DMO: Sustainability of Public Debt Dependent on Significant Revenue Growth

* Seeks effective implementation of PIA

Ndubuisi Francis in Abuja

The Debt Management Office (DMO) has stated that going forward, the sustainability of Nigeria’s public debt requires that government’s revenues are enhanced significantly while continuing to explore more concessional and semi-concessional sources for its borrowing and refinancing needs.  
This was part of the recommendations of the DMO in its 2021 Debt Sustainability Analysis (DSA) report released on its website yesterday.

Nigeria’s total public debt stock comprising the debt obligations of the federal government, states and the Federal Capital Territory (FCT) rose from N39.56 trillion in December 2021, to N41.60 trillion ($100.07 billion) in the first three months of 2022, raising concerns over the sustainability of the mounting debt stock.
The DSA report revealed that despite increased borrowings, total public debt in terms of Debt-to-Gross Domestic Product (GDP) remained at a moderate level, while Debt Service-to-Revenue ratios were high.

According to the DSA, the projected ratios of total public debt to GDP at 26.1 per cent and 25.8 per cent in 2022 and 2023 respectively, were below Nigeria’s self-imposed limit of 40 per cent and within the 55 per cent limit recommended by the World Bank and the International Monetary Fund (IMF), as well as the Economic Community of West African States’ convergence threshold of 70 per cent.

“The ratio remained within the 40 per cent limit when Guaranteed Loans and the Ways and Means Advances at the Central Bank (CBN), were included.  
“Going forward, the sustainability of the public debt requires that government’s revenues are enhanced significantly while the Government continues to explore more concessional and semi-concessional sources for its borrowing and refinancing needs,” the report stated.

The DSA noted that based on the projected 2022 GDP of $$448.32 billion and Nigeria’s country-specific Debt to GDP limit of 40 percent, the Borrowing Limit for the fiscal years 2022 and 2023 will be about US$62.21 billion or N25.586 trillion (at an exchange rate of $1/ N411.3).
It stressed that in line with Nigeria’s Medium-term Debt Management Strategy, 2020-2023, the proposed New Borrowing could be raised from both domestic and external sources.

These recommended maximum amounts that could be borrowed would depend on absorptive capacity of the domestic debt market, and the options available in the external market, in line with the revised Medium-Term Debt Management Strategy, 2020-2023.
The borrowings would be long-term and would be strategically deployed to fund priority infrastructure projects, it added.
The DSA also recommended the strengthening and continued implementation of the Strategic Revenue Growth Initiatives (SRGI) to shore up government revenues, to reduce financing pressures, and expand the fiscal space.

Also recommended included sustaining the implementation of the National Development Plan (NDP), 2021-2025 to maintain the recovery in the economy; rationalising expenditure by focusing on priority spending on growth-enhancing sectors of the economy.

Other recommendations included effective implementation of the Petroleum Industry Act (PIA) 2021 which was expected to attract investment in the oil and gas sector; enhancing growth in non-oil export through fiscal and trade incentives, maintaining relative stability in the foreign exchange market.
Part of the DSA recommendations also included encouraging private sector participation in funding infrastructure projects through public-private partnership arrangements, improving and sustaining political and macroeconomic stability, as well as addressing security and infrastructural challenges, to attract Foreign Direct Investments (FDIs).

Meanwhile, the DMO has explained that the federal government’s appetite for Eurobond was to finance budget deficits and capital projects.
In a statement posted on its website, the Debt Management agency said it was providing clarifications on the comment allegedly made by a member of the Monetary Policy Committee of the Central Bank of Nigeria (CBN), expressing worry over the country’s rising debt, particularly the increasing accumulation of Eurobonds in the external debt component.

According the DMO, the statement may have been made without due consideration of the government’s borrowing needs as captured in the annual budgets, Medium-Term Expenditure Framework (MTEF), as well as, the Debt Management Strategy (DMS).
It stated that the borrowing needs were derived from the Annual Budgets while the borrowing mix is based on the subsisting DMS.

“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 in order to access cheaper and long tenored funds, whilst taking cognisance of the limited funding envelopes available to Nigeria, due to Nigeria’s classification as Lower-Middle-Income country,” it said.

Given the size of new borrowings in the annual budgets over the years, the DMO argued that it would not have been proper for the FGN to raise all the funds from the domestic market as this would result in the Government crowding out the private sector and raising borrowing rates.

“Consequently, some part of the required funding has to be raised externally. While loans from concessional sources such as the International Development Association (an arm of the World Bank) are relatively cheaper as stated above, they are limited in amount. In addition, they are not available for financing infrastructure and other capital projects.

“Thus, Nigeria accesses concessional and semi-concessional loans as may be available, while issuing Eurobonds to part finance the annual budgets and the infrastructure projects contained therein.

“On the issue of Eurobonds likely lead to debt distress, the DMO reiterates the need to generate more revenues significantly beyond their current levels. Data from the World Bank show that compared to a number of advanced and developing countries who have higher Public Debt to GDP Ratios than Nigeria, Nigeria has a much lower Revenue to GDP Ratio.

” The World Bank’s Economic Outlook for 2020 showed that in 2020, Nigeria’s Revenue to GDP Ratio was 6.3% placing it at number 194 out of 196 countries.

“The DMO explains that while the government continues ongoing efforts to diversify and grow revenues, the public should take into cognisance other benefits of Eurobonds which include increase in the level of external reserves and opening up opportunities for the private sector to issue Eurobonds since January 2011 when the debut Sovereign Eurobond was issued by the DMO on behalf of the FGN.

“Many Nigerian banks including United Bank for Africa, Access, Zenith and Fidelity have issued Eurobonds to raise capital,” the statement added