Road to economic diversification, recovery

  •Oil price decline persists

Drop in crude oil prices, which constitutes over 85 per cent of Nigeria’s export earnings, means several things for the economy. With oil revenues still low, and the government’s commitment to deliver on its infrastructure development plans unshaken, a three-year debt management strategy unveiled last week by the Federal Government seems a viable option for the economy recovery.

The debt plan, to be managed by Debt Management Office (DMO), would run from 2016 to 2019 with a marginal increase in external borrowing, increased commitment to capital projects execution and long term borrowing plan.

The DMO Director-General, Dr. Abraham Nwankwo, who unveiled the debt management strategy in Abuja, said the plan was approved by the Federal Executive Council, and would boost economic recovery and diversification.

The DMO boss explained that the focus of the new initiative is to develop a debt management strategy that would ensure that in the face of macroeconomic and other financial constraints, the cost and risk profile of the public debt portfolio remains within acceptable limit over time.

The plan is also in line with President Muhammadu Buhari’s vision to generate maximum employment, reduce poverty and increase the living standard of Nigerians. Dr. Nwankwo further stated that for this to be effectively achieved, the government is making positive efforts in diversifying the economy as against the backdrop of structural collapse in oil prices and oil revenue.

“The Debt Management Strategy we are going to pursue over the next four years takes into account the fact that for now, Nigeria’s public debt portfolio is dominated by domestic debt. After the Paris and London Club exits between 2004 and 2006, the country took a deliberate decision to develop its domestic bond market and to do most of the public borrowing from domestic sources so as to develop the domestic bond market, that objective has been sufficiently achieved,” he said.

“And therefore taking into account that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources. Therefore, one of the major elements of this strategy is that over the medium term, we will strive to remix the public debt portfolio from 84 per cent domestic and 16 per cent external to 60 per cent domestic and 40 per cent external.

“In addition taking into account other factors, the fact that over the next four years public borrowing proceeds will be devoted to capital expenditure an element of the strategy is to ensure that we remix the current status of about 31 percent short-term and 69 percent long-term to a maximum of short-term 25 per cent and the minimum of long-term 75 per cent.

He said Nigeria is remixing between external and domestic; and also remixing within the domestic, between short and long-term.

Justifying the  decision to remix in favour of external debt, he said the country will be able to achieve cheaper cost of funds, lower debt servicing and avoid the risk of crowding out the private sector from accessing the domestic market, adding that the private sector is still expected to play the lead role to complement government’s effort.

While dismissing concerns on government’s decision to focus on external borrowing in a country currently facing foreign exchange constraints and harsh macroeconomic environment, he disclosed that the new strategy is the best for the economy as the government is presently making sustained efforts on diversifying the economy.

He projected that in the next five to seven years, export proceeds accrued to the economy will rise, making the exchange rate favourable. While encouraging Nigerians that the future will be sustainable, the DMO boss further stated that the citizens should take advantage of the current challenges as a stepping stone to actualise their vision and achieve their dreams.

“One of the questions that will naturally arise and which many of you have asked us, has to do with the challenge of foreign exchange constraints. At this point, our exchange rate is not very favourable and our reserves are not as buoyant as they used to be and people are raising the question while would you go for external borrowing when you have foreign exchange constraints,” Nwankwo said.

He explained that a closer look at the issue shows that the strategy the government has chosen is still the optimum strategy and the secret to arriving at that conclusion is simply to differentiate between a short-term static situation and a long-term dynamic situation.

“If we are simply focused on the challenges we have currently, there will be undue concerns about our ability to service external debt, however if you take into account that everything we are doing now are for the purpose of diversifying our economy in a sustained manner, so that in the next five to seven years, we will be exporting a variety of processed and primary products. We have all it takes in terms of variety of opportunities in agriculture and in solid minerals for example. The efforts being made by the government and private sector is to ensure that many of the products we now import will be provided locally, such as rice, sugar, flour, wheat, fruit juice, we can produce in abundance to satisfy our domestic needs and also have surplus to export,” he said.

Nwankwo was upbeat that in the next few years, there will be significant improvement in employment generation, poverty reduction and living standard of the people, adding that as part of the new strategy, the DMO will develop new products particularly the Federal Government saving bond and also diversify the sources of raising funds domestically.

The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, agreed with Dr. Nwankwo. He explained that with declining government revenues from oil, budgetary allocations alone may not be enough to finance the infrastructure deficit in the country.

Prof. Ekpo admitted that the debt option is still the most viable at this time. He said Nigeria’s rebased $510 billion Gross Domestic Product (GDP) economy gives it more room to borrow more to bridge infrastructure gap.

For Prof. Expo,  Nigeria could borrow up to 40 per cent of its GDP externally, adding that the DMO has in the past, demonstrated good negotiation skills in dealing with the country’s debt matters, either with internal or external creditors.

He believes the viable option for government to take is to borrow from the World Bank or African Development Bank (AfDB) to fund the key developmental projects.  Government can also borrow internally to achieve the feat, but disclosed that internal borrowing is always short term while external borrowing has longer tenor.

Besides, the Nigeria Trust Fund with the AfDB can be used as leverage while borrowing from the bank, adding that borrowing from the International Monetary Fund (IMF) will be expensive because Nigeria is now classified as a Middle Income Country on the Fund’s list.

Ekpo said the DMO has the capacity and constitutional role to advise the government on these choices. “The World Bank rates are cheaper with longer term. The DMO can also leverage on the Nigeria Trust Fund with the AfDB to get better deal on new loans needed to fund developmental projects,” he said.

A report by FBNQuest titled: ‘A planned pick-up in FGN external borrowing’, said: “The DMO has set a medium-term target of a 60/40 blend for the FGN’s domestic and external obligations in its Debt Management Strategy, 2016 to 2019. The blend as at end-2015 was 84/16. The target is unchanged from the previous strategy for 2012-15, and is driven by relative servicing costs and the DMO’s determination not to crowd out the private sector”.

On the costs, the DMO shows the weighted average interest rates for domestic and external obligations at 13 per cent and 1.74 per cent respectively at end-2015. Naira rates are far higher than dollar rates.

More significantly, the difference in the weighted averages reflects the fact that the FGN’s external debt is predominantly contracted on concessional terms from the World Bank Group and the African Development Bank (AfDB). This burden amounted to $10.73 billion at end-2015, and the only substantial borrowings on market terms are Eurobonds totalling $1.5 billion.

FBNQuest said the strategy was prepared before the liberalisation of exchange-rate policy by the Central Bank of Nigeria (CBN).

It said the 2016 budget projects net domestic and external borrowing of N940 billion and N900 billion respectively. A figure of N1.20 trillion for the domestic element in an earlier version was reduced for fear of crowding out.

“For the external element, the Federal Ministry of Finance has suggested a possible Eurobond issue in the third quarter. We assume that it would be mostly concessional, and are waiting for news of the FGN’s negotiations with the World Bank and the AfDB,” it said.