Nigeria’s external debt may rise to N1.234tr by year-end

Posted by admin Top Stories Tuesday, December 21st, 2010

One of the biggest news items in the news last week was weekend’s news by Reuters that the Federal Government is considering a shift in the date for raising $500 million Eurobond till next month, owing to prevailing unfavourable international market conditions.

Although, the bond was originally slated for this year, following Deutsche Bank and Citigroup as book runners, besides naming Barclays Capital and FBN Capital, a subsidiary of First Bank of Nigeria, as financial advisers, and a road show planned for the United States next week, it was rescheduled for the umpteenth time, because of the debt crisis in Europe.

The report quoted Director-General of the Debt Management Office (DMO), Abraham Nwankwo, as telling CNBC Africa TV in an interview that: “Given the rumblings in the euro zone over the past few weeks … we have considered it important to watch carefully over the next couple of weeks and as soon as possible make the offer.”

Nervousness triggered by the debt crisis in Ireland, it is believed, contributed to the decision to postpone the U.S. road show, just as discussions are on to determine the appropriate timing of the issue.

The $500 million Eurobond is the commercial portion of the $3.702 billion foreign loans from different sources, as part of the $5.3 billion peg placed on external borrowing by the National Assembly, out of which approval had earlier being granted for $2.4 billion. The loan to be secured on concessionary terms, and with a repayment period of between 20 and 40 years by the Abuja would also have a moratorium of seven to 10 years and is for use to address major infrastructure gaps across the country.

According to Market Pulse, a weekly research publication of BGL Plc, an investment-banking group, at the weekend, “the new loan comprises of multilateral, bilateral and commercial loans in the amounts of US$2.052 billion (55.43 per cent), US$1.150 billion (31.1 per cent) and US$500 million (13.5 per cent).”

While $2.015 billion (55 per cent) is to help States finance different infrastructural projects, and budget supports, the balance will go the Federal Government’s power infrastructure and budget support.

The new loan of $3.702 billion, analysts at BGL noted, would bring total outstanding external debt to US$4.5 billion at the end of the 2010 third quarter, rising to $8.24 billion (about N1.234 trillion) at the end of 2010.

This would then “imply that external debt more than doubled in 2010, compared to 2009 figure of $3.95 billion- the fastest growth since the debt relief in 2005,” recalling that total domestic debt outstanding at the end of the third quarter of 2010 was N4.229 trillion.

Meanwhile, the DMO plans to issue N70 billion worth of FGN bonds this month, thereby bringing outstanding domestic debt in 2010 to N4.511 trillion where more treasury bills than projected are not sold. This will therefore bring total estimated public debt to as high as N5.747 trillion by end of 2010, translating to about 21 per cent of 2010 estimated Gross Domestic Products (GDP).

The growing spate of borrowing has however raised concerns over the equally raising cost of debt servicing and the proper utilisation of the loan proceeds.

The 2010 budget has a deficit of about N860 billion that is being funded by the DMO through treasury bills and bonds issuance.

“According to Medium Term Expenditure Forecast and Fiscal Strategy (MTEF & FS)

Report for 2011-2013 of the Federal Government produced by the Budget Office, debt service payment as a proportion of aggregate revenue of the federal government is expected to rise from 10 per cent in 2009 to 17.1 per cent in 2010. This is obvious considering the size of accumulated debt, both domestic and external, in 2010. It is projected to grow to 20.9 per cent, 21 per cent and 21.6 per cent in 2011, 2012 and 2013 respectively. Unfortunately, the government is yet to show that appreciable proportion of these debts have not been and/or will not be utilised to finance consumptions.

“The present state of infrastructure in the country and the large size of recurrent expenditures of government in the face of dwindling revenue suggest that outstanding debts have not been sufficiently channeled to capital projects.

The descriptions of planned utilisation of the new $3.201billion are in many cases ambiguous despite the claims that they are meant for infrastructural development,” the report added.

As at the end of June 2010, Nigeria’s total public debt stock (addition of external and domestic debts) stood at N4.398 trillion as at June 30, 2010, according to FSDH, another non-bank financial services group in recent report, which quoted data from the DMO. Of this, domestic debt stock was N3.764 trillion, representing 85.59 per cent or 15.23 per cent of the nation’s GDP.

The total debt profile, the report noted, represents about 17.80 per cent of the GDP as against the applicable critical limit of 40 per cent for countries in her economic peer group, noting that “Nigeria’s debt portfolio has a wide fiscal sustainability space.”

“IMF gross debt to GDP ratio projection for advanced economies (France, Greece, Ireland, Italy, Japan, Netherlands, Portugal, Spain, United Kingdom and United States) in 2010 stood at 101.2 per cent,” the report added.

Going by the quantum and composition of the nation’s sovereign debt, FSDH Research estimated that interest payable on public debt at the end of 2010 would amount to N183.21 billion, with N174.08 billion going into domestic debt servicing, leaving N9.12 billion for paying interest on external debt. The figure represents about 0.69 per cent of the nation’s GDP estimate, compared with a 2.75 per cent average interest bill for advanced countries, according to the IMF.

While this shows that interest payment on Nigeria’s debt should not be a cause for concern at the current rate, the FSDH analysts noted that although, the nation “has good sustainable fiscal space, there is the need for better discipline in the management of public resources and a need to ensure that public debt are channeled to productive projects.”

Most facilitators at a one-day “policy seminar on the 2010 Federal Government budget,” jointly organised by the Nigerian Economic Society (NES) and the Chartered Institute of Bankers of Nigeria (CIBN), earlier in the year, lamented the 2009 budget largely performed below expectation.

According to Prof. A. G. Garba of the Department of Economics, Ahmadu Bello University, Zaria, government continues to finance the deficit through the capital market, thereby raising the nation’s sovereign debt. He estimated that at current growth rate, and relying on the trend between 1996 and 2009,

Nigeria’s cumulative debt may hit N16.08 trillion by 2020. The debt level, he noted, is currently being serviced with about N2.3 trillion.

Garba, who spoke on “Management of domestic and external debt and early warning signals,” regretted that “Nigeria is on the march again to the debt trap that it got into until the Paris Club debt agreement in 2006. We should ask (ourselves) whether the debt is sustainable.”

Reasons for Eurobond

However, speaking at an interactive session with finance journalists and business editors, in Lagos, as part of the DMO’s public enlightenment campaign some weeks ago, Nwankwo said the Eurobond first mooted in September 2008 and was to have been issued last year was cancelled, because of the then raging global economic meltdown.

Finance Minister, Olusegun Aganga had said in January 2010 that the choice of second quarter 2010 for the bond issue was to enable “the market to settle down and allow the necessary preparations to be done.”

The Eurobond and FGN bonds are expected to enhance the setting of a benchmark for the nation and to encourage the private sector to issue their own bonds for development and deepening of the financial system.

Nwankwo assured that the nation is still within acceptable threshold in both external and domestic debt, relative to its Gross Domestic Products (GDP), with a 2009 year-end external debt of about $3.9 billion and domestic debt of about N3.2 trillion, which brings total public debt to N3.8 trillion. Relative to a GDP of N23 trillion, he continued, Nigeria’s GDP to debt ratio stands at 13.8 per cent, from 54 per cent before 2004, prior to Nigeria’s exit from the Paris Club.

“The international benchmark requires that countries in our group do not exceed a debt to GDP ratio of 45 per cent, which means that we are at a very comfortable level… After exiting the Paris Club, we have maintained prudence and restraint in ensuring we do not go back to the dark days,” he said.

Continuing, the DG explained then: “we are under pressure to mobilize funds for infrastructure deficit,” noting that the government continues to be guided by the principle of debt sustainability, while encouraging the private sector to bring in their own funds.

In an interview with Bloomberg television some weeks ago, also, Aganga said the Goodluck Jonathan administration is carrying on with its plans for its first global bond, because of its commitment “to encouraging investment. We have a government ready to deliver infrastructure,” he said.

Speaking on: “Growth Prospects for the Nigerian Economy,” at the convocation lecture of the Igbinedion University, Okada, Edo State, Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria (CBN), said a major item that fuels inflation in an economy remains the overhead expenditure.

Sanusi expressed concerns about the inflationary pressures in the economy, arising from the overhead cost of the government, including the National Assembly, which increased from 14 per cent of the Federal Government overhead expenditure in 2008 to 19 per cent in 2009 and 25 per cent in 2010. The basis of comparison by the CBN Governor was neither on recurrent expenditure or government revenue.

Conclusion

Against the backdrop of the recent approval for an increase in Nigeria’s minimum wage and its consequences on public sector finances, especially the States, Tola

Odukoya, Vice President and head, research at Dunn Loren Merrifield, lamented, “the assessment, viability and sustainability of the current model of funding Nigeria’s federating states remains largely ignored. In our opinion, this is fundamental to Nigeria’s ability to achieve and sustain economic growth and development in the long run.”

Despite the huge amounts shared between the tiers and government by the Federal Accounts Allocation Committee (FAAC), so far, this year and since the inception of Nigeria’s federal revenue allocation system, Odukoya lamented that “basic infrastructure still remain non-existent, or at best very weak while states continue to receive the monthly FAAC allocations.

“In general, given that recurrent expenditure consumes approximately 68 per cent of states’ total expenditure, the vast majority of states barely have enough funds left to develop infrastructure that will attract investments and aid growth and development.”

Government’s huge debt profile, analysts believe, will soon return Nigeria to its inglorious past, unless efforts are intensified to ensure that critical infrastructure is put in place across the country to help private sector endeavours, particularly in the small and medium scale enterprises (SME) segment, to thrive, helping to generate employment and alleviating poverty. One of such infrastructure is power generation and distribution.

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