Oniha: Borrowed Funds Are Pumped into the Economy
Nigeria’s debt profile has been in the spotlight in recent times. While the federal government has continued to allay concerns, some Nigerians insists that the country faces a debt crisis. In this interview, the Director General, Debt Management Office, M
Nigeria’s debt profile will definitely be a talking point as we draw closer to the 2019 general elections. Politicians and commentators would definitely be looking at the country’s debt level prior to 2015 when the present government took over and where it is today. In your assessment, what is the state of Nigeria’s debt?
Let me use this opportunity to say that as a country, one of whose goals for several years has been to grow, Nigeria has had to support its revenue with borrowing so as to stimulate growth. So, if you go back to the period oil was over $100 per barrel, we still ran deficit budget and we still borrowed. So, all of those borrowings contributed to the debt stock that we have. So, is the debt stock sustainable? My answer is yes. I won’t say the debt stock is too high. When you look at it relative to the size of your Gross Domestic Product (GDP), which is one of the measures that the International Monetary Fund (IMF) uses, it is among the lowest in the country. But, where the concern is, officials including myself, have said that the Debt Service to Revenue ratio is higher than we like it to be. The reason is that the absolute debt service figure is not what is large, it is that your revenues are extremely low. And why that has come to the fore lately is because the country’s revenue dropped by about 50 per cent. When oil revenue crashed, our revenue dropped by about 50 per cent, but debt service is fix! These monies were borrowed long time ago and there is a fixed coupon which is not dependent on oil prices. So, the debt stock is growing because each year you are running a deficit and most of it is financed by borrowing. So, in absolute term, debt stock is not too high, the problem is that we need more revenues so that we are not using a large part of our revenue to service debt. That is what I can say.
You said even when oil prices were as high as $100 per barrel, the government at that time borrowed. But the argument remains that in the last three years, the level of borrowings has aggravated?
Okay, lets explain that. And it’s good you talked about aggravated borrowing, but I won’t call it aggravated borrowing, but through Eurobond. Like I said, we have always borrowed. So, one of the things you have to consider is the currency depreciation which increases your cost anyway, that is your expenditure side of the budget. We have always borrowed, like I said, and not small amount. But, what has always happened is that we went into a recession in 2016, everybody saw that coming. We can sit back today and say we could have done better, but that is history. So, when you go into a recession anywhere in the world, just like when we had the global financial meltdown, all the advanced countries, whether it is the United States or the United Kingdom, they all pumped in money. They borrowed and pumped in money into the economy to restore growth and we are seeing the results now. So, in the case of Nigeria, government then needed to borrow more. When you slipped into a recession, your revenue is only 50 per cent because all we have always had was oil revenue. So, that meant that the government needed to spend more in order to stimulate the economy, which is a function of government irrespective of whether they are capitalist, communist or socialist. So, what I am saying essentially was that the deficit in the budget was bigger because revenues had dropped and secondly because government had to spend more money, largely on infrastructure and the social investment scheme, in order to stimulate the economy. So, in addressing your question specifically, yes, borrowing increased because revenue was down. And I think one of the things we shouldn’t forget is that the wages and personnel costs are fixed. So, if you match only your revenue to personnel cost for instance, you won’t be able to pay salaries. And the government took a wise decision that in a period of recession, they would not downsize to reduce the wage bill. So, that wage bill is fixed and your revenues couldn’t have sustained it, especially when the oil prices fell below $30 per barrel. That is one part. So, that is one part. But equally important from the question you asked: Why the aggravated borrowings through Eurobonds? We have a debt management strategy that says one of the objective should be to manage the debt, which is one of the reasons why the DMO was created, so that we don’t go back to the Paris Club era, where there was no process and anybody could borrow for the government. So, our mandate is to manage public debt and there is a strategy around it. First level is that you must get approvals to borrow. So, the debt management strategy the DMO has always had, one of the objectives is that the issue of domestic to external debts should be 60-40 per cent. But, because government had a policy for several years, that for external debts, when you have been badly hit, you decide that you are not going back there. So, we said for external borrowings, we would do only concessional windows. What do we mean by concessional windows? We are talking about borrowing from the World Bank, the Africa Development Bank, etc, that the cost is less than three per cent per annum and you have a grace period of seven to 10 years and tenors of about 40 years. So, you have time to service the debts. So, that was what we did for a long time. But like I said, we were running a deficit budget and so we still needed to bor- row because those loans were not for budget deficits, but for projects. So, we still then needed to fund the budget. Since we have said its only concessional window, we kept borrowing in naira every year to fund the budget. So, the domestic debt grew and at some point, probably when I joined the DMO in 2008, it was around 87 per cent. That had its benefits because we have a fixed income securities market that we can talk about now, an FMDQ OTC which has a life of its own, where corporates can issue commercial papers and bonds. So, that had positive benefits and we are very proud about it. For me, it makes sense that in leaving the private sector, I was able to come into government and apply many of the things working with stakeholders that we speak the same language. So, it played a developmental role. So, the domestic debt grew very high and there were two downsides. One of it was that because we are a frontier market, your cost of borrowing was high because by definition interest rates in frontier or developing countries are higher than in the international market. So, it meant debt service was high because the interest rates in the local market were high and that became worst with the recession and monetary policy tightening. So, government was borrowing at