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

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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.

Min­is­ter of Fi­nance, Mrs. Kemi Adeo­sun

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