Oniha: Borrowed Funds Pumped into the Economy

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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, Ms. Patience Oniha, provides reasons for the growth in Nigeria’s debt stock. Oniha insists that the country needs to do more to raise more revenues. Obinna Chima presents the excerpts:

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 borrow 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 about 18.5 per cent on treasury bills. So, for the monetary policy tightening, we knew why the central bank was doing it. It was because they wanted to manage liquidity and protect the forex. They it clear that price stability was their concern. So, interest rate was high and the new borrowing were at market rates. That also contributed to the increase in debt service from 2016. So, whereas we were borrowing at 13 per cent, it increased to about 18.5 per cent. So, we went back to our debt management strategy.

So, we started by trying to increase the component of external debts to achieve the 60-40. Remember I said we were at about 87-13, when I joined the DMO in 2008. So, we issued the first Eurobond in January 2011, which was $500 million. So, we issued another one in July 2013, and that was $1 billion. But let me state this clearly, banks like the AfDB, also have commercial window. So, they can give you concessional loans. So, we started accessing the international market and the external component started increasing. And by the end of 2015, we were at about 80 per cent domestic debt and 20 per cent external. So, it started building up. So, when recession hit, domestic interest rates were extremely high and the Central Bank was tightening liquidity. So, would you keep borrowing in the domestic market? No. So, we started borrowing externally. That strategy is what explains why you saw some more external borrowing. The idea was to work towards that 40 per cent that we said we wanted to achieve to reduce debt service cost. So, instead of borrowing domestic at 18 per cent, we started borrowing at eighth per cent.

And all the borrowings we did last year, up to February, were all below eight per cent per annum. So, we were saving a differential of about 10 per cent. So, one of the reasons was debt service cost and the second reason was that the organised private sector and even the Central Bank, if you read the Monetary Policy Committee communique, they say we crowd out the private sector. So, we felt if we borrowed less from the domestic market, there would be more money for the private sector to borrow and interest rate would drop. And that happened last year. The rate at which we borrow is about 14 per cent, compared with the 18.5 per cent we used to borrow. We have injected money into the system. So, that aggravated borrowing is a strategy to increase the external debt component, reduce debt service cost and free up space in the domestic market. So, one of the things you often hear me say, and I say that when I am with the capital market people, is that between December last year and June, we released about N840 billion into the market, how come it has reached the real sector? That is because the money is now sitting in the banks and the CBN mops up through open market operations (OMO). That was not the intention, it was meant to make funds available to the real sector. So, why are the banks not lending and why is the organised private sector not borrowing? Which was why I think at a recent Bankers’ Committee meeting, the CBN was looking for how to use the cash reserve requirement (CRR), to encourage them to lend. So, all of that is a strategy. But for us too, as part of the government policy to support the forex, the external borrowings actually contributed to the external reserves. So, the money comes, the CBN receives it and give us naira. That is important because we needed to build the external reserves to support the exchange rate. So, last year alone we gave the CBN over $7 billion. So, the CBN is in a good position to support the naira. Why is that important? It is not about the DMO or the CBN, but when the multilateral institutions are assessing you, they look at the level of your external reserves and the volatility of your currency. So, it is all a macro policy. So, that has helped the CBN because that money is clean and it is their own.

It is not a foreword, nor a loan, they bought it and gave us naira. So, that is the reason why we had the Eurobonds last year. But, the truth is that some of the Eurobond issued in the first quarter of this year, were actually to fund the 2016 budget, which itself was approved late. So, the one we are working on now is for the 2018 budget. Now that it has been approved, we are almost good to go.  So, let me explain the borrowings we did last year because it had two components. So, $1.5 billion of it in the first quarter was for the 2016 deficit financing and the one we did in November last year – $3 billion – $2.5 billion of that was for the deficit in the 2017 budget. But what we issued in November was $3 billion and $500 million of that was for the refinancing of domestic debt. So, we did the issuing in November, and in December, all the treasury bills that matured that month, we retired them. That was about N198 billion and we did that with that $500 million that we raised. Then in February we issued $2.5 billion and we have also been using that to retire treasury bills. So, the volume of treasury bills we have been issuing has dropped. The aim was to reduce the short-term domestic debts because that is actually the most expensive. So, it was like we borrowed for two budgets and then borrowed for refinancing.

But some have argued that concessional loans from the AfDB and others are much cheaper than Eurobonds. You said the funds that were raised through Eurobond sales were at eight per cent interest rate, but when you factor in the cost of the various roadshows that would be done ahead of the issuance and other fees involved in issuing Eurobond, you will find out the actual cost of borrowing is above eight per cent. So, why do we still go for Eurobonds if that is the case and considering that with the policy normalisation in some advanced economies, interest rates have already risen?

Let me agree with you, the concessional loans from the AfDB, the Islamic Development Banks, China-EXIM, India-EXIM, the German, French and Japanese agencies, are certainly cheaper. If you look at our website, you will see a breakdown of the figure for external debt, the amount and percentage. They are cheaper and you and I would jump at them because they are soft loans. But the reality is that it still has a limit. And institution would access you and tell you the maximum it can lend you. What if you need more? So, what is the strategy? Everything you can take concessional from all of these agencies, take it and if you need beyond that what do you do? You then go and issue Eurobond. If concessional loans are limitless, meaning we can access any amount we want, then we won’t go to the Eurobond market or the commercial window as we call it. Another thing is that by the time Nigeria moved to the status of a lower middle income country, they felt we have grown a bit and stronger and that they would give us a blend, meaning they can’t give us 100 per cent concessional. For example, if they want to give us $2 billion over three years, it means they would spread it over three years and $1 billion would be concessional and the other $1 billion would be commercial. So, even that reclassification affected how much of concessional loans we could get.

If you look at the annual budget, the capital allocation is not always fully implemented, but we are always told that the funds were borrowed for capital projects?

I think the budget office has already uploaded its half-year report on its website. So, one of the reasons you don’t have full implementation is because of the revenue shortfall, meaning revenue is less than what you budgeted. But in terms of borrowing, as a DMO, we always deliver. So, let me just use last year’s own as an example. The $2.5 billion we raised in November was released first week of December for capital projects. But because of the procurement process, those projects were not completed in December. It had to be early in the new year. So, when you are talking about full implementation, we challenge there.

So what happens to the funds that were released for those projects?

Those releases are done by the minister and they are announced for capital. So, they go through the procurement process. So, those monies go to different agencies to implement projects within their budgets. So, the budget was still running until June this year when the 2018 budget was sign this year. So, the way it works is that within that six months, speaking from a DMO experience, ministries, departments and agencies (MDAs) would have awarded contracts based on the procurement process. Don’t forget that we can’t pay advance payment 100 per cent. Remember that the 2017 budget expired the day the new one was signed in June this year. So, the day the president announced it was going to sign,  the Office of the Accountant General, then wrote to MDAs that the budget has expired and what they do is what is called a sweep or a mop up. That is, any money that has not been used is swept into the Treasury Single Account (TSA). So, if you have a project that you haven’t completed, but you have awarded the contract and it has been done 50 per cent, meaning 50 per cent of the money is still with the MDA, you are allowed under the financial regulation, to get an approval to hold that money until the project is completed. But there is a cut-off date for that. That is how it operates.

Are there regulations around states’ borrowings because we noticed that most states are also carrying lots of debts?

Several sections of the Fiscal Responsibility Act applies to states as well. A golden part of that document says that you can only borrow on concessional basis, for capital projects and human capital development. As with all laws, it says if you are doing anything outside of it, you have to get express approval. There is a provision in the DMO Act that states that any state government that wants to borrow from a commercial bank, the bank must inform the Minister of Finance. Meaning that from the beginning of that process, the minister ought to know. Before 2015, many of the banks were not complying. The Minister of Finance then, Dr. Ngozi Okonjo-Iweala, actually went to speak with the bank CEOs then, on the need for them to comply. But they were still lending. I think if not for the bailout we saw in the banking industry, the banks would have written-off huge losses. But now they are extremely compliant, they write to the minister and copy me and then we process. Then, there is a fiscal sustainability plan which gives several concessions. There is also the Investment and Securities Act and the Securities and Exchange (SEC) Act, that has provisions for states’ borrowings. For instance, when they want to issue bonds, it says it must be backed with an Irrevocable Standing Payment Order (ISPO). The ISPO is a debit against their funds from the Federation Account Allocation Committee (FAAC). They would create a sinking fund and every month, they would give the minister authority to debit their FAAC allocation and put in the sinking fund. Putting all of that together, the DMO has a borrowing guidelines for external and domestic borrowings for both the federal government and the states. That document spells out the process, but also states that the debt service of a state should not be more than 40 per cent of its revenue. So far, we have defined revenues by referencing FAAC. You know that is what most of them have? if you take out Lagos state, that is only what most of them have. So, that debt service simply means the service on existing debts and the new one they plan to take. If it is below 40 per cent, then we make recommendation to the minister to approve and if it is more than 40 per cent, we return it. So, there is an administrative process. If you ask me what journalists and watchdogs need to do a lot more is to get involved a bit more in the utilisation. For me, one of my best days in DMO was to go and look at those Sukuk roads and actually see the construction. So, I could tie my marketing and all the efforts to raise the money to something that I am seeing. I know some didn’t like the fact that the Sukuk bond was called an Islamic product, but that was one of the best disciplines we have had using borrowed funds. With that, we had control.

So, when are we expecting the next DMO’s Strategic Plan?

The one we are running expires in December 2019. So, by the fourth quarter of 2019, we would start working on it and then it goes through the approval process.