Issues in Nigeria’s oversubscribed $1bn Eurobond facility
Investors still maintain high confidence in the Nigerian economy despite the current situation, as the $1bn Eurobond issued by the federal government on Thursday was over-subscribed by almost eight times, the Ministry of Finance has said. The bond, issued
Nigeria experienced its first full recession in decades in 2016. What is the government’s strategy for economic recovery?
At the heart of the government’s economic strategy is a recognition that we have to restructure the way the government spends money. Over the last decade Nigeria has experienced relatively strong growth, but much of this was fuelled by high oil prices. The broader economy was not delivering the growth that it is capable of, and which is needed if Nigeria’s people are to experience improving living standards. We have been far too exposed to oil price shocks and in 2016 we saw both a major price fall and a simultaneous reduction in output, which is why the economy fell into recession. We have seen how vulnerable our economy is.
One of the main reasons for this was clear deficiencies with the way the federal budget was structured. Nigeria has a huge infrastructure deficit and we cannot deliver broad based growth if we don’t address that. Our budget process for the last decade has had only a very limited focus on infrastructure spending. That is why the 2016 and 2017 budgets have been fundamentally re-structured to deliver 30% of spending on infrastructure projects. We want to utilise government’s spending power to stimulate an unprecedented investment drive and attract private capital. Already, in 2016, we have spent more on infrastructure projects than any previous administration.
At the same time, far too much of the federal budget was focused on recurrent expenditure, which had become inflated and inefficient, with much of the money allocated to the process wasted, or ‘leaking.’ That is why we have spent so much time focused on reforming how government collects and allocates funds. The TSA means we fully understand the cash generation profile of all government agencies and can far more efficiently allocate funds to where they are needed. The impact of every Naira and Kobo that we spend is far greater than it was when we started and we have far greater confidence in our execution capacity on projects.
Nigeria launched a new Eurobond programme earlier this month. Can you tell us why, and what the outcome has been?
Our strategy for funding the 2016 and 2017 budget ensures that we utilise government revenue to deliver on recurrent expenditure obligations, while we raise long term debt to fund capital spending. The Eurobond is part of our funding strategy for our 2016 capital expenditure and will be spent on key infrastructure projects, in line with our economic plan.
Over the last two weeks I have been privileged to lead a strong delegation including the Minister for Budget and National Planning, the Central Bank Governor, the DG of the Debt Management Office, the DG of the Budget Office and representatives of the National Assembly to engage international investors and we’ve been very pleased with the response. The investment community understand the strategy we are adopting and have been positive. That is reflected in the bond being almost 8 times oversubscribed.
What are the terms of the Eurobond? Why is it better than domestic borrowing? Or borrowing from other external sources like the World Bank or China?
We have borrowed US$1 billion over a 15-year period, with an annual coupon of 7.875%. That compares to an average Naira borrowing rate of 15%. The international capital markets are a key source of capital for us and our sovereign issuance provides a key benchmark for corporate borrowers looking to tap the ICM. Ultimately, we want to achieve an optimal mix of borrowing from the ICM and other external sources, including concessional funding from the World Bank and China, as part of the 2017 budget process.
What does this mean for the man on the street? Does this make his life any easier?
We know that the state of the economy is creating challenges for people across the country. Inflation is high and so prices are rising. That’s why we have been working to ensure our social intervention programmes are prioritised, and we have already started the conditional payments programme. But we also know that the reason we are in this situation is because we have not taken the hard decisions to re-structure our economy and we must do so now, if we are going to offer the prospect of long term improvements in quality of life for all Nigerians.
How can the government raise further foreign debt given the current challenges with foreign exchange liquidity?
The simple reality is that international debt is considerably cheaper than domestic debt and while we extensively utilise domestic debt instruments, we need longer term and cheaper debt to allocate to infrastructure spending. That is available from international sources, and we are seeking to maximise the tenure and minimise the cost of this debt so we get the best deal for Nigeria.
Why has it taken so long for the government to raise the Eurobond?
The Eurobond programme was approved as part of the 2016 budget, but that process began late, with final budget approval only delivered in May 2016. We’ve extended the 2016 budget spending cycle through to the end of March 2017. The Eurobond, and the AfDB loan we secured late last year, are allocated to capital projects identified in that budget.
Is this the end of borrowing, or should we expect more?
The government’s debt strategy has been well defined and approved by the National Assembly. We are focused on re-balancing our debt profile to ensure we have longer term debt that can be used to fund infrastructure development. You can expect to see us continue to raise international funds over the coming 2 years as we work towards an optimal debt profile.
Can we afford that level of debt?
Yes. We have one of the lowest debt to GDP ratios amongst emerging economies. We have the headroom to borrow, but we must not be complacent. We must ensure that we are rapidly increasing government revenue at the same time to give us enhanced resources to deliver growth.
How are you going to increase revenue generation then?
We know we have to expand the tax base. Nigeria’s tax contribution to GDP is only 6%, that’s one of the lowest anywhere in the world and reflects decades of the populations unwillingness to contribute to government revenue, often because they don’t believe the money will be spent appropriately, or for their own good.
That is the situation we have to change, and it is why we spent so much of 2016 re-structuring the way government collects, allocates and spends money. We have to build confidence in that process, if we are to attract the kind of tax base that can deliver increased government revenue. We believe that if we show Nigerians things can be done differently, then we can rebuild the social contract with citizens to pay their fair share of taxes. We are already beginning to deliver on this, with a focus on improved customs collections, including migration to a single window (with support from the NSIA) and simultaneously strengthening controls in SOEs.