The Debt Management Office of Nigeria (DMO) has made a clarification on the federal government’s borrowing need, dispelling sentiments that the federal government’s appetite for Eurobonds may lead Nigeria to debt distress.
The debt office made this disclosure in a press release on its official website as a response to the comments of Asogwa Robert, a Monetary Policy Committee (MPC) member of the Central Bank of Nigeria.
The remarks of Asogwa Roberts raised emotional confusion and tension about the federal government’s borrowings when he expressed his concerns about the government’s desire for Eurobonds amid exchange rate risk and high interest rates.
He stated that “The escalating fiscal sector deficits with the attendant rising debt ratios are part of the weak links in the domestic economic environment.
“The poor revenue growth in a period of expanding government expenditures has continued to soar the budget deficit levels in the first quarter of 2022, similar to the trend witnessed in 2021.”
Clarifications Made by DMO
The DMO explained that it would not be proper for the FGN to raise all the funds it needs domestically. Considering the huge borrowings in the Annual Budgets over the years, sourcing funds from the Domestic Market would result in the Government crowding out the private sector and raising borrowing rates.
It also said that Asogwa Roberts’ statement “may have been made without due consideration of the Government’s borrowing needs as captured in the Annual Budgets, Medium-Term Expenditure Framework, as well as, the Debt Management Strategy”.
The DMO further explains that “the borrowing needs are derived from the Annual Budgets while the borrowing mix is based on the subsisting Debt Management Strategy”.
“Successive Debt Management Strategies have often indicated that the Federal Government of Nigeria’s (FGN) preferred source of external borrowing is concessional sources rather than commercial sources such as Eurobonds. For instance, one of the objectives of the Debt Management Strategy 2020 – 2023 is Maximizing funds available to Nigeria from Multilateral and Bilateral sources to access cheaper and long-tenor funds, whilst taking cognizance of the limited funding envelopes available to Nigeria, due to Nigeria’s classification as Lower-Middle-Income country”.
Nigeria prefers concessional sources of external borrowings because they are relatively cheaper and extended on long terms making them substantially more generous than regular commercial loans. However, accessing concessional loan sources such as the International Development Association (an arm of the World Bank) are limited in amount, and are not available for financing infrastructure and other capital projects.
On the issue of loan leading to distressed debt, DMO emphasizes the need to raise additional revenue significantly more than the current levels.
What you should Know
One of the benefits of FGN’s Eurobonds is that they increase the level of external reserves and also open up opportunities for the private sector to issue Eurobonds.