Strategic mix in domestic, foreign debt, key to debt sustainability -Nwankwo

Dr Abraham Nwankwo has been in charge of Nigeria’s public debt management over the last few years and helped, through strategic plans and appropriate guidelines, to ensure sustainability of the debt portfolio, as well as deepening the nation’s domestic debt market, amongst other achievements. In an interactive session with a team of National Mirror management led by the Acting Managing Director, Mr. Fidelis Owoamanam, last Wednesday in Abuja, the Director General of the Debt Management Office (DMO), spoke on various aspects of the nation’s debt issues and how the Office had been pursuing its sustainability and long-term goals imperatives. Excerpts:

Sir, one of the key objectives of the National Debt Management 2nd Strategic Plan that was implemented between 2008-2012 is the need to establish and develop effective institutions and debt management capabilities at the sub-national level. What is the state of debt management capacity at the state level now?

Let me start by saying that all the states of the federation and the Federal Capital Territory should be congratulated and appreciated for their commitment to the programme of helping them have the right institutions and capacities for public debt management. As you know, institution building is not one of the very attractive pre-occupation of governments anywhere in the world because institution building is thinking of the long term, not immediate gains, not things you see mainly. But if you are thinking of sustainability of a system, the sustainability of a country, the sustainability of development, you have to think in terms of institution building.

Things that will outlast this generation and some structures on which the future generations can build on to continue achieving excellence. So, that’s why when we came into the conclusion that public debt management needs to be democratised, that effective public debt management should not end at the centre, that it should also devolve to the sub national levels. We are happy that all the states of the federation and the Federal Capital Territory keyed into the programme and supported it wholeheartedly such that over the past five years, we have worked very cooperatively with them in a rare spirit of fiscal federalism, very rare. We have worked to achieve the set objectives to the extent that, as you know, each and every state of the federation as well as the FCT has its own debt management department in one form or the other now, to the extent that we have, through various regional workshops, through various attachments at the Debt Management Office, through various seminars and conferences, we have been in a position to develop the right skills and capabilities among the officers of the states of the federation so that they can manage their own debts.

To a lay man debt management is esoteric as he may not be familiar with what it entails and its purpose for his life. Could you explain in very simple language, which will be understandable to ordinary Nigerians, what exactly the DMO does and what debt management is all about?

The job of the Debt Management Office is to manage the debts of the country. Just as any individual household or individual company or private companies, borrow money to solve their problems, so also every government all over the world borrow money to solve their problems. As you know, a business entity usually will borrow money in addition to the equity of its owners, of the shareholders. It will also borrow money so that it can achieve high turnover, it can achieve higher profitability, it can compete effectively in the market place. It needs to expand, build more factories and all that. So, it goes beyond its own resources, that is, its own equity to borrow money in order to compete effectively and to achieve maximum returns to the shareholders. That is what a company does. In the same way, governments all over the world don’t just depend solely on their revenues. From time to time and frequently too, they spend more than their own revenues by borrowing additional resources so that they can accelerate development faster than would have been the case if they depended solely on their revenues. In doing that they take into account that yes, they will continue to have some expected in-flow of revenues in the future. But instead of waiting for say, the next 10 to 20 years to accumulate enough of those in flows before they can embark on projects, they take practice steps to go and borrow in advance in order to be able to provide the goods and services that people need thereby fast- tracking growth and development, whilst planning to make use of those streams of revenues that will come in the future to repay the money they have borrowed. That is the summary of public debt management.

What kind of advice is your office giving to government to ensure the country’s debt sustainability?

Essentially, we have to give advice to the government in terms of if and when they want to borrow. Now let’s go back to the origin of borrowing. The borrowing for a country like Nigeria, the democratic system of Nigeria originates from the annual budget. Every year, there is an annual budget which is sent to the National Assembly for appropriation, that results into the appropriation act which is law. That budget details all the expected revenues for the year, and details the planned expenditures for the year, and invariably from time to time, the planned expenditure is greater, based on the reason I explained, than the expected revenue. So, that difference is what is called the fiscal deficit, and it is much of that fiscal deficit that is going to be borrowed to be able to fund the budget for that year. That’s how borrowing comes about. So, within that context, of course, even before the budget, there is a threshold that gives government a general idea of even if you want to borrow, this is the limit you should not go beyond for the debt to be sustainable.

The DMO does not necessitate the government to go and borrow, but the DMO guides the government to say, if you want to operate a fiscal deficit, please make sure that it does not go beyond this level, because if it goes beyond this level, the debt will be unsustainable. So, within that limit you have set for the government a threshold which those responsible for formulating the budget can now decide what level of deficit they want for the year. And having decided that, it is the responsibility of the Debt Management Office to borrow what has been included in the appropriation act from the right sources as efficiently and possible from the market. If it is approved for the domestic market, you borrow from the domestic market as you do by auctioning every month and if it is approved for borrowing from external sources, we go to the international capital market as we did in July this year or we go to the World Bank or the ADB to borrow on a bi-lateral basis as we do from time to time.

Now, under the 3rd Strategic Plan 2013 – 2017, 12 one of the targets is achieving a better structure between domestic and external debts mix in the public debt stock. How far have you been able to go in this direction?

Two things are issues raised from your question. First of all is the issue of what is the “optimal mix” between domestic and external borrowing and that is important, but it is important to appreciate that what influences the “optimal mix” change from time to time. When we exited the Paris and London club debts, our external debts dropped dramatically and relatively, our domestic debts became bigger. The fact that the external debt was reduced drastically from about $35 billion to less than about $5 billion, you know when we got the debt relief of $18 billion and we paid up to $8 billion, that was enough to make the domestic components in percentage to be very high relative to the external one because the other one has been drastically reduced.

In terms of statistics the ratio will change automatically even if we did not change the value or the amount of the domestic borrowing. But in any case, over these years, we have been increasing the level of domestic borrowing deliberately, deliberately to the extent that government needed to borrow but we thought that it was important at that level having exited the Paris Club debt to develop an alternative source of funding and that is the domestic source of funding. Before then, there was no market for long-term fund in the economy and if government wanted to borrow long term, it would not be able to do so because there was no long term market for long term debts in the economy. So, we took advantage of government borrowing to use it to develop the market for long term funds so that if and when government needs to borrow, it has an option to borrow from external or from domestic market and they can mix as against having only one source, which is external. For now, at least government has two reliable sources of borrowing, external and domestic. In the process of trying to develop the domestic market, we necessarily borrowed more from domestic sources because you needed to create the market with that borrowing.

That is why between 2005 in particular and 2012, we have developed a market where you now can assess money whereas before then, you couldn’t have money of more than 91 days and much of the government borrowing from the bond market was through issuance of Treasury Bills, which were 91 days instrument. But now, you know that every month, government can go to the market in order to fund the fiscal deficit, government can issue bonds of five years, 10 years and 20 years, as the case may be. That is the type of change developing the domestic market has achieved. In terms of portfolio mix at that stage, you will find out that there was a strategic decision to do more domestic borrowing, not only just to raise money for government but for the purpose of developing an alternative market and that alternative market has been developed not just for the government but also for the private sector. That is why we said between 2005 and 2012 at least 20 private companies issued their own long term debt instruments to raise long term money for their own purposes, not government this time around.

That shows that that objective has been achieved, the objective of using government borrowing, domestic borrowing to develop the market, not only for government to succeed, but also for the private sector to start issuing their own bonds, so that market has been established. Now that that has been achieved, you now look at a different strategic objective which is, we have this market so that private sector can have access and if and when government needs to borrow from domestic sources, the market is available. Now you have to lay emphasis on other issues. For example, you should lay emphasis on the relative cost of funds, how much does it cost for you to borrow externally and what is the rate of interest externally on the average and what is the rate of interest domestically? And within this period we know that domestic borrowing cost more in terms of the interest rate, it is higher than what you pay for externally borrowed funds.

Sometimes, between 400 and 500, 600 basis points, or about 4 per cent up to 6 per cent difference in the interest rate for the same maturity, for example. So, from that point of view, it makes sense, you will like to rebalance in such a way that you borrow less from the domestic source because of the relatively high cost. A third reason why you might want to do that is that if you reduce government borrowing from the domestic source, you are putting less pressure; you are reducing the pressure on the funds available domestically in terms of the demands for those funds. If you are putting less pressure on the demand for funds available domestically, it will help to bring down domestic cost of funds because relative to the supply of funds, the demand for it is lower. So the cost of funds which is the interest rate will be much lower.

These are all strategies of ensuring a good mix so that at every point in time, the mixture of the portfolio or the optimal mix of the portfolio depends on various strategic objectives we want to achieve. That is why we said in the Medium Term Debt Strategy and in our Third Strategic Plan that going forward, attempts will be made to rebalance so that government borrowing from domestic sources will be moderated while more of the borrowing should tilt towards external borrowing to achieve all these objectives.

Recently, international institutions upgraded Nigeria’s debt sustainability threshold to 56% ratio of the GDP. But in your view, there was no need for Nigeria to move beyond the 40% benchmark. Are you still maintaining that conservative stance in the face of substantial drop in government revenues this fiscal year?

As I said, in terms of where we should be before we get around, Nigeria will have to reach 40 per cent, that is comparing the money it has borrowed with the ability to generate revenues to pay, it should not be more than 40. The Gross Domestic Product, GDP is the measure of the total goods and services produced in the economy and it is this total goods and services produced in the economy that is the base for government to generate revenue. That is why they are related. In our own case, for countries in our group, the ratio should be 40 per cent of the GDP before you get worried that you could be going into dangerous zones. Then because the Nigerian government, the government of President Goodluck Jonathan want to take no risk as far as public debt is concerned, that is why we strongly feel the 40 per cent is good for now. So, up till now, we have made sure that we restricted ourselves around 20 – 21 per cent. So, we are nowhere near the dangerous zone.

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