Tag: Debt Management Office

The Director General, Debt Management Office, Ms. Patience Oniha has assured Nigerians not to lose sleep over the nation’s debt profile which stands at N22.7trillion. In this interview with Assistant Editor, Jide Babalola and Victor Oluwasegun, the DG speaks on the debt portfolio among other related issues.

What assurances would you give Nigerians who have anxieties about Nigeria’s debt burden being as high as it is now?

Nigeria’s debt level is not high. And let me sort of allay your concerns about saying debt is a burden, debt is not a burden. The debt burden is not high. If you look at the size of the Gross Domestic Product, as we always say, our debt is still sustainable. We’re only at about 19 percent in debt to GDP ratio. There is some control around that by government; we have set ourselves a maximum of 25 percent and we are not there yet.

If you look at other countries, the ratio for the World Bank for instance, the World Bank looks at countries like us and say you should have a ratio of not more than 56 percent, but government has been prudent to keep it at 25 percent and we are only at about 19 percent by the end of June when the accounts are prepared.

Let me clarify. If you are looking at absolute numbers of debt rising and you say you’re worried, I think you should look at three aspects.

The first one is if you go back to 2015 when we had a recession; revenues came down by about 50 percent. We have these figures and we all know that. Government needed to continue operations, but more importantly, needed to stimulate the economy and couldn’t have done that with revenues at 50 percent. Why did revenue fall? We know why. Crude oil prices fell, local crude oil production fell, it’s like we suffered on both sides.

So, government needed to spend on infrastructure particularly because that is where employment is generated. The government needs to spend to stimulate the economy and restore growth. And we saw the result of that last year; the economy exited recession. I believe for the first quarter of this year, the country exited recession then by the growth of 0.72 percent, then 1.9 percent for the first quarter of 2018 and we have improved.

I think we should first look at why government is borrowing and what are the outcomes we see. For those of us who still travel by road or move around, you can see roads. If you don’t see any other roads, you see smooth roads all across the country. So, that borrowing is being channeled into production and we are seeing it.

Lastly, let me add that a lot of the increase in the past year came from external borrowing, and that was deliberate because the government was looking at its debt management strategy and deciding on how we can borrow without increasing the interest cost of borrowing too high, which is debt servicing.

As you know, in January last year, to borrow in the domestic market was about 18.5 percent, that was why the government went external and the whole of last year, we borrowed at less than 8 percent  in the international market. That was one strategy.

But all of that borrowing also contributed to external reserves. So, when you see external reserves at $47 billion there is a lot of government borrowing that went there.

The Federal Government receives US Dollars obviously from borrowings which it sells to the Central Bank. Government spends Naira. So, that has happened with increased external reserves? The currency is stable. So, debt has been used for various purposes and I think we also shouldn’t forget that while the government was managing its own debt issues, it was trying to create an environment in the local economy for the real sector to access funds, so where are interest rates today? About 13 percent!

State governments don’t have the expertise that is available to the federal government but many states seem so bent on borrowing further. What is your assessment of state government borrowings?

Let’s put it this way, state governments also don’t just borrow; there are regulations, there are laws that governs borrowing. The Fiscal Responsibility Act as well as the Debt Management Office Act govern borrowing by the sovereign and also borrowing by the state government.

I implore you go to the DMO website and look for a document called “The Borrowing Guidelines.” It would tell you what process the states need to go through in order for them to borrow. Their State Executive Council must approve, their State House of Assembly must approve.

Then, on the side of the Debt Management Office, the law requires that when they want to borrow, if it’s from a commercial bank, that bank that is lending to them (it’s in the DMO Act) must inform the Honourable Minister, so, it just doesn’t happen like that. When the Honourable Minister gets that request, she passes it to the DMO to see whether the state has capacity to service the debts. What’s the revenue base for most state governments? FAC, is that correct? We know states like Lagos are far ahead in terms of their own internally generated revenue. So, what we look at, we set a limit for any state that wants to borrow, whether from a commercial bank or to issue a bond, whatever, including external borrowing which the federal government does on their behalf. Let me make a correction by noting that states can’t borrow externally all by themselves; it is the federal government that borrows. We compare the debt service, meaning the principal repayment over time as well as the interest, to ensure that it does not exceed 40 percent of their revenue. So, there is a control mechanism in place because it is backed by an ISPO (an Irrevocable Standing Payment Order); no ISPO will be issued without that being in place.

Before such guidelines were institutionalised, several state governments had been into borrowing. Are there no state governments that have overexposed themselves to debt obligations?

If you look at what happened prior to 2015, what had happened was for them to issue bonds so. We are talking about Capital Market operations. The Investments and Securities Act requires that they have what we call an ISPO. What that means is, it’s like giving a cheque that says every month, from my revenue at FAC ( Fiscal Allocation Committee), deduct X amount to go into a Sinking Fund which is managed by Trustees. With the Capital Market for those states that issue bonds, there was that requirement. So, they could not have borrowed without going through the Ministry of Finance as well as the Debt Management Office.

But what was happening before 2015 was that many of the states were borrowing from commercial banks, and many of those states and the banks were not complying with the provision in the DMO Act that says any commercial bank lending to a state government must inform the Honorable Minister of Finance. So, they borrowed and that piled up, which explained why the DMO had to restructure some of those loans for them in 2015. However, things have changed as commercial banks don’t do that anymore.

So, there is no cause for fear in the states now?

There are rule books. DMO has a whole department dedicated to building debt management capacity at the state level. So, we go there and teach them what we have learnt that has benefitted us; we go there and share those with them. All of them have debt management units or debt management departments. Some states pass their own equivalent of the Fiscal Responsibility Act and Public Finance Management Act to help them. So, they are coming up.

There have been alleged complaints on the issue of high consultancy fees in government agreements. Does this apply to loans too, including the loans from China?

I don’t know what you mean by consultancy. If the government is borrowing from China, it is talking to China. There are no consultants appointed to help us get loans from China or the African Development Bank or from the World Bank.

No, we negotiate directly. And most of those loans before Nigeria moved to medium income status were concessional. So, all the cost, when you add interest, commitment fees, it comes to less than three percent interest for concessional loans. So, we don’t appoint consultants to go and help us talk to China, its bilateral.