Author: The Nation

There has recently been a lot of misinformation and misconception in our
public debate on debt. My goal in this article is to shed some light on the
public debt, to clarify the real state of Nigeria’s debt position, and
hopefully, provide a knowledge platform for constructive debate.

Let me say at the outset that no one in government is supportive of a
Nigeria that returns to a high state of indebtedness. On a personal note,
having gone through tremendous stress during the quest for Paris Club debt
relief, I am committed to a Nigerian economy that is fiscally prudent,
balances its books and remains at a low state of indebtedness.

To begin, Nigeria’s overall debt is comprised of external and domestic
debts. The external debt is typically owed to foreign creditors such as
multilateral agencies (for example, the Africa Development Bank, the World
Bank, or the Islamic Development Bank), to bilateral sources (such as the
China Exim Bank, the French Development Bank or the Japanese Aid Agency),
or to private creditors such as investors in our Eurobonds. The domestic
debt, however, is contracted within Nigerian borders, usually through bond
issues which are then purchased by Nigerian banks, local pension funds, and
other domestic and foreign investors. The resources raised typically go to
help fund the budget or other domestic expenditures, such as infrastructure
projects. We also have some contractor arrears, and other local liabilities
which are normally handled through the budget.

Both federal and state governments borrow domestically and externally.
However, no state government can borrow externally unless guaranteed by the
Federal Government. Similarly, state governments’ domestic borrowing is
subject to federal government analysis and confirmation – based on clear
criteria and guidelines that a state can repay based on their monthly FAAC
allocations and internally generated revenues (IGR).

As a nation, we have had a difficult history with debt. As such, no one can
forget the challenging times we went through from 2003 to 2005 trying, in
the end, successfully to get relief on our large external debt. Neither the
government nor any Nigerian wants a repeat of the country’s past history of
large debts. That is why the current President Goodluck Jonathan
administration, the Legislature, the Ministry of Finance, and the Debt
Management Office, are very focused on a conservative and prudent approach
to managing the national debt. Our current approach balances Nigeria’s
needs for investment in physical and human infrastructure with a strong
policy to limit overall indebtedness in relation to our ability to pay.
Above all, any debts incurred must go for directly productive purposes
which yield results that Nigerians can see.

*First the numbers:*

a. In 2004, prior to the Paris Club debt relief, Nigeria’s overall debt
stock was very high. External debt stood at US$35.9 billion while the stock
of the domestic debt amounted to US$10.3 billion resulting in a total of
about US$46.2 billion or 64.3% of GDP excluding contractor and pension
arrears.

b. After the successful debt relief initiative, Nigeria’s stock of foreign
debt declined dramatically. Indeed, in August 2006, when I left office,
Nigeria’s foreign and domestic debts amounted to US$3.5 billion and US$13.8
billion respectively – a total of US$17.3 billion or 11.8% of GDP.

c. By August 2011, when I resumed for the second time as Finance Minister,
the domestic debt stock had grown substantially to US$42.23 billion, while
the external debt was still a modest US$5.67 billion. This implied a total
debt stock of US$47.9 billion or 21% of GDP. Note that while the debt stock
grew, our national income also grew so that debt to GDP ratio (the
parameter used globally to measure a country’s debt sustainability) remains
modest and manageable.

d. Thus, the key noticeable change in Nigeria’s indebtedness in recent
years has been the growth of domestic debt. There were two main reasons
which resulted in this outcome. First, the initial growth of the domestic
debt stock was because the federal government wanted to deepen the domestic
debt markets and generate a yield curve for Nigeria which ultimately could
help our corporate bodies to access the capital markets and borrow funds at
more affordable rates. The DMO through its work has been successful in
doing this.

Nigerian corporates can now raise money at reasonable rates at home and
abroad, helping them secure resources to invest in the economy. Secondly,
however, domestic debt was also raised to finance increased budget
expenditures including consumption. For example, in 2010, the 53% salary
increase for civil servants was financed by raising domestic bonds.
Borrowing for recurrent expenditure or consumption, as was the case here is
a practice that is less than ideal and one that we should endeavour not to
repeat. We must learn that domestic debt should be incurred sparingly at
modest and manageable rates so that government is able to service it and
pay back domestic creditors. Failure to do so would severely undermine the
finances of our private and institutional creditors to the detriment of the
economy.

It is with this background in mind that we have put in place several
measures to limit and manage the national debt. There are a number of
specific policies we have introduced in the current administration to slow
down the increase in our overall debt stock.

a. First, we have brought expenditures and revenues much more in line,
through a low fiscal deficit of 1.81% GDP, to reduce the need for domestic
borrowing. For example, we reduced annual domestic borrowing from N852
billion in 2011, to N744 billion in 2012, and to N577 billion in 2013. Our
objective is to reduce government’s domestic borrowing to below N500
billion in the 2014 budget.

b. Second, for the first time, we have paid down part of our domestic debt
rather than rolling all of it over. Beginning in February 2013, we
successfully retired N75 billion worth of maturing domestic bonds. And we
will continue with this practice in the coming years.

c. Third, we have established a sinking fund with an initial capitalisation
of N25 billion. This fund will enable the government to retire maturing
bond obligations in the future.

d. Fourth, we are working increasingly with states to get a clearer picture
of domestic debts acquired by state governments, thanks to the
comprehensive review recently completed by the DMO. Our particular concern
is that state governments limit borrowings in line with their incomes and
put any borrowings made to work on specific projects and programmes that
bring direct beneficial results to their citizens.
    [Please find attached the Debt-to-GDP ratio of selected economies]

     e. Fifth, instead of the previous practice of contracting foreign
loans in an ad hoc manner, we have streamlined the process for federal and
state governments and made it transparent through the Medium Term Rolling
External Borrowing Plan, which is reviewed and approved by the National
Assembly. This plan presents the anticipated loans to be contracted by the
government over a three-year time window, so that we can target funds to
priority projects, and also make trade-offs where necessary. Notice that
this covers planned foreign borrowing by both the federal and state
governments for projects that will yield results in infrastructure,
education, health, etc. Most loans contracted are on concessional or very
favourable terms. For example, many of the multilateral loans are at zero
interests, 40-year maturity, and 10 years grace. Others are at less than
three per cent rate of interest.

f. And finally, we have put forward a Medium-Term Debt Strategy with a mix
of limited external and domestic borrowing that is appropriate for the
economy.

But let me repeat that we shall never be complacent about our national
debt. We need to be constantly vigilant to limit the amount of debt and
create room for the private sector instead to borrow. As such, we need to
stay focused on three main priorities.
First, we should continue to monitor our external borrowing and ensure that
we do not slip back to our high indebtedness prior to the debt relief
programme. As I mentioned earlier, the External Borrowing Plan, helps to
address this concern by ensuring that we always have a comprehensive,
transparent view of our foreign borrowing. As at now, our external
indebtedness is low at $6.67 billion or about three per cent of GDP.

Second, we should closely continue to monitor and limit our domestic debt,
and ensure that it stays within a prudent and conservative range. We should
pay off debt that is due to the extent of our ability.
And third, we should also continue to closely monitor borrowing by states
to ensure that the debt burdens of our state governments remain within
manageable levels and that borrowings are applied to specific projects that
yield results for citizens of the state. In that regard, we enjoin banks
and other lenders to be careful and prudent when lending to ensure that
this is done within the existing rules, regulations and guidelines.

Former UN Secretary-General Kofi Annan once said: “Information and
knowledge are central to democracy – and they are the conditions for
development.” That is precisely why I have gone to some length to throw
light on the real facts and the real issues regarding our debt situation
and what the federal government is doing to address them. We need to create
the basis to have a healthy and constructive public conversation on this
issue, not a distorted and partisan battle.

*• Dr. Okonjo-Iweala is Coordinating Minister for the Economy and Minister
of Finance.*