External Loans to the Rescue as Revenue from Oil Continues to Dip

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  • FEC approves new debt management strategy FG rolls out conditions for states to draw down N90bn loan

Tobi Soniyi in Abuja

Faced with a shortfall in oil revenue, the federal government will in the next three years seek external loans to finance its programmes and diversify the economy.

The Minister of Finance, Mrs Kemi Adeosun, disclosed this to State House correspondents wednesday at the end of the Federal Executive Council (FEC) meeting at which acting President Yemi Osinbajo presided.

According to her, government opted for external borrowing to allow Nigerian banks have more resources to stimulate growth in the private sectors.

At the briefing, Adeosun was accompanied by the Minister of Information, Alhaji Lai Mohammed, and the Minister of State for Budget and National Planning, Zainab Ahmed.

According to her, the new policy is part of the debt management strategy for the years 2016 to 2018 as approved by FEC wednesday.

She said: “Today, I presented a memo to the FEC which was approved for the debt management strategy for the years 2016 to 2018.

“Nigeria started producing a debt management strategy in the year 2013 and a three-year debt management programme and the previous ones had expired in December 2015 and there was a need for a new one.

“There was a need for a new one for two reasons: one was that the previous one had expired, but two, given the current economic challenges and then the desire of this government to reflate and diversify the economy.”
She said that there was a need for a new debt strategy, in order to align it with the Medium Term Expenditure Framework (MTEF).

The MTEF prepared by the Ministry of Budget and National Planning, she said, assumed that the domestic debt would reduce from one per cent of GDP to 0.7 per cent by 2018.

Adeosun added: “And the reasons for this is that the government recognises that for the next three years to really stimulate this economy and to provide the infrastructure that we need, we would need to be borrowing.

“We need to borrow at the most cost effective rate and under the most cost effective and beneficial terms.
“And also, the government recognises that there is a need to stimulate the private sector, for the private sector to really grow, banks must lend to the private sector. So we don’t want government borrowing crowding out the private sector.

“Government has taken a strategic decision that where possible we would borrow more externally. That is external debt in dollars or in any other currency because the interest rates are cheaper, the tenures are longer and there is more room for local banks to lend to the private sector especially SMEs. So the strategy was approved by FEC after much debate.”

Adeosun said the new debt management strategy was approved by FEC after council suggested that new guidelines be adopted to make sure loans taken benefitted Nigerians.

She said that FEC also suggested that non-oil exports be given a boost.
According to her, FEC also mandated the removal of bottlenecks working against such exports.
She said: “We are moving more of our debt to dollars. We need to focus more on exports, especially non-oil exports and the discussion was held around how to make exporting easier.

“There was a lot of discussions around reforms that we would need in the Nigerian Customs Service and other ministries to make it easier to export Nigerian goods, agricultural produce and solid minerals that there is demand for at the moment.

“Some of the bottlenecks that exist at the Customs and those under quarantine need to be removed. If we do this, that would create foreign exchange earnings so that these borrowings which are in dollars when they need to be repaid we would have dollar revenues to repay them.”

> Adeosun said that FEC also mandated her ministry to re-negotiate some multilateral loans with agencies like the World Bank, African Development Bank (AfDB) and others by past administrations, which were not favourable to Nigeria.

“Ministers have raised concern that some of the previous agreements that the Nigerian government entered into were not optimal and cabinet agreed that these were not grants but loans and therefore Nigeria should be confident enough to renegotiate with some of these multilateral agencies to make sure that those loans we take either from the World Bank or AfDB are on terms that are advantageous to Nigerians.

“FEC unanimously supported us and mandated the Ministry of Finance which is the main negotiator, that henceforth such loans will need to be structured so that they benefit Nigerians.

“We also agreed that there will be new instruments in the domestic market, particularly bonds, infrastructure bonds and inflation-linked bonds to deepen the domestic market and create greater opportunity in the domestic market,” she clarified.

She said that the strategy would govern how the government manages borrowings for the next three years.
“They agreed that it is cheaper to borrow externally but we must manage the risk involved,” she stated.

Also speaking, the Minister of State for Budget and National Planning said the new debt strategy was necessary in order to move away from short-term borrowing to longer-term borrowing and to move government borrowing away from the domestic market as much as possible to cheaper external loans.

She said: “The purpose is that the local financial system will have more resources to lend to the real sector, the productive sector.

“The MTEF has a plan to reduce the level of debt from what it is in 2016 to 25 per cent in the next three years and that is what this plan is really conforming to,” she stated.

In a related development, the federal government has released the 22 conditions the 36 states of the federation must fulfill before being eligible to draw from the N90 billion loan to be raised on their behalf by the federal government.

Speaking on the loan to be raised in two tranches of N50 billion and 40 billion bonds on Tuesday, Adeosun said the loan would help the states to meet their obligations, but should not be deemed a bailout, as it would be repaid in full from their monthly allocations.
The conditions for accessing the loan, which are posted on the Facebook page of the Special Adviser to the President on Political Matters, Mr. Femi Ojodu were:

•Publish audited annual financial statements within nine months of a financial year end.

•Introduction and compliance with the International Public Sector Accounting Standards (IPSAS). Publish state budget online annually.

•Publish budget implementation performance report online quarterly.

•Develop standard IPSAS-compliant software to be offered to states for use by state and local governments.

•Set realistic and achievable targets to improve independently-generated revenue (from all revenue-generating activities of the state in addition to tax collections) and ratio of capital to recurrent expenditure.

•Implementation of targets – implement a centralised Treasury Single Account (TSA) in each state.

•Quarterly financial reconciliation meetings between federal and state governments to cover VAT, PAYE remittances, refunds on government projects, Paris Club and other accounts.

•Share the database of companies within each state with the Federal Inland Revenue Service (FIRS). The objective is to improve VAT and PAYE collection.

•Introduce a system to allow for the immediate issue of VAT/WHT (withholding tax) certificates on payment of
invoices.

•Review all revenue-related laws and update of obsolete rates/tariffs.

•Set limits on personnel expenditure as a share of total budgeted expenditure.

•Biometric capture of all states’ civil servants will be carried out to eliminate payroll fraud.

•Establishment of Efficiency Units. Federal government online price guide to be made available for use by states.

•Introduce a system of continuous audit (internal audit).

•Create a fixed asset and liability register.

•Consider privatisation or concession of suitable state-owned enterprises to improve efficiency and management.

•Establish a Capital Development Fund to ring-fence capital receipts and adopt accounting policies to ensure that capital receipts are strictly applied to capital projects.

•Domestication of the Fiscal Responsibility Act (FRA).

•Attainment and maintenance of a credit rating by each state of the federation.

•Federal government to encourage states to access funds from the capital markets for bankable projects through issuance of fast-track municipal bond guidelines to support smaller issuances and shorter tenures.

•Full compliance with the FRA and reporting obligations, including:

•No commercial bank loans to be undertaken by states;

•Routine submission of updated debt profile report to the DMO.