The Federal Government has explained how the securitisation of the Ways and Means (overdraft) it secured from the Central Bank of Nigeria (CBN) will be executed.
Responding to inquiries from The Nation, the Director-General of the Debt Management Office (DMO) Ms. Patience Oniha, said the Federal Government of Nigeria (FGN) will not give cash to the CBN.
According to her, “In simple terms, the FGN will not give cash to the CBN as it is a conversion of an existing overdraft. It is the FGN’s Overdraft at the CBN that we are trying to convert to a long term bond”.
Explaining further, Professor Mike Obadan, a Board member of the CBN told The Nation that, “Government had resorted to this borrowing because of very low revenue and the need to meet critical expenses through the annual budget”.
“But because of government ‘s inability to repay the debt as and when due, it has constituted a huge burden to the CBN’s balance sheet making it to be bloated and vulnerable with implications for its ability to maintain price and monetary stability” he said.
However, with this transaction, Prof Obadan noted that “the CBN’s credit risk will be transferred to the investors who purchase the securitised debt”.
He stated that “Securitisation is one resolution strategy that’s been under consideration for sometime now. Once the securitisation strategy is implemented, the debt burden will be removed from the CBN’s balance sheet to investors who will buy the long-term securities to be issued”.
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“Securitisation will provide relief to the CBN through the funds received from investors. Of course the government, as the original borrower, will be expected to continue to make repayments which form part of a trustee account. This adds to the cash flows generated from the securities” he disclosed.
The CBN Board member told The Nation that “the marketing of the ways and means securities at 9.0 per cent will be viable to the extent to which potential investors show interest and importantly in consideration of the magnitude of the difference between the securities discount rate and the rate of interest that government pays on the ways and means advances”.
Government he said is not trying to raise funds from the securitisation “but trying to minimise the impact of its debt on the stability of the CBN”.
The Professor pointed out that “the total debt stock will not increase through the transaction as it entails a transfer of the debt from the CBN to private investors”.
“As the government continues to service the debt to the CBN at its own pace, it has a breathing space while the CBN’s balance sheet is also relieved”.
Olusegun Onigbinde Director at BudgIT on his twitter handle argued that securitizing the N20 trillion at 9percent coupon was unrealistic. “That’s putting a burden of at least N1.8 trillion annual debt servicing on governments for next 40 years. We have mounting external/domestic debt service costs. Now, we are going to add CBN adventures to it, for a long time”.
Using the 2023 budget proposal, he predicted that “in 2023, we will spend another N15 trillion with N5 trillion revenue and borrow N10 trillion. Foreign and domestic loans at N4 trillion; CBN prints N6 trillion. By 2027, we would have acquired another N24 trillion CBN debt and we sell to the markets again. We expand debt servicing”.
Last week, minister of finance Zainab Ahmed while answering questions from journalists disclosed that the N20trillion Ways and Means will be securitized over a 40-year period with an interest rate of 9 percent.