The Debt Management Office (DMO) has ruled that the maximum amount that could be borrowed in 2014 is N1,249.52 trillion or US$7.834 billion (domestic and external) by the federal government.
This decision was taken by the DMO because by the end of 2013, the total public debt/GDP ratio is projected at 22.4 per cent as a result of the country’s current stance at maintaining a very conservative debt portfolio.
As such, the borrowing limit was calculated using the benchmark of 25 per cent Present Value (PV) of Public Debt/GDP ratio for 2014.
Accordingly, the available borrowing space will be 2.6 per cent of the normal GDP estimated at N48,057.35 trillion or US$301.3 billion.
Apparently heeding this warning, the federal government has proposed a new borrowing in 2014 of N572 billion which is slightly lower than the N577 billion earmarked to be borrowed in 2013.
This is because the government wants to continue to exercise fiscal prudence and limit its borrowing requirements in compliance with the Fiscal Responsibility Act, 2007.
However, in line with the Medium Term Development Strategy (MTDS), 2012-2015, which recommends a gradual substitution of the relatively more expensive domestic borrowing with cheaper external financing in order to reduce cost of borrowing and achieve an optimal portfolio mix, the N1,249.52 or US$7.834 billion maximum additional borrowing for 2014 is expected to be raised in the ratio of 60 per cent (external) and 40 per cent (domestic), respectively.
This recommendation is contained in the 2013 DMO report of the annual National Debt Sustainability Analysis (DSA) recently released. In this regard, the recommended borrowing from domestic and external sources has been pegged at US$3.137 billion (equivalent of about N500 billion) and US$4.697 billion (equivalent of about N748.64 billion) respectively.
The recommended borrowing limit is about N264 billion or US$1.65 billion lower than the projected borrowing in the Medium Term Expenditure Framework (MTEF), indicating government’s commitment to fiscal prudence and discipline.
The report noted that “efforts aimed at ensuring that all new borrowings (external and domestic) are project tied should be sustained and such projects should have significant multiplier effects that would provide long-term benefits for the economy.”
As a way of reducing public sector expenditure and borrowing, as well as the rate of debt accumulation, government was also advised to “sustain the policy measures aimed at incentivizing the private sector to lead investments in the critical sectors of the economy, and development of infrastructure.”
The 2013 DSA report noted that Nigeria remains at a low risk of debt distress as the standard stress test under the Baseline and Optimistic scenario has shown that Nigeria’s debt outlook remains robust in the medium to long term.
However, under the pessimistic scenario or customized revenue-specific scenario, which simulates a persistent shock in the price of crude oil, “all revenue indicators deteriorated when compared to the Baseline results.”
The customized scenario also shows that without significant compensating revenue sources, a prolonged shock in the price of crude oil or prolonged deterioration in the current account balance could undermine the progress made in achieving macroeconomic and debt sustainability.
As a long-term solution to the adverse effects of possible revenue shocks, the report recommended that the “current efforts aimed at increasing collectible revenue from existing sources and diversifying the revenue base through the acceleration of growth of the non-oil sector in the medium to long-term should be intensified.”