DMO Justifies External Borrowing Amid Forex, Reserves Constraints

James Emejo in Abuja

The Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo, monday defended the federal government’s resolve to slant more of its borrowings in favour of external sources as contained in the new Debt Management Strategy (2016-2019) which was approved last week by the Federal Executive Council (FEC).

One of the major elements of the strategy is the remixing of public debt portfolio to 60 per cent domestic and 40 per cent external, from 84 per cent domestic and 16 per cent external in the previous debt strategy document which expired December 2015.

The new national borrowing guide also provided for the remix of the domestic composition of total debt portfolio to a maximum of 25 per cent of short term and a minimum of 75 per cent of long-term compared to the current status of about 31 per cent of short-term and 69 per cent long-term.
Nwankwo said a major advantage of remixing in favour of external debts was that it offered the country cheaper cost of funds, thereby lowering debt servicing obligations.

He also said sourcing funds externally, under the present circumstance, especially from multilateral institutions would help to avoid the risk of crowding out the private sector from access to the domestic markets.

He said:”Therefore, given the momentum government is bound to create in resuscitating the economy, the private sector would be expected to require massive resources as well and it becomes necessary to leave more space for the private sector to mobilize the resources they require to be able to complement government’s initiatives.

“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 improving 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.”

The DMO boss, who noted that the new four-year borrowing plan was appropriate for the times and challenges as well as appropriate for the country’s vision going forward, further justified the rationale behind embarking on external borrowing particularly at a period of unfavourable exchange rate regime and lower reserves.

Addressing journalists in Abuja to provide further insights into Nigeria’s Debt Management Strategy (2016-2019), he described the new document as one which would be broad-based as well as inspire permanent confidence in Nigerians.
He observed that there appeared to be undue concerns over the ability to service external debts adding that ongoing efforts by government aimed at diversifying the economy will ultimately increase items for exports and create job opportunities-conditions he argued could further correct exchange rate vulnerabilities and boost reserves.
Nevertheless, he said in arriving at the final draft, the current debt management strategy had already taken into special account, new challenges including foreign exchange concerns and reserves position.

He said:”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.”

He said:”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 from the domestic markets.

“Therefore, given the momentum government is bound to create in resuscitating the economy, the private sector would be expected to require massive resources as well and it becomes necessary to leave more space for the private sector to mobilize the resources they require to be able to complement government’s initiatives.”

The DMO boss explained that the new strategy took into account the fact that “for now Nigeria’s public debt portfolio is dominated by domestic debts. It also observes that the structure of the portfolio was deliberate during the stage of the country’s economic development after the Paris and London club exits between 2004 and 2006.”

He said the country had in the previous debt management plan taken a deliberate decision to develop its domestic bond market and to do much of the public borrowing from domestic sources so as to develop the domestic bond market.
He said:”That objective has been sufficiently achieved. And therefore, taking into account, that external financing sources on the average are more cheaper than domestic sources, it becomes necessary to slant more of the borrowings in favour of external sources.”

While admitting that it was intuitively genuine for Nigerians to raise concern over the ability to service external debts as they become due, he, however, maintained that “a closer look at the issues shows that the strategy that government has chosen is still the ultimate strategy to arriving at that conclusion and it’s simply to differentiate between a short term static situation and a long term dynamic situation.

“Of course, if we are simply focused on the challenges we have currently, there’s this undue concerns over that ability to service external debts. However, if you take into account that everything we are doing now, all the massive investment we want to do both from the public and private sector as for the purpose of diversifying our economy in a sustained manner so that in the next five to seven years, we would be exporting a variety of processed and primary products, not just one as we are doing today.”

Continuing, he said: If you take into account that in the next five to seven years, the efforts being made by the government and by the private sector to ensure that many of the products we now import will be provided locally if you take into account such things as rice, sugar, flour, wheat, fruit juice and other such item which every Nigerian is convinced that we can produce in abundance to satisfy our domestic needs, we will also have surplus of these to export, then you will appreciate that in the next five to seven years, with Nigerians working hard, and in a focused manner, there’s no doubt that our exchange rate should be much more favourable as the years go by and our reserves will be more buoyant.”

“All efforts are focused on diversifying the economy in a sustainable manner. We have all it takes in terms of variety of opportunities in agriculture and solid minerals for example. No person doubts that with commitments and focus over the next few years,meet should be able to export at five to seven products in addition to export of oil and derived products. So if we are able to do that over the next seven years, there’s no doubt that your foreign exchange condition will be significantly and sustainably better than this, not only as it is today but as it has ever been.”

He said:”So, we should be in the first time, in a much better position that we’ve ever experienced in our economy. As I said, you complement this with the fact that much of the foreign exchange expenditure we make now are avoidable. So when you calculate it on both the demand and supply side, you find out that certainly in the next five to seven years or even within a shorter period, our foreign exchange situation will be much more favourable.
So thinking in terms of medium to long term, the strategy is about right because we are not bogged down by our currently situation, rather we are inspired on where we must be going forward. The focus of our diversification is on export manufacturing export oriented agriculture and exposed oriented services but this would be complemented by the fact that we have credible capacity to substitute most of the things we now import.”

He added:”I wish to reiterate our believe that Nigeria and Nigerians should not be bogged down by the current challenges, rather we should take advantage of these challenges as stepping stone to achieve our ultimate position in terms of our position in the global economy. 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, they 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 further 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.”