By Ifeanyi Omokwe:
The promise of Change by the President Muhammadu Buhari-led administration is one that should take a holistic approach to curb the issue of unemployment and investment in the country. So it was not unexpected, when on June 20, 2016, the Debt Management Office unveiled what seems to be an airtight strategy to manage Nigeria’s debt going forward. Contrary to the situation that led to the 2004/2006 strategy, the new debt management strategy takes an almost 180 degrees turn to address current issues in the economy viz the vision of President Buhari.
In a nutshell, it was originally argued that the best way to manage Nigeria’s debt profile is to reduce the level of external borrowing and increase the rate of domestic borrowing; precisely 84% domestic borrowing to 16% external borrowing, the new thinking canvasses a marginal increase in external borrowing, in both the short and long term.
A decade ago, the ideal strategy in view of the Paris and London club’s debt relief to the country. However, there were downsides to the notion such as the unavailability of the needed fund in by the private sector to sustain local industries to culminate in the needed economic leap. The result of this single factor dwarfs the possibility of an effective diversification of Nigeria’s economy.
In view of the above, logic therefore demanded that a review is done on the internal to external debt ratio. Hence, the DMO came up with a new ratio of 60:40 borrowing template. According to the office, it is intended to keep money in the hands of private investors in order to spearhead a private sector driven economy. Ultimately, it is expected that this will translate into job creation and a diversification of the economy.
An analogy given in “A Tale of Two Cows” expresses the traditional capitalist action when resources are limited. It goes thus, you have two cows; you sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income. Fortunately, this is where Nigeria finds herself today because the economy finally gets serious attention to diversify. The question of where we are coming from should find some sort of relevance here. Likened to an American corporation that has two cows; you sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to analyze why the cow has dropped dead.
Going forward as a nation, it is important that investors are not over labored with a perfectly avoidable mix of reduced resources and a demand for increased productivity; this is bad business and a strategy for failure given the dwindling prices of oil. Just like the central bank’s flexible foreign exchange rate policy, the DMO under the able leadership of Dr. Abraham Nwankwo has scored a major goal in Nigeria’s drive for an economic quantum leap and deserves the applause for his ingenuity and intellectual sagacity.
The DMO boss, who recently addressed members of the media in Abuja on further insights into Nigeria’s Debt Management Strategy (2016-2019), described the new document as one which would be broad-based as well as inspire confidence in Nigerians.
He noted that the new four-year borrowing plan was appropriate for the times and challenges as well as appropriate for the country’s vision going forward.
He said: “The Debt Management Strategy we are going to pursue over the next four years, takes into account the fact that for now Nigeria’s public debt portfolio is dominated by domestic debt.
“After the Paris and London Club exits between 2004 and 2006, the country took a deliberate decision to develop its domestic bond market and to do most of the public borrowing from domestic sources so as to develop the domestic bond market, that objective has been sufficiently achieved.
“And therefore taking into account that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources.
“Therefore one of the major elements of this strategy is that over the medium, term we will strive to remix the public debt portfolio from 84% domestic and 16% external to 60% domestic and 40% external.
“In addition taking into account other factors, the fact that over the next four years public borrowing proceeds will be devoted to capital expenditure an element of the strategy is to ensure that we remix the current status of about 31 percent short-term and 69 percent long-term to a maximum of 25% short-term and a minimum of 75% long-term.
“So we are remixing between external and domestic and we are also remixing within the domestic, between short and long-term.
”And when we look at the opportunities and possibilities which are very credible given our resource base, given the number of things we can do better than we’ve ever done, there’s no doubt then that in the next few years, there will be significant improvements in employment generation, poverty reduction and in the living standards of our people and more importantly, we should be inspired by the fact that the picture of the future which we see is a sustainable one; it’s not one that will be bedeviled as in the past by volatili
ties in the oil market.”
Further justifying the rationale behind the external borrowing particularly at a period of unfavourable exchange rate regime and lower reserves, he said: “One of the major advantages of remixing in favour of external debts is that first, we will be able to achieve cheaper cost of funds, therefore lower debt servicing but more importantly, we will be avoiding the risk of crowding out the private sector from access from the domestic markets.
“As you know, within the context of government’s economic programme which requires massive investment in infrastructure, and diversification of the economy, the private sector is still expected to play the lead role so that as government makes its own expenditure in infrastructure and improving the business environment, you expect the private sector to key in, in developing the various sectors of the economy including agriculture, solid minerals, manufacturing among others.
“Therefore, given the momentum government is bound to create in resuscitating the economy, the private sector would be expected to require massive resources as well and it becomes necessary to leave more space for the private sector to mobilize the resources they require to be able to complement government’s initiatives.”
Looking at the trend, Nwankwo has made sustained effort in outlining Nigeria’s public debt management objectives by ensuring the growth and development of the country’s domestic and international securities markets, meeting government’s financing needs at minimal cost and with prudent degree of risk over the medium to long-term and also the efficient management of Nigeria’s public debt in terms of well-diversified and sustainable debt portfolio, supportive of government and private sector needs.
Beyond the need to diversify the economy, Nwankwo also said Nigeria may still access the Eurobond or sovereign sukuk market for more cash but hinted that the country was yet to determine the size of a potential sukuk deal and was working with the Securities and Exchange Commission (SEC), the Central Bank of Nigeria and the stock exchange to build capacity.
Besides, Nigeria’s low debt to Gross Domestic Product (GDP) ratio means the country can borrow more to fund budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.
Also, speaking at a one-day workshop on “Public Debt and the challenge of financing Nigeria’s economic recovery” organised for Capital Market Correspondents Association of Nigeria (CAMCAN) in Lagos, the DMO boss reiterated the federal government’s stance to use all money to be borrowed to finance the 2016 budget to fund capital projects.
Nwankwo stressed that the Nigerian debt level is highly sustainable, noting that the nation still had a lot of idle potential, which the current administration is working to harness for effective growth of our national economy.
According to him, in the medium to long term, debt sustainability in Nigeria hinges on the overall sustainability of the economy, and the overall economic sustainability hinges on diversifying the economy in a sustainable manner.
On revealing the three year debt management strategy which will run from 2016 – 2019, Dr. Nwankwo explained that the focus of the new initiative is to develop a debt management strategy that would ensure that in the face of macroeconomic and other financial constraints, the cost and risk profile of the public debt portfolio remains within acceptable limit over time.
By way of conclusion, this solution is not a quick fix for local industries in an economy that has been laid unattended. Rather, it is an enduring effort that will ensure local industries organically erupt as a result of the availability of funds in the hands of private individuals.