With a provision of N2.2 trillion deficit in the 2016 budget, the Federal Government is under obligation to establish sources for financing the deficit. There are two established sources open to government in financing its budget gaps.
They are external and domestic borrowings. To facilitate funds borrowing on government’s behalf using these channels, is a government agency – Debt Management Office (DMO). Established in year 2000 to centrally coordinate the management of Nigeria’s debt, which was hitherto done by myriad of offices under the finance ministry and Central Bank of Nigeria, the DMO designed a framework known as Debt Management Strategy (DMS).
The framework serves as a working guide for borrowing and management of the nation’s debt profile in a coordinated and well structured pattern within specific duration. The maiden Debt Management Strategy (2012 to 2015) expired weeks ago, while a new subsisting DMS covering (2016- 2019) was unveiled recently by the DMO.
After exhausting the maiden debt management strategy, which covered (2012-2015), the DMO, last month, announced the new debt structure package, which has a three-year life span (2016-2019).
The document, earlier endorsed by the Federal Executive Council (FEC), was presented by the DMO’s Director- General, Dr. Abraham Nwankwo, at a recent interactive session with journalists.
He explained that the office took cognisance of the shift in the economic focus of the President Muhammadu Buhari administration, with emphasis on diversification of the economy to the non-oil sector, and the administration’s strong preference for infrastructure development for emancipation of industries.
The DMO boss said: “The Federal Government has embarked on a number of sector reforms with a view to diversifying the economy away from crude oil, and boosting productivity in agriculture and solid minerals. It has also committed to developing key infrastructure projects in power and transportation (road, rail and aviation).
The new policy focuses on the utilisation of all the borrowed amounts to fund the budget deficit and the amounts would be specifically allocated to fund identified infrastructure projects. Efforts are also being made to improve governance and efficiency in fiscal operations of the government so as to reduce wastages and leakages.”
Unlike the previous debt strategy plan (2012-2015) that gave priority to domestic borrowing, the new strategy (2016-2019) adopts a mixture of both domestic and external borrowing for the financing of government projects.
However, preference is given to external borrowing sources and cogent reasons were given in support of this decision. Justifying the DMO’s reasons for adopting external borrowing preference, Nwankwo said: “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 debts.
“After the Paris and London clubs exit 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.
“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 84per cent domestic and 16per cent external to 60per cent domestic and 40per 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 31per cent short-term and 69per cent long term to a maximum of 25per cent short-term and a minimum of 75per cent long-term. So, we are remixing between external and domestic and we are also remixing within the domestic, between short and long-term.
“And when we look at the opportunities and possibilities, which are very credible, given our resource base, given the number of things we can do better than we’ve ever done, there’s no doubt then that in the next few years, there will be significant improvements in employment generation, poverty reduction and in the living standards of our people and more importantly, we should be inspired by the fact that the picture of the future, which we see is a sustainable one; it’s not one that will be bedeviled as in the past by volatilities in the oil market.”
Attractions for new strategy
The agency’s boss explained that in the course of a painstaking research on the new debt strategy, the team spotted some advantages, which prepared the ground for its adoption. “One of the major advantages of remixing in favour of external debts is that first, we will be able to achieve cheaper cost of funds, therefore lower debt servicing but more importantly, we will be avoiding the risk of crowding out the private sector from access to the domestic markets.
“As you know, within the context of government’s economic programme, which requires massive investment in infrastructure, and diversification of the economy, the private sector is still expected to play the lead role so that as government makes its own expenditure in infrastructure and improves the business environment, you expect the private sector to key in, in developing the various sectors of the economy including agriculture, solid minerals, manufacturing among others.”
In the new DMO borrowing template, a ratio of 60:40, the agency said more money will be kept in the hands of private investors in order to spearhead a private sector driven economy.
This, it explained, will drive the agenda of the present administration of diversifying the economy and creating more jobs.
With the exit of Nigeria from the debt trap of the Paris and London clubs, the DMO’s newly unveiled debt management strategy, if religiously and strictly followed as borrowing plan, will help in diversifying the economy, positioning the country for export and above all, creating room for ease of debt service payment.