The Debt Management Office on Thursday explained that the proposed borrowing of N5.5 billion from external sources by the Nigerian government is a good initiative.
President Muhammadu Buhari recently wrote the National Assembly seeking permission to raise the funds.
Analysts across the country have decried the intention to borrow, expressing concerns about Nigeria’s rising debt ceiling. The Debt Management Office has moved to clarify the benefits of the borrowing exercise.
The $5.5 billion is in two phases, the DMO explained. The first represents “$2.5 billion represents new external borrowing provided for in the 2017 Appropriation Act” while the second represents “$3 billion External Borrowing that will be used to repay some of the existing domestic debt.”
The $2.5 billion proposed Eurobond, will be used to finance critical road and rail projects included in the 2017 Appropriation Act,” the agency said in a statement sent to PREMIUM TIMES.
It also listed four reasons such funds were better raised externally.
Read the full DMO statement below.
DMO Clarifies Position on USD5.5 Billion External Capital Raising
The Debt Management Office, DMO, in a recent Press Release has clarified the plans of the Federal Government to source for capital from the International Financial Markets. In the Press Release, the DMO stated that the proposed $5.5 billion comprises of two components: $2.5 billion new borrowing and $3 billion for refinancing.
The first component of $2.5 billion represents new external borrowing provided for in the 2017 Appropriation Act to part finance the deficit in that Budget. It will be recalled that the 2017 Appropriation Act provided for new External Borrowing of
N1.067 trillion or $3.5 billion at an Exchange Rate of $/ N305. Out of this amount, $300 million has been raised through a Diaspora Bond that was issued in June 2017 leaving a balance of $3.2 billion out of which $2.5 billion is to be sourced through a Eurobond Issuance. The $2.5 billion proposed Eurobond, will be used to finance critical road and rail projects included in the 2017 Appropriation Act. Some of the projects are: construction of a Second Runway at the Nnamdi-Azikwe International Airport; rail projects including Lagos-Kano, Calabar-Lagos, Kano-Kaduna, Ajaokuta-Itakpe-Warri, Kaduna-Idu; and the Bodo-Bonny Road with a Bridge across the Opobo Channel.
These infrastructural facilities will lead to job creation and improve the climate for business thereby contributing to economic growth.
The DMO also provided further clarifications on the issue of the proposed $3 billion External Borrowing that will be used to repay some of the existing domestic debt. In the explanation, the DMO stated that this was purely a portfolio restructuring activity that will not result in any increase in the public debt as it is simply an exchange of one type of debt (Domestic) for another (External). The DMO stated that the Domestic Debt Stock as at June 30, 2017 included about
N3.7 trillion of Nigerian Treasury Bills (NTBs) with tenors of less than one year and at interest cost of about 17 per cent p.a.
The short term nature of the NTB stock and the high interest rate expose the public debt to refinancing risk and high Debt Service Costs. By converting them to External Debt, the tenor will be extended to at least five years while the Interest Cost will drop to about 7 per cent p.a. The savings in Debt Service from this exercise is estimated at over
N90 billion p.a.
Benefits of these External Capital Raising
i. Reduce Debt Service
Reduce the Interest Cost of Borrowing as external borrowing in US Dollars is much cheaper at about 7 per cent p.a. compared to up to 17 per cent p.a. in the domestic market.
ii. Increase Stability in the Debt Stock
Extend the tenor profile of the debt stock as longer-dated external debt is used to replace short term domestic debt. This would make the debt portfolio more stable, thereby reducing refinancing risk.
iii. Increase in borrowing space for the private sector
The pressure in the domestic market created by the large government borrowing will be reduced. This will create more space for borrowing by the private sector which will enable them contribute to the growth of the Nigerian economy.
iv. Increase in Nigeria’s External Reserves
External Borrowing represent foreign currency into the nation’s External Reserve thereby allowing for a stable exchange rate for the Naira.
The proposed $2.5 billion new borrowing through Eurobonds to part finance the deficit in the 2017 Appropriation Act and the refinancing of existing domestic debt through external capital raising of $3 billion, are consistent with Nigeria’s Debt Management Strategy, whose main objective is the increase external financing with a view to rebalancing the public debt portfolio in favour of long-term external financing in order to reduce the cost of debt and lengthen the maturity profile.
The DMO added that in contracting external debt, a conscious effort is made to exhaust all opportunities available from the concessional sources in order to reduce the level of External Debt Service.
Furthermore, all borrowings are approved by the National Assembly and are included in the Annual Budgets and the Medium Term Expenditure Framework (MTEF)