asserts that the federal government has vowed to keep the debt stock at 25 per cent of the Gross Domestic product and not more. He argued that countries in the same league with Nigeria can leverage on 40 per cent debt GDP ratio.

Total debt to GDP ratio was 28.6 per cent in 2005. When Nigeria got the famous debt relief from the Paris club of creditors the ratio dropped significantly to 12.39 per cent in 2006. It was 11.67 per cent in 2007, 11.77 peer cent in 2008 and 13.88 per cent in 2009. Nwankwo says it is 16.8 per cent in 2010.

Nwankwo admits that Nigerians must and should be concerned about the profile of public debt and should raise questions and seek clarification at all times. However the total public debt of the federal government, comprising both external and securitised domestic debt, rose by $6.7 billion (about N1.005 trillion) in the last ten months, from $25.82 billion as at end of December, 2009 to $32.5 billion as at end of September 2010.

Dr. Abraham Nwankwo, who stated this at a media chat in Lagos, also disclosed that two book runners have been short listed for appointment next week, for Nigeria’s planned sale of $500 million Eurobond before the end of the year. Nwankwo noted that the domestic debt stock constitutes the bulk of the total public debt at $28 billion, accounting for about 86 percent of the total while the remaining $4.5 billion is for external debt.

Nwankwo also debunked the insinuation that the interest rates on Nigeria’s external borrowing are as high as 20 per cent. He asserted that interest rates on external debts are just about 1.25 per cent, adding that the Debt/GDP ratio for the country at the moment is 16.8 per cent whereas the prevailing ratio among countries of similar economy to Nigeria is 40 per cent.

On the move by the federal government to raise Euro bond from the international capital market, Nwankwo stated: “Two firms have been short listed as book runners, and they will also serve as the issuing houses.
Now that Dr okonjo Iweala is back on the saddle she has given a clear direction government can not continue to borrow from the domestic market on regular basis. Can this be sustained, given the situation in the international oil market? If Libya returns its oil supply to the international market, if the US economy and that of Europe go into recession, the prices of crude will come down, and if care is not taken collapse. What will Okonjo Iweala do then?

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