FG Cautioned against Securitising N23.7tn Ways and Means

Kunle Aderinokun

The federal government has been advised to adopt options within the Debt Management Office (DMO) Act to refinance N23.7 trillion of Nigeria’s total debt financed through ways and means, instead of securitising it.

 The Chief Executive Officer, The CFG Advisory, Adetilewa Adebajo, who gave this advice, proposed a resolution trust Special Purpose Vehicle (SPV) backed by legislation within the current DMO Act and framework for refinancing of the nation’s burgeoning debt as against securitising the ways and means debt financing on the CBN balance sheet.

Adebajo, in an exclusive with THISDAY, disclosed that after his informal consultation with key capital market operators, Senate and House leadership as well as relevant government agencies, he had made a number of suggestions.

He, specifically, suggested that the federal government should, as a matter of urgency, stop financing the country’s debt through ways and means, which he described as illegal.

The economist asked: “How do you obtain N23 trillion debt from the capital markets when the total current domestic debt is N21 trillion?”

According to him, credit to the government last year increased by N11.3 trillion to N24.7 trillion, while credit to the private sector increased by N6.6 trillion to N42.2 trillion. Meanwhile, total Money Supply as of January 2023 was N53 trillion, “and we need to refinance N23 trillion of ways and means.”

 “On first thoughts, we need to create a secondary marketplace with liquidity and a standby line from the government to create a special asset class to refinance the ways and means,” he proposed.

Adebajo argued further: “DMO annual debt maturity profile and yearly fund raising can’t cover this quantum of ways and means. Money supply only increases by N5 to N6 trillion annually. DMO has a critical role to play.

“I have reviewed the DMO Act, there are statutes we can leverage. The DMO act can be expanded to create a resolution trust vehicle for FGN/CBN similar to AMCON to ensure we stay within the tenets of the law. Consultations with both Senate and House leadership suggest favorable disposition to new legislation, but we also need to create the financing structure to support that legislation.

“I have developed three financial model options, I will share with MOF/CBN and relevant agencies, with a legal and regulatory framework. I believe either of these three finance models can work, depending on the political preferences and will.”

According to him, the issue now was the capital market.

“Is the FGN crowding out the private sector? This is leading to the sluggish rate of GDP growth, and the ways and means putting upward pressure on the inflation trajectory. A recent basket of goods and services we surveyed shows inflation closer to 30per cent.

“FGN borrowing is increasing at 75per cent while the private sector is going up at only 25per cent. FGN is already sitting on about N15 trillion or about 30 per cent of the N50 trillion bank deposits via the statutory CRR.

“The banks also don’t lend all the deposits as they are active in trading treasury bills. Sixty-five per cent or N9.5 trillion of the N15 trillion pension funds already invested in FGN securities. “The Insurance industry and other institutional investors at best have a capacity of N1.5 trillion.

“We unfortunately cannot list FGN on the equity market to optimise the FGN’s capital structure.”

“The N23 trillion will overwhelm the entire Nigerian capital markets and therefore requires a special intervention vehicle,” he emphasised.

Adetilewa, therefore, said the need for urgent structural reforms within the fiscal regime could not be overstated.

 “The removal of subsidies will bring in $10-15 billion additional revenues annually and we need to step up the privatisation and concessioning programme, and right-sizing the government. This will significantly ease the pressure and improve government revenues and cash flow going forward.”

He believed, “The right policies will help improve the country’s perception and improve our sub optimal international bond ratings which has increased the cost of borrowing. A good rating will help reduce our cost of borrowing.”

“Our debt servicing costs have exceeded our revenues. The CBN MPR rate hikes to tame inflation will stifle growth as real rates in the system are still negative as a result of the inflation locust.”

Noting that, the CBN, DMO and fiscal responsibility acts were designed with circuit breakers to ensure financial stability, Adebajo lamented, “It is unfortunate that we find ourselves where we are but we need to strengthen and not break these laws.”

 “The Ukraine/Russia war provided an opportunity for a windfall for Nigeria. While other oil producers are enjoying massive surpluses, we are contending with deficits and a 23 Trillion Naira illegal ways and means debts, we need to get off the CBNs balance sheet. If we do not stick to these guidelines of these laws, we can be headed towards Zimbabwe and Venezuela status,” he added.

He called for the review of “all the intervention loans on the CBN balance sheet,” stating that, “The CBN should make a provision for the bad loans and the good loans transferred to the Bank of Industry, Bank of Agriculture and Development Bank of Nigeria.”