Director General of the Debt Management Office, Dr. Abraham Nwankwo says Nigeria will achieve debt sustainability only when the economy is diversified
What are the responsibilities of the Debt Management Office?
Our job is to manage Nigeria’s debt effectively, and that is to say, as you know, every sovereignty depends on revenue from borrowings to run its expenditure. Most of the times, most economies want to spend more than they generate from revenue. The usual source of revenue for governments all over the world is various sums of taxation, starting with conventional sources of revenue. Only few countries have other sources; those countries that are rich in minerals, and the mineral resources are owned by the public. There are some that the minerals are owned by the private sector as well. Government still cannot depend on the taxation that comes from the private sector alone. In modern economy, most organisations operate in deficit; their budget is bigger than their revenue. And to make it up, they have to borrow to fund the expenditure.
For example, a country that would have generated revenue of N2 billion per annum, and in that particular year, plan to spend N2.5 billion. What it means is that, it is having a deficit of N0.5 billion. It has to now cover that by borrowing from various sources. It could be from the domestic market, capital market, multilateral organisation, World Bank, African Development Bank, etc. The bottom line is that DMO has to make sure that these monies are borrowed from appropriate sources, that they are applied in appropriate ways, and that appropriate analytical regulatory framework has been put in place to make sure that the country is able to service the debt as at when due. Now, that is the real challenge of public debt management. The essence of debt management, for example, is to be able to provide the path of sustainability for government i.e while we borrow and are able to service the debt as at when due. We advise government on the limit of public borrowing that is consistent to stable growth and poverty reduction.
Nigeria is blessed with both human and natural resources that if properly harnessed could generate lots of income. Why do we need to borrow?
Every country borrows. Every modern economy borrows. Go and look at the balance sheet of countries like Britain, America, Germany and others. Let use Britain as an example; Britain has a very efficient tax system. They know that if they start collecting tax now, in the next 20 years, they will be able to build another Heathrow Airport. Instead of waiting to save enough, they will go and borrow and build the airport, which will in turn generate the money for them. The country that does not borrow and thinks it can survive on its internally generated revenue will be left behind. While other countries are borrowing and building factories, one country is depending on one factory. They will be left behind in development.
What is the limit of Nigerian government borrowing ratio?
For a country in our peer group, there are various measures for sovereignty ratio, and there is also the liquidity ratio. But most importantly, sovereignty ratio is the debt stock GDP ratio. For countries in our peer group, the debt stock ratio should be 40 and currently, Nigeria is operating somewhere around 21 per cent and that 21 per cent includes the federal and states’ external debts. The debt ration of all the debts owned by the federal government domestically and externally is about 21 per cent.
Another sovereignty ratio is the debt stock ratio. For a country in our peer group, the debt stock export ratio is 150 per cent. Currently Nigeria is at least 60 per cent out of the 150 per cent.
The third sovereignty ratio is the debt stock revenue ration which is at 250 per cent and Nigeria is operating at 85 per cent.
Now, there is another type of measure of sustainability and that is the liquidity ratio. The very important liquidity ratio is debt service to export ratio. By this particular analysis, countries in our peer will still be in the sustainability threshold at 20 per cent. We are operating at below nine per cent. So, when you take all these into account, Nigeria is operating within sustainable limit.
Are you referring to this current government or successive governments?
I am talking about government in continuity or perpetuity not government for a particular period of time. But more importantly, this present government of President Goodluck Jonathan has been very committed to the issue of effective public debt management. That is the point I was making. This government is laying emphasis on the fact that we need to improve the structure of the economy. We know that over 75 per cent of our total export comes from oil and gas so there is a need to build stability in the source of our revenue. That is why, even though we are operating below equal ration, government is conservative, because it knows that structure of economy for now is weak. And that is why they are pushing us towards diversification through agriculture and privatisation. Power is the key thing so that the manufacturing sector will start again, and this will boost significantly both external and internal debts, so that solid mineral will start contributing, cassava from agriculture will start boosting, and with other contributions being made from other sectors which include the production of dry season rice, which is now very much in places like Katsina State. In less than five years, Nigeria will be self-sufficient in rice production, and the $3billion to $5 billion that we spend on importing rice per annum would now be saved. This will make us stronger by diversifying it. This can also make us debt sustainable. Let’s not be looking at our growth statistic on the short-term view. In the long run, our debt will be more sustainable when we diversify our economy.
What does all this mean?
It means that the country is under-borrowing
How does this translate to transformation for the economy?
We are saying, you borrow to cover your gap and to be able to pay as at when due. Before you say for example, I want to buy a mansion in Abuja, the income you will generate over the next 20 years, will it be enough for you to harmonies the mortgage over the period? So, you can only borrow to an extent you know that your salary can pay over the next 20 years. You don’t go and get a four-bedroom flat when you know you cannot meet up the payment. When it applies to you as an individual, it is the same way it applies to an economy, country and government. You must borrow in relation to your earning capacity. It is the same principle.
But Nigerians worry that most times they don’t see what the debts are being used for?
That is not true. Don’t make generalising statement like that. Recently, both the Coordinating Minster of the economy and the permanent secretary of the ministry of power signed a loan from China for Zungeru Dam. The project is going on. Many years ago, we borrowed money to build Kainji Dam. Are you saying there is no Kainji Dam? We borrowed money to revitalise Lagos-Kano rail-line. Has it not been revitalised? We borrowed money to build Abuja light rail and it is still under construction. Are you not seeing all the airports in Nigeria being renovated? Are you not seeing the FADAMA projects going on in some parts of the country? Are they not projects of money borrowed from the World Bank? Now, Nigeria has gone to the capital market to borrow $1 billion, which we raised in July at the Euro bond to create gas pipelines. And it is left to you after six years to ask how far it has gone. Every time, you have a national budget which specifies what will be spent on and it also specifies monies to be borrowed from domestic sources. Now, the budget is already there and all the items of expenditure and all the revenues to be collected have been specified and the shortfall has been specified. So, how can you come back and say you don’t know what it was used for whereas the budget is the document of the people and the National Assembly scrutinises it.
Do states have debt management offices?
We go beyond the conventional act because we know that Nigeria is running federalism. We have the central government, the 36 states and the FCT and we also have 774 local governments. So, we accept that as Nigerians we should reflect the realities of the Nigerian economy as fiscal federalism. What we did was to establish debt management offices in every state. We have succeeded in that and now we are building capacity. Suddenly, Nigeria is managing its debt more than it used to before now.
What are the guidelines for managing external debt?
There are frameworks for external borrowing, domestic borrowing, and for borrowing from banks. For example, no bank can lend validly to a state without clearance from the Minister of Finance. It is in the law that no state can borrow without clearance from the federal executive and the state legislators. And when you get the clearance, you still come to the Minister of Finance for clearance. And those are sent to the DMO which will advise the Minister of Finance whether the loan be approved or not. Moreover, the Constitution of the Federal Republic of Nigeria, the DMO Act, and the Fiscal Responsibility Act Law 2007 are very specific that no state or its agency can borrow externally without approval from the National Assembly.
But have state governors been obeying this law?
If you know of any state governor who has not obeyed this law, please bring it to the attention of law enforcement agencies. No state can borrow external debt without following the guidelines. The Constitution and the Fiscal Responsibility law is very specific on the issue of borrowing and they are under the DMO. We are in charge of debt management in Nigeria and I can assure you that all the states and FCT are cooperating with the DMO. They appreciate that we are operating federalism, that we are well-coordinated for the overall development of one economy, which is the Nigerian economy.
But is the mechanism easy for states to borrow?
Borrowing has to be difficult so that you don’t wake and say you want to borrow…
But are there mechanisms put in place to ensure that these funds borrowed are judiciously used?
The mechanism is you, the people that voted them into office. It is not for us to force them to use the money judiciously but the people, civil rights organisations in the state and the media. There is no state in Nigeria called federal government so if all the citizens and their legislature make laws that will ensure that all their resources are used judiciously, then Nigeria will definitely develop…
A primary dealer is a firm that buys government securities directly to resells, thus acting as a market maker of government securities. How many of such do we have in the country presently?
They are about 21. The issue is that if you want to buy a bond, it is just like when you want to buy shares and you go to your stockbroker. So, your bank is your primary dealer. If it is not, it will direct you to the primary dealers. Their job is to buy the bond for you and monitor it to mature. You get your interest every six months. If for any reason you want to sell your bond before its maturity date, just like you sell shares, you can go to your primary market maker and tell them you want to sell it. The primary dealers will get somebody and sell your bonds to the person. So, the primary dealers are there to buy and sell a bond which means if you buy FGN bond, you can never be stuck. There is nothing like that. It is liquid and it has effective liquid market. That is why we got recognition from JPMorgan and Barclays in the Emerging Bond Market Trending Index. People all over the world know about the Nigerian bond and they are buying and selling it.
What are the major achievements on domestic debt management?
During the military era, government abandoned the capital market for funding its projects. They borrowed from the CBN instead of borrowing from the market, which would have resuscitated the market. But now, the government goes to the market when it wants to borrow. The financial system used to be dominated by short-term instruments, like treasury bills. But we have elongated it from 91 days Treasury bill to 20 years. So now, you can issue a 20-year bond in the market. You can now get people who can give you money over 20 years to build a factory unlike before when people will tell you that they don’t have money and will only do buying and selling, importing and exporting. People don’t want to invest in factories or agriculture, which all have long gestation periods. But now, we have developed a market where you can issue your own bond to raise about N200 billion. Any Nigerian company can issue a long-term bond and raise long-term money.
The third is that we have been able to acquire an investor base; pension funds and others account for about 70per cent. So, you have banks investing now. We have been able to bring domestic investors to participate in the domestic bond market. Every month, foreign investors’ participation level is almost 50 per cent. The International Finance Corporation (IFC) owned by the World Bank come to Nigeria to issue their own bond in the market. That shows that we have external validation from JPMorgan, Barclays and the rest. This has proven that we have a strong bond market, which is developing rapidly. So, we have diversified to investor-based. We have also been able to get reliable bond market that has liquidity.
What are the benefits of centralising and professionalising our debt market?
It means that things that used to be done in different agencies are being put in one roof and trusted in the hands of core professionals. Debt management is not just a general practice but a profession where people are focused to solve problems and regulate issues. That is why we are able to produce analytical reports and do analyses every year. We are going to the details on what it will take to make Nigeria’s debt sustainable; we are going to the details of borrowing from soft windows; concessional windows and professional windows. The benefit is, when you have a focus of responsibility, then you can achieve efficiently. And we have gone beyond looking at the Federal Government and are now looking at the state governments so that in the next five years, we will not just have a debt management office, but we will have them in 36 states of the federation and even export our professionals. Places like Sudan and Zimbabwe have done that. From time to time, international organisations like the US-AID and others come to us for staff when they want to organise training for their staff members to be resource persons.
What will it take for Nigeria to have a strong and viable economy?
It will take each and every Nigerian to produce their best. If you are a journalist, be the best. If you are a debt manager, be the best.
Compared to our peers, would you say Nigeria’s debt is the lowest?
It is the lowest. It is on the internet and anybody can see it in the debt profile of other countries.