Nigeria is finally facing up to its weighty debt problem, lobbying hard for debt relief from international creditors and improving debt management at home. It is a long overdue move and made possible only because finance minister Ngozi Okonjo-Iweala is wrestling back control of government finances and slashing deficit spending.
In July, Nigerian vice-president Atiku Abubakar was in London canvassing support for debt relief. About 83% of Nigeria’s external debt is owed to Paris Club creditors. Bilateral debt rescheduling agreements have been signed with 12 of the 15 members and the aim is to sign similar accords with the remaining three members by the end of the year.
External debt is an emotive issue, considered by most Nigerians to be illegitimate because it was accumulated under successive military regimes. On a recent visit to the country, IMF managing director Rodrigo de Rato told Nigerians that the surest way to secure debt relief was to implement economic and civil service reforms genuinely and transparently. Although Nigeria owes nothing to the IMF, Mr de Rato’s words echo those of Paris Club negotiators, who want to see irrefutable reform progress before committing to deeper debt relief or cancellation.
Mansur Muhtar, director general of Nigeria’s Debt Management Office, says Nigeria is in open dialogue with creditors and acknowledges that progress hinges on the momentum of reform. “At the end of the day, that things are changing for the better as a result of the reform will be self-evident,” he says.
Public debt management in the past two decades has been dismal. Fiscal mismanagement has expanded public debt and contributed to debt servicing difficulties. Moreover, says the IMF, the government’s large borrowing needs have been poorly managed, with scant consideration to the implications of risky debt structures, and extensive reliance on non-market sources of financing, macroeconomic stability and the functioning of the financial markets. The central bank’s role as the government’s debt manager has also undermined its ability to control liquidity effectively. And shortcomings in monetary management have impeded the development of the government securities market.
Nigeria’s public debt burden is high. It amounted to N5600bn ($42bn), equivalent to 74.5% of GDP and 138% of non-oil GDP at the end of 2003. External debt of $32.8bn (57% of GDP) accounts for the bulk of it. Total domestic debt amounted to N1300bn (about 18% of GDP) at end-2003, and most of it is securitised.
Hidden burdens
But this is only part of the story. The total public debt burden is estimated to be higher, if expenditure arrears, contingent liabilities and domestic securitised debt of state and local governments are included. The authorities admit that no official tally has been taken but the best estimate suggests that domestic debt could amount to about 40% of GDP.
Federal government debt also excludes potential liabilities such as the domestic debt of major state-owned enterprises, including the Nigerian Electric Power Authority, which is estimated to be about N350bn (4.5% of GDP) at end-2003 and is expected to be transferred to the Debt Management Office (DMO) by end-2004.
Nigeria’s debt burden compares unfavourably with most non-highly-indebted poor countries in Africa and most emerging market economies. It has led to periods of debt servicing difficulties. Nigeria has largely been cut off from international finance since the late 1980s, when it defaulted on its external debt obligations. It continues to accumulate arrears on its external debt with service in local currency terms equivalent to the size of the federal government’s 2004 capital budget, according to IMF figures.
The government also faced domestic debt-servicing difficulties in the late 1980s as market rates rose in the wake of interest rate deregulations.
Bad practice
Typically, the government has financed its borrowing needs with advances from the Central Bank of Nigeria (CBN) ways-and-means account. At the end of the year, this has been converted into three-month treasury bills. Because demand usually fell short of supply, the CBN typically purchased most of the issue at below the market-clearing rate.
According to Dr Muhtar, a number of problems have arisen as consequence. First, the short-term maturity structure exposes the government to high roll-over risk. According to IMF figures, about N825bn (equivalent to 75% of base money and 40% of broad money at end-2003) is being refinanced on average every 91 days in 2004. Any change in money-market conditions feed through to higher debt-servicing costs, impacting on the budget.
Second, there is a severe “bunching” problem – a large volume of securities maturing on a certain date. Dr Muhtar accepts the IMF conclusion that this reflects a lack of cash management planning and issuance strategy.
Third, there is an inherent mismatch in the duration of the government’s assets and liabilities, with longer-term investment projects being financed with short-term money. There are also unintended consequences, specifically the inflationary impact of borrowing from the CBN at below market rates.
Reform objectives
The main objective of the public debt management reforms is to improve the effectiveness and soundness of overall public debt management in Nigeria. The reforms are focused on three key areas: institutional, external and domestic debt management and reforms at the subnational level.
The establishment of the DMO, into which all functions related to debt management were consolidated, was aimed at strengthening control, accountability and oversight of public debt management. Previously, responsibility for debt management was scattered across numerous departments and agencies. The DMO’s role has been buttressed by a new legal framework.
The DMO has made some progress, if nothing else to reconcile all external debt obligations of both the federal as well as state and local governments. In terms of domestic debt management, it is focusing on financing the deficit in a non-inflationary manner; lengthening the maturity structure and promoting capital markets development.
At the core of these initiatives is the government’s bond issuance programme, a combination of fixed issues and floating rate notes. The bond issuance programme would allow for reopening at these maturities to gradually build up the outstanding volume to the desired levels and develop a yield curve at key benchmarks. The bonds would be listed at the Lagos Stock Exchange to allow for secondary market trading.
Bond issuance
As part of the domestic debt management reform, the federal government announced in 2003 that it would seek to raise N150bn through the issuance of long-term bonds – its first issuance since 1986 – to finance the 2003 budget deficit. The federal government bonds were issued in tenors of three, five, seven and 10 years. The overall take-up fell short of expectations, with total subscription amounting to N72.5bn. While the three-year fixed-rate bond was oversubscribed, there was little interest for the longer-dated bonds, suggesting a continued perception of high default risk.
Weak demand for the 2003 bond issues was also put down to practical issues – establishment of the trading platform and listing on the Lagos Stock Exchange – as well as regulatory issues. Also, there was no medium-term budget outlook, making it difficult to predict future gross domestic borrowing needs. All these factors are being addressed.
The government has prepared a draft Fiscal Responsibility bill, with guidelines on debt management for the federal, state and local governments. Among its most significant provisions is that all tiers of government would only be able to borrow for investment purposes and would be subject to debt limit, and the CBN would be prohibited from purchasing new issues of government securities.
The proposals have received a cautious endorsement from the IMF.
