Director General of the Debt Management Office, Abraham Nwankwo recently spoke with Economic Confidential on issues concerning widening the debt market to accommodate private companies; introduction of non-interest debts and how governments have used debts to strengthen infrastructure. He however, cautioned that government should apply the brake.
How do you rate the attitude of Nigerians towards government?
Let me start by saying that the challenge of building our country rests on us. No matter how much support or assistance, advice or guidance we received from external sources ultimately, our destiny is in our hands, and therefore many of us, no matter which sector we find ourselves whether public service, private sector, whether in public debt management or as media practitioner should not lose hope with complete patriotic favour. Having said that in general, let me emphasise that while the country has been experiencing significant challenges, all of us working together, supporting the government working as Nigerian citizens with our own commitment and responsibility and supporting the various initiatives of government that we are making progress that is inspiring.
It is important as we go along this journey of nation building of economic and political as well as social and cultural forms to be able to recognise when we do make achievement no matter how modest so that we will be encouraged to continue with our efforts towards reaching our ultimate goals: economic, political and social and more importantly, the journey toward building a nation.
Can you appraise Nigeria’s journey so far about structured debt management?
You will recall that as we have always maintained, the real target of public debt management in Nigeria goes beyond what is conventional in other climes. Taking into account that we have tailored Nigeria’s public debt management to reflect the challenges and aspirations of our own country in terms of what our challenges are and how we could use public debt management to address these challenges. So beyond the conventional objective of being able to raise funds domestically and externally in a judicious manner with good terms and conditions within acceptable risk profile to fund gaps in the budget, we have made sure that we are using public debt management to leverage development of private sector. Specifically, our objective included finding ways of encouraging the private sector, enabling them to raise long time money which they can use to fund various sectors of the economy, particularly the real sectors; agriculture, manufacturing, solid mineral and infrastructure.
A major constraint to growth and development in Nigeria has been that of unavailability of long term money particularly debt money, which corporates could use to fund long term projects. Banks are only able to provide only relatively short term money because they cannot use short term deposits to fund long term assets and that is true of all economies. So we needed in Nigeria to develop a market for long term debt so that our private sector could access long term fund and that was the reason why in 2005 and 2006, the DMO working with other agencies of government and private sector embarked on a complex process of making sure we develop the domestic bond market, which led us to develop a market that extended the tenure of the money in the market from about 91 days to as long as 20 years.
With that background it was now possible for Nigerian companies to issue their own long term debts especially bonds in the domestic market to be able to raise monies which they are now using to fund real sectors of the economy: agriculture, solid minerals, infrastructure including the power sector and the facts are there both from the capital market, the Security and Exchange Commission, the Manufacturers Association of Nigeria (MAN) will give the debt statistics that between 2005 and 2013, about 23 different companies issue long term debt instruments in the market to raise more than N223 billion.
That is evidence that the efforts all of us have made is an evidence that that component of the transformation agenda of government which is to enable the private sector to occupy the driving seat in generating employment and grow the economy is already working. And the challenge to all of us is to continue making efforts to support that trajectory of progress.
How will that benefit the ordinary man?
The implication is that with the private sector being able now to raise long time monies and investing them in agriculture, solid mineral, manufacturing, power sector and other infrastructure, they are now in position to generate sustainable growth, sustainable employment which in the medium to long term will impact significantly on reduction of poverty and that is the bottom line, welfare for the people, so you can see how you can migrate from public debt management through the transformation of bond market across greater economic activity by the private sector and then trickling down to ordinary person and that is the whole essence of engineering growth and development. That is an indication that we are on the right part, we have not arrived the destination yet but in terms of chosen the right road to our destination we are on the right road. Similarly and complimentarily, we appreciate that given the size of Nigerian economy, given our population, given our resource base and given that much of our natural resources, whether agriculture, solid minerals and others have hardly been exploited and developed.
Most of our natural resources are still lying free. Therefore, given that we need to generate more growth and development and reduce poverty, it is imperative for us to augment domestic resources with external resources for it to accelerate growth and development, it will not be reasonable to depend only on local resources. It is important as well to open access particularly for the private sector so that as they are already mobilising long term resources from the local front, they are also enabled to mobilise long term resource from the international capital market.
This is essentially the rationale behind the Eurobond issuances that government has made first in 2011 for $500million and then in 2013 $1 billion in two tranches. The whole idea was to establish a bench mark in the international capital market so that when Nigerian companies want to assess the international markets, their issuances could be easily evaluated, assessed, priced and transacted upon because without a sovereign bench mark investors would hardly wish to look at any corporate issuance and if they do look, they will do that by demanding a coupon on interest rate or yield that will be too high because of the uncertainty. However, with a sovereign bench mark in international market they have a reference point so decisions are easier. It is in that regard, therefore, that the three Eurobonds that we have issued in 2011 and 2013 have also enabled our private sector to issue their own bond to the international capital market suggested that as at today, six Nigerian companies had issued a total of nine bonds in the international capital market and raised about $3.4 billion. If you look at the structure and nature of the issuances which we distribute, you will find out that most of them are banks and that makes sense. You know banks mobilise funds not for themselves but for their customers so they are responding for safety demand of Nigeria corporates who need these long term funds to import equipment from overseas and also for investments in local production which are most likely to be export oriented local production. Again, you will see the additional benefits from Eurobond in the sense that apart from open access for the private sector to the international capital market to raise long term money to augment local resources, it is a way also of integrating our own banks into the international financial system by making them part and parcel of the activities of the transactions in the international capital market.
But how challenging has it been achieving all these?
The important thing with the illustration from public debt management is that in spite of the enormous challenges of the economy and the polity collectively as a people, as a nation under the leadership of President Goodluck Ebele Jonathan, the country is moving forward. But it also shows that if all of us as individuals, as groups, as private sector and as public sector if all of us are committed to minimizing the distractions some of which are avoidable in our systems, we could have even done much better than we are doing. So you can imagine if we are doing this work with distraction and enormous challenges some of which are artificial, the country should have even move much further if those artificial distractions which most of us are aware of were avoided. So, the truth is that Nigerians, all of us particularly, those in mass media who are in position to influence opinions to educate ourselves, our people to the fact that if we are lagging behind, we are holding ourselves, nobody is holding Nigeria backwards. Nigeria has everything it takes to move forward and there are enough evidence to show that with effort Nigeria makes a lot of progress, a lot of advance.
As I was saying, beyond what has happen in public debt management, there are success stories in every other sector and it is a responsibility of the media to highlight these achievements so that you continue to inspire our people so that our people don’t lose hope. As you know, even in religion, the worst sin is the sin of despair. We should not let our people lose hope. Yes, we should identify areas of weakness and commit ourselves to addressing those areas and improving on them but we should make sure we do not destroy areas of strength that we have already attained.
What is the debt profile of Nigeria today as a sovereign nation and what is role of DMO in state governments accessing funds from the capital market?
The debt sovereign debt is doing well. Currently our total domestic debt for both the Federal and the all states including FCT is about N8.9 trillion and external debt is about $9.38 billion. If we combined the two in one currency and then find the debt GDP ratio it will amount to about 12.15% which is much lower than the 56% of total public debt ratio for countries in our peer group. However, this is not an indication that Nigeria can afford to borrow without caution. In spite of the fact that because of the rebasing of the economy, our debt to GDP ratio has fallen showing that we have more capacity, we are not going to borrow without caution. Indeed, we are going to be more cautious. And the reason is that the tax revenue GDP ratio is low because it seems that many economic agents do not pay their tax according to their output so the challenge also is for the mass media and other professionals to continue to find ways of encouraging greater compliance with tax payment.
As you know, the government had already commissioned an exercise that will lead to improve tax administration and tax collection so that our tax revenue to GDP ratio will be significantly higher than what it is now. Currently our tax revenue GDP ratio is about 12% and compared to countries in our peer group which is 18%. What it means then is that revenue from economic agents that make up the private sector; farmers, tailors, taxi drivers, operators of private schools and hospitals, manufacturers all these are the economic agents of the economy. Journalists, newspaper houses, radio houses, television houses, online publishers, online news vendors are all supposed to ensure that they look at tax pools and we know what we produce, we know the income we earn as individuals and as corporates and you should be able to make your tax returns to the inland revenue so that as you produce within the economy and you are using the infrastructure in the economy as journalists, television stations, you are using the infrastructure built by the tax money. When you then generate, you are supposed to pay your tax as an individual or companies so that government will continue to maintain these facilities you are using and build new ones. That is how every economy works.
In summary, Nigeria’s debt remain sustainable, our debt GDP ratio is quite low but Nigeria has a challenge; all of us have a challenge to ensure that as the economy grows through our various activities by paying our taxes fully and timely so that there is enough revenue to support debt services. So, the best way for an economy to maintain sustainability is to ensure that the economy is productive and is growing. This will happen when all economic agents are paying their taxes effectively so that there is enough revenue to continue maintaining public and social infrastructure and building new ones.
Is it proper for governors who have only eight months left in office to still approach the debt market to raise fund?
We have to be careful. Societies don’t go asleep because an administration might be coming to an end within the next three months.
The economy continues working, the policy is continue working, the factories don’t close down, public service don’t close down farmers shouldn’t close down. However, one has to appreciate that when a state or any government agency has to borrow it has to be related to an objective. If there is a ground for borrowing and there is already a programme of borrowing for a project and the project has already started, and you have funded part of the budget, it makes sense to continue funding the project because it is not for an individual. And in that context the remark about a governor leaving in the next 10 months is not useful because the money you are using is for the state and not for an individual. Somebody is leaving in next ten months but a state will not die in the next 10 years. The State is continuous an what is important is that every state should have enough institutional framework that will ensure that first of all, for you to borrow whether from domestic or external sources, from the bond market or from banks there are some procedures, there are some approvals, the state house of Assembly should be aware, the civil society should be interested to monitor the projects. I think those are the things that are important.
Also, let me emphasise that any that any state that wants to borrow from bond market must get approval from the centre. DMO has to appraise, make recommendations for the Minister of Finance who has to take a decision base on the recommendation on whether it is appropriate to borrow or not and for what purpose. So there is adequate control at the centre. But all of us, not just because they are going to the election but even after elections all of us should continue being interested in how productively, how transparently the resources are used. It has nothing to do with election or no election. All of us should be interested in making sure that our resources including borrowed funds are well used. It does not mean that once election is coming near, economic activities should halt. Rather, whether there is election or not, we should make sure that economic activities are carried out efficiently, effectively and productively. We should have enough adequate institutionalisation of doing the right things at all times. That is why DMO works with all the states starting from 2006 to 2012 to establish debt management departments in all the states. We are still working with them, to strengthen them, to make them internalise the practices.
The issue is to work on institutionalisation to make that the states and other agencies have the capacity to manage resources well: borrowed or not borrowed. That is where emphasis should be. So, let me conclude by saying that for states to borrow from the capital market, the undergo evaluation by the Debt Management Office, undergo a decision to approve or not to approve by the Coordinating Minister of the Economy/Minister of Finance based on the existing guidelines which all of are aware of.
The second point I made is that it is our responsibility as individuals and citizens of every state, as citizens of the country as civil society and the media to monitor the projects and make sure that whatever money has been borrowed for: because to borrow from the capital market, you will issue a prospectus, you go through Security and Exchange Commission, issue a prospectus and the purpose of borrowing are spelt out therein. Banks who are acting as the trustees are all there.
You in the mass media should help the public to monitor these projects so that you will be playing a noble role as true citizens. That is what we should be doing.
Let me assure you that there is enough control, enough evaluation, and enough assessment. Sometimes, some states may indicate that they want to borrow. It does not mean that they have borrowed. You can indicate an interest but until you apply and it is evaluated, there are no issue to discuss publicly in terms of criticising a state. If a state actually applies, and that it is appraised and that it has a result then you have a basis to know whether the decision has been rightly made or not. But the mere fact of a state indicating an interest and it is all over the newspapers and there is politics involved…Let me also say that there is tendency during this period for people to over politicize everything and I request the mass media to excuse things relating to public debt management from politicization. But your question is very pertinent.
What is happening concerning the introduction of the SUKKUK non interest yielding segment of the bond market?
For the SUKKUK, we are still preparing for it. We have been very busy working on it for some times, so, the SUKUK Product is on-going. We are designing it, watching the markets both local and international so that at appropriate time it will be issue. It is still one of the products in the pipeline. We need to increase the variety of the products in the market both in terms of liquidity and asset because there people who need money which could be access from SUKU but those who have these monies but are only willing to put their surplus in SUKKUk. They are not ready to put them in interest yielding products. We know it is a product that will come in at the appropriate time so we are still working it.
Can you give us the specific areas where funds raised from the capital markets are deployed?
I am going to dwell on the private sector because we have talked about the public sector enough in the past about how we have used borrowed money to dualize the Airport Road in Abuja, how we have use it to dualize Kubua Road, how we have used it to build new districts in Abuja, how we have used it to revive the railway; how we have used it to fund the revival of textile sub-sector. Those are old stories, now we are at a stage where we are saying even beyond government borrowing money directly, what government is doing now is leveraging. Government is not going to mobilise all the resources. Government is not going to borrow all Bulk of the money that should be borrowed in the economy should be borrowed by the private sector, that is the emphasis. So let’s appreciate that government should borrow minimally as a of activating the economy, of activating the market so that private sector now takes advantage of that momentum to do the borrowing and funding of the economy, That is caught up with taking advantage of the relatively small borrowing government has done and taking advantage of it to now start raising their own money and that is where our emphasis is.
And of course they are using it in manufacturing, power sector, and other sectors. But in the particular case of Eurobond issued last year, you are aware that almost all of it has been pumped into the power sector; to the Transmission Company of Nigeria, to the Nigeria Bulk Electricity Trading Company and also to gas to power projects. That is where proceeds from the Eurobond $1 billion 2013 was pumped into. These are concrete projects with TCM, with NBETC, with gas to power projects.
Where will debt management be in next few years?
It will be where all of us want it to be. But certainly we have been in a state of improving our efficiencies in the way we manage our resources, the way we manage our portfolio; we will introduce more products like SUKKUK, products like inflated link bonds but we will also lay more emphasis on how to continue to encourage the private sector to take more advantage of these markets we have already created. We will be thinking of what we can do to continue helping the private sector to take advantage of capital available not only in the domestic market but international capital market. We will also continue working on the sub-national programmes of encouraging states to become stronger in their institutions, in their management of their finances and the management of their public debt in particular.
Did the rebased GDP figures provide any challenges the debt management strategies in the country?
Yes it provides both challenges and opportunities and as I indicated, if as you saw, before the rebasing even as for 2013, the debt to GDP ratio was about 23% but after the rebasing it dropped to between 12 and 13%. Ordinarily, you will now say you have more borrowing space, but that is an illusion. That was a challenge because you have to recalibrate, you needed to re-orientate yourself to appreciate that yes, your GDP has been measured better and is now higher. However, because you tax revenue to GDP is not as big as it should be because we are not collecting as much tax as we should collect from the outputs. It them means there is a problem, because if look at the debt GDP ratio, you will say you have more space to borrow but since you don’t service debt with GDP but only with revenue and since most Nigerians do not pay taxes, it then becomes difficult to service debt. That is a challenge.
However, it provides an opportunity for you to know that even now our debt is quite sustainable and yet we are not collecting as much revenue as we should collect in terms of taxes that should be going to the treasury so if we really collect as much taxes as should be collected based on current GDP then we will be in a better position to service our debt better. That is a challenge from conception point of view that if you don’t take time you will get the impression that you have more borrowing space but I have cautioned that we don’t have more borrowing space. On the other hand, it throws out the challenge for us to improve on payment of taxes and collection of tax revenue so that the treasure will have more resources to service debt and to fund growth and development.