DMO Clarifies Position on $5.5bn Proposed External Capital Raising

The Debt Management Office (DMO) has clarified the plans of the federal government to source funds from the international financial markets.

In a statement, the DMO stated that the proposed $5.5 billion comprises of two components: $2.5 billion new borrowing and $3 billion for refinancing of existing domestic debt.

According to the DMO, the first component of $2.5 billion represents new external borrowing provided for in the 2017 Appropriation Act to part finance the deficit in that budget.

The 2017 Appropriation Act provided for new external borrowing of N1.067trillion or $3.5 billion at an exchange rate of USD/N305.

Out of this amount, $300 million has been raised through a Diaspora Bond that was issued in June 2017 leaving a balance of $3.2 billion out of which $2.5 billion is to be sourced through the international debt capital markets.

The $2.5 billion proposed capital raising, will be used to finance critical road and rail projects included in the 2017 Appropriation Act.

Some of the projects are: construction of a second runway at the Nnamdi-Azikwe International Airport; rail projects including Lagos-Kano, Calabar-Lagos, Kano-Kaduna, Ajaokuta-Itakpe-Warri, Kaduna-Idu; and the Bodo-Bonny road with a bridge across the Opobo Channel.

These infrastructural facilities would lead to job creation and improve the climate for business thereby contributing to economic growth.

The DMO also provided further clarifications on the issue of the proposed $3 billion external borrowing that will be used to refinance some existing domestic debt.

It stated that the federal government domestic debt stock as at June 30, 2017, at N12.033 trillion was 78 per cent of the total federal government debt stock.

 Further, about N3.7 trillion or 31 per cent of the federal government’s domestic debt was in Nigerian Treasury Bills (NTBs) with tenors of less than one year and at interest cost of about 17 per cent p.a.

The short term nature of the NTB stock and the high interest rate associated with domestic borrowing, exposed the public debt to refinancing risk and high debt service costs.

By converting some portion to external debt, the tenor will be extended by at least five years while the interest cost will be significantly lower.

The savings in debt service from refinancing a portion of the domestic debt with a $3 billion borrowing is estimated at over N90 billion p.a.

Advantages include the reduction in the interest cost of borrowing as external borrowing in US dollars is at a much lower interest rate than the domestic market and in so doing, increase stability in the debt stock.

“By this, we mean extending the tenor profile of the debt stock when longer-dated external debt is used to replace short term domestic debt. This would make the debt portfolio more stable, thereby reduce refinancing risk.

“Increasing borrowing space for the private sector: The pressure in the domestic market created by the large government borrowing will be reduced. This will create more space for borrowing by the private sector which will enable them contribute to the growth of the Nigerian economy. In essence, the issue of the government crowding out the private sector will be effectively addressed as the government shifts its borrowing to external sources.

“Increasing Nigeria’s external reserves: external borrowing represent foreign currency into the nation’s external reserve thereby allowing for a stable exchange rate for the naira.

“Other considerations: The proposed $2.5 billion new external borrowing to part finance the deficit in the 2017 Appropriation Act and the refinancing of existing domestic debt through external capital raising of $3 billion, are consistent with Nigeria’s Debt Management strategy, which main objective is to increase external financing with a view to rebalancing the public debt portfolio in favour of long-term external financing in order to reduce the cost of debt and lengthen the maturity profile,” the DMO said.

In contracting new external debt, a conscious effort is made to exhaust all opportunities available from the concessional sources such as the World Bank in order to reduce the level of external debt service.

Furthermore, all borrowings are approved by the National Assembly and are included in the annual Appropriation Acts and the Medium Term Expenditure Framework (MTEF).