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Nigeria’s 2016-2019 debt strategy which now targets an optimal debt mix of more external than domestic borrowings at a 60% to 40% ratio is quite appropriate for the country’s present circumstances, the Debt Management Office (DMO) said on Monday.
Nigeria intends to achieve the new balance by progressively increasing the percentage share of external financing, taking into account the need to moderate foreign exchange risk in the short to medium-term.
Africa’s largest economy intends to borrow up to N1.887 trillion to partly fund the N2.2 trillion projected deficit in the N6.06 trillion 2016 budget.
The new framework therefore means that it could source up to N1.132 trillion from international sources while about N754.8 billion is expected to be sourced locally.
As contained in the debt management strategy (2016-2019) endorsed by the Federal Executive Council (FEC) last Wednesday, Nigeria wants the share of debt maturing within one year, as a percentage of Total Debt Portfolio to stay at not more than 20%, as against 29.15% as at end-2015.
It also targets an Average Time-to-Maturity (ATM) for the Total Debt Portfolio at a minimum of ten years, as against 7.15 years as at end-2015.
But experts are still wondering why a country still struggling with exchange rate constraints would prefer to raise external borrowings to domestic in terms of increasing FX risks. There are also concerns around how to maintain liquidity in the short end of the government domestic securities market.
Abraham Nwankwo, director-general of the Debt Management Office (DMO) is of the opinion that remixing the borrowing option was necessary because “external borrowing is comparatively cheaper than domestic.”
Nwankwo is upbeat that using the borrowings to fund priority infrastructure projects will boost output and put the economy on the path of sustainable growth and competitiveness.
The fact that the loans are long-term – 15 years and above means that the economy would have been sufficiently diversified for increased export earnings for ease of debt service payments, he said.
It will also help the country in the long term to be able to allow the private sector the needed funding opportunity to diversify the strained economy, export and earn foreign exchange in a matter of five to seven years.
“The strategy is best for Nigeria in the present circumstance,” Nwanwko insisted, as he addressed the press yesterday.
The new structure is a significant deviation from Nigeria’s previous debt structure which allowed for 84 percent domestic and 16 percent external. The old structure has also succeeded in crowding out the private sector and also become too expensive for the Africa’s largest economy to cope with.
The new framework, in addition, seeks to lengthen the maturity profile of the domestic debt portfolio through reduction in the issuance of new short-dated debt instruments or refinancing of maturing NTBs with external financing, or both.
Nwanwko clarified that the target is to achieve a domestic debt mix of 75:25 for long and short-term debts, respectively, from 69:31 as at end-2015. This will reduce the cost of debt service and roll-over risk.
In the external front, the mix of external borrowings are expected from the World Bank, Africa Development Bank (AfDB), International Fund for Agricultural Development (IFAD).
The DMO says deliberate efforts would be made to obtain fixed rate debts with relatively long tenors of 15 years and above.
There are also plans to access the International Capital Market (ICM) through the issuance of Eurobonds, Diaspora Bonds and International Sukuk, under market conditions that would ensure realistic cost and risk.
In addition, the DMO plans to introduce new products with a view to further diversifying the investor-base, boost financial inclusion and national savings culture for increased gross capital formation, create more benchmarks and deepen the domestic and external markets for government securities.
The new debt instruments to be introduced subject to market conditions, include the Domestic Debt Market: Retail Bond, Inflation-Linked Bond and Domestic Sukuk, International Capital Market and International Sukuk. Meanwhile, government is in the process of issuing Diaspora Bonds.
Onyinye Nwachukwu
