Managing Nigeria’s Debt in Season of Despair

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KRISTALINA GEORGIEVA

With a stunted economy further buffeted by external shocks especially low oil price and the global Covid-19 pandemic, the Nigerian economy will no doubt have to depend on external borrowings over the next few years to achieve any form of recognisable economic growth. With an ambiguous debt management strategy that has produced a distressing external and local debt collection, it is uncertain how the Nigerian government intends to manage its massively expanding debt portfolio. Kunle Aderinokun and Nosa James-Igbinadolor report

These are not the best of times for Nigeria. Indeed, it is the worst of times. We live in what Charles Dickens defined as “an epoch of incredulity, a season of darkness and a winter of despair.”

A despairing economy seems set to finally come to ‘judgement’. Truth be told, the President Muhammadu Buhari administration since its empanelling in May 2015, has never really strong leash over the economy. It has been one capitulation after another as the president and his economic team increasingly portrayed their inscience and lack of erudition in national economic management.

The global coronavirus epidemic and its associated crash in oil prices have left Nigeria open to the buffeting vagaries of external and internal shocks. With the price of Nigeria’s bonny light crude at just $20 per barrel, it is increasingly become economically unviable to produce crude in the country as the cost of production of crude in Nigeria along with its associated corruption is just around the cost price in the international market. The economy has been in a pretty bad shape over the last five years, characterised by millions of job losses, extremely poor production capacity, meagre internally generated revenue and very negligible foreign direct and local direct investments in the economy, itself occasioned by an enormous distrust of the Buhari administration’s capacity to take sound and rational economic decisions.

It was this plethora of debilitating economic variables that forced the Nigerian government to shop for a $22.7billion loan from the Islamic Development Bank, the African Development Bank, the World Bank and creditors in China, Japan and Germany. In a letter sent to the National Assembly last December, Buhari had promised that the money will be used to expand the railways, build a new hydro power dam and fund special intervention projects across the country.

The loan request came against a disconcerting reality that the country’s outstanding loans of $27.676bilion amount to about a quarter of its economic output, of which it spends more than half of its revenue servicing debts.

It was against this grim reality that the International Monetary Fund (IMF) recently warned that without major revenue reforms, Nigeria’s debts could rise to almost 36 per cent of GDP by 2024, with interest payments taking as much as 75 per cent of government revenue.

Only recently, in the face of the unattractive economic situation in the country, the Debt Management Office (DMO) began issuing Promissory Notes to oil marketers, state governments, federal government agencies and exporters on behalf of the Federal Government of Nigeria (FGN) with a total of N968,092,181,889.00 issued as at the end of February 2020.

While the senate hurriedly approved the president’s request for the gargantuan loan, the House of Representatives stepped down further debate on the request. Had the loan been taken, Nigeria’s debt profile, which is currently distressing by any measure would have become unsustainable especially with the garrisoning influence of the coronavirus and low oil prices. Nigeria’s debt would have come to over $50 billion, the largest in the history of our country. The IMF Managing Director, Kristalina Georgieva, recently warned that half of the low-income countries, including Nigeria were already in “high debt distress” and much would depend on the official creditors. Less than a decade after President Olusegun Obasanjo led the country to exit a miry debt burden, Nigeria is once again assailed by a poor debt management strategy occasioned by borrowings that have had little impact on the economy.

A retired diplomat, Ambassador Kayode Garrick, and one-time Nigerian Ambassador to Brazil, warned that the country “must change the way we do things including the way we manage our debts”, adding that “if we had taken that debt, the reality is that the budget was based on a 57 USD per barrel projection and now oil sells for as low as 20 USD and might not come down soon. What the coronavirus has done is that it has exposed our economic weakness. There is no investment in manufacturing and production in Nigeria and this is bringing to the fore our deep structural challenges. The question is where will the government get money to finance the 2020 budget?”

The IMF and the World Bank at the end of last month, both launched emergency programmes to offer grants and loans to member countries, with a heavy focus on developing countries and emerging markets, some of which are already in debt distress. They have also called on official bilateral creditors to provide immediate debt relief to the world’s poorest countries.

“Poorer countries will take the hardest hit, especially ones that were already heavily indebted before the crisis,” the World Bank President, David Malpass, told the International Monetary and Financial Committee, the steering committee of the IMF, adding that, “many countries will need debt relief. This is the only way they can concentrate any new resources on fighting the pandemic and its economic and social consequences.”

Perhaps what wasn’t stated by the World Bank and especially the IMF were the conditionalities that would have to be met before debt relief is extended to countries like Nigeria. For a country that has in just 10 years thoroughly mismanaged its debt management credibility, strict conditionalities will no doubt have to and need to be met including the removal of the ultra-corrupt petroleum products subsidy, a scheme that has over the years been used to rip the nations treasury of billions of dollars.

Nigeria spent N1.713 trillion on the importation of Premium Motor Spirit, also known as petrol, in 2019 out of a budget of N8.9 trillion and N2.95 trillion in 2018 out of a budget of N9.1 trillion, an average of twenty percent of the country’s budget.

Garrick, who once served as the Minister Economic and Commercial Affairs at the Nigerian Embassy in Washington, believes that even with the potential credit line being opened by the Bretton Woods institutions, “countries that have a better capacity to pay than Nigeria will likely be first in line to receive credits.”

Last Tuesday, ministers of finance from Nigeria and other African countries recognising the dire situation their economies face due to substantial drops in revenue from commodity price drops coupled with increasing costs of imports that are putting pressure on both inflation and the exchange rate, called for debt relief from bilateral, multilateral and commercial partners, due to the ravaging impact of the COVID-19 pandemic, arguing that, the need for a longer period for debt relief was necessitated by the fact that the global economy has entered a period of synchronised slow down, with recovery only expected after about 24 to 36 months.

“Development partners should consider debt relief and forbearance of interest payments over a two to three-year period for all African countries, low-income countries (LICs) and middle-income countries (MICs) alike,” they stated.

The ministers also called for the support of multilateral and bilateral financial institutions such as the International Monetary Fund (IMF), the World Bank Group, and the European Union, to ensure fiscal space required by African countries to deal with the COVID-19 crisis.

APC National Leader and former Lagos State governor, Ahmed Bola Tinubu last week called on the Buhari administration to take urgent economic actions to contend against the socio-economic impact of the coronavirus. Government, he said, “should announce a tax credit or partial tax reduction for firms. VAT should be suspended for the next 2-4 months. This will help lower import costs and protect against shortages.” On increased stipends to the poor, Tinubu said: “We do this by widening the net, substantially increasing the number of recipients of anti-poverty stipends.”

Tinubu did not however posit on how government should get the money to fund the social intervention programmes.

With little in terms of financial reserved to buffer the country against the threatening economic whirlwinds, Nigeria particularly needs the fiscal space to design an effective and sustainable debt management strategy. At the end of the administration of former President Olusegun Obasanjo in May 2007, Nigeria’s external reserves stood at $43.13 billion and $22 billion in the Excess Crude Account. The Excess Crude Account, ECA, had been created by Obasanjo in 2004 for the purpose of saving oil revenue in excess of the budgeted benchmark, to protect planned budgets against shortfalls due to volatile crude oil prices. At the end of the Jonathan administration eight years later, foreign reserves had fallen to $29.6 billion while Excess Crude Account stood at $2.45 billion. By the end of March 2020, the nation’s foreign reserves stood at $36.69 billion while the Excess Crude Account had been depleted to a miserly $71.8 million.

DMO, the agency responsible for the management of the country’s debts, asserts that it is on the verge of releasing a new Debt Management Strategy (DMS), which will set out the modalities for debt management in the country.

It is expected that the soon-to-be-released DMS would continue to give external sources of borrowing higher preference over domestic borrowing.

Acting Manging Director, UCML Capital Ltd, Egie Akpata, argued that foreign borrowing though cheaper on the short term is certainly more expensive in Naira terms over the long term due to regular, material devaluation of the national currency. He noted that, “the recent move of the official exchange rate for government business from 306 to 360 automatically increases the Naira equivalent of the $27.7billion (at end of Q4 2019) foreign debt by 17.6per cent or N1.5trillion. It is virtually certain that further official devaluations would occur this year due to reversals in all the major sources of foreign exchange to this economy.

“Unfortunately, the proposed $3.3billion Eurobond was not issued before the market shut out oil producers after the total collapse in oil prices. Interestingly, Ghana was able to issue a $3billion Eurobond in February at attractive rates. Considering that Ghana is a much smaller economy than Nigeria, a $3.3billion issue seems small, but should have been an easy sell if the issue came to market on time.

“By mid-March, all existing FGN Eurobonds were trading at deep discounts and at much higher yields to maturity than equivalent tenor Naira bonds. So basically, it would have been cheaper on the short and long term to issue Naira bonds instead of borrowing in foreign currency and having to service the debt with scarce USD. Of course, this ignores the benefit to the reserves of borrowing in USD and converting to Naira for local spending by the FGN.

“It is no surprise that the collapse in FGN Eurobond prices was quickly followed by a formal downgrade to B- by S&P. This downgrade should not be taken lightly. It will make it more expensive for FGN to raise money in the Eurobond market for years to come. A B- rating is just one notch above CCC+ which is a rating for issuers with very likely default tendencies. Nigeria certainly does not want to be in that category as CCC rated African government Eurobonds are currently yielding close to 20per cent

“If we are now into a long-term period of oil prices below $30, it is unlikely the Eurobond markets would be easily accessible by the FGN or cheap by recent standards. But given that the system needs a huge infusion of foreign currency into the reserves, where exactly can the FGN borrow $5billion+ every year as raw cash with no restrictions? None of the big DFIs can provide such cash. They all want to fund very over- priced projects. This leaves the IMF as a viable option. But their money comes with very stringent economic conditions which might not be palatable to the current government. But the choices going forward are likely to be very expensive Eurobond money with no strings attached or ‘cheap’ IMF money with lots of strings attached.”

The first step no doubt in designing an effective debt management strategy is to know the true state of the country’s debt especially its local debts. Egie Akpata, further posits that it is a well-documented fact that only the financial debt of the FGN are listed by DMO, with contractor, employee and possible litigation debt not listed. According to the investment banker, the outstanding debt now includes N733billion of Promissory Notes out of N14.3trillion outstanding as at end of Q4 2019. More recent reports from the DMO put that promissory note debt at just under N1trillion. Considering that the FEC approved up to N3.4trillion in Promissory Notes issuance, it is likely that number will keep growing nearly as fast as local FGN bond issuances.

“The astronomical rise in CBN outstanding OMO bill issuances in the past few years was driven largely by lending to the FGN.

In the absence of current audited financial statements of the CBN, it is difficult to see how much exactly has been borrowed from CBN by the FGN. However, various reports put that number at around N5trillion, but it is likely more. There have been news articles stating that that debt will be converted to regular FGN debt which suggests FGN bonds. How exactly up to N5trillion of FGN bonds would be sold is not clear neither is it clear who the buyers would be as local pension funds have over 70per cent of their assets in FGN paper and banks won’t be keen to take on the potential mark-to-market losses that come with holding long term bonds.”

Akpata added that, “Given the new trend of contractor and employee debt morphing into Promissory Notes, it is very likely that N3.4trillion approved amount will be reached in the near future. Add FGN debt to CBN that has to be termed out over the long term and you start to approach another N5-10trillion that is already owed but not formalised onto the FGN balance sheet. Clearly, local FGN debt of over N20trillion is already here.”

The critical state of the nation’s finances according to Ambassador Garrick, presents a nascent opportunity “to go back to the drawing board to figure out how we will deal with our revenue challenge.

He warned that, “What must change is that we need to spend less and spend wisely. We do not need to spend so much of our foreign exchange on importing petrol when our refineries are there lying idle. Oil sales are difficult because of suppressed demand and oil prices will not likely bounce back soon.

“We must therefore cut down on wasteful spending and renegotiate our debt sustainably while at the same time paying serious attention to reforming our economy from its import dependency to a producing cum manufacturing one that will not be easily susceptible to external shocks.”