March 3, 2021

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In this interview, Patience Oniha, the director general of Debt Management Office (DMO) explains the major considerations the informed the Nigerian government’s recent issuance of a new Medium-Term Debt Management Strategy for the period 2020-2023. The policy was approved last Wednesday by the Federal Executive Council (FEC).

Mrs Oniha who spoke on Arise TV Xchange show on Wednesday, said Nigeria’s loans from China are about N3.2 trillion and constitute about 11 per cent of its total external debt.

The official said they are all concessional loans that are project-tied and that there are no reasons for Nigerians to be worried about them.

She said Nigeria’s debt to Gross Domestic Products (GDP) is currently sustainable, but that there is a need for the country to do much better in terms of debt services to revenue.

What are the key considerations of the Debt Management Office towards the preparation of this new medium term debt management strategy document for Nigeria?

Oniha: MTDS is a strategy that guides your borrowing to reflect your economic objectives and then have targets, so that it is measurable. For this specific one, several things influenced the strategy and the target. Let me quickly say that we had actually prepared one before COVID-19 started, we had actually started but of course the assumptions were no longer realistic, so we started afresh. So what’s one of those assumptions? Of course the GDP was now going to be negative in terms of growth, secondly, borrowing was going to be higher so, if you remember the first 2020 Appropriation Act had a borrowing of about N1.7 trillion. That had to be revised and became about N4.2 trillion.

So it was revised to reflect lower GDP, new borrowing, increased spending obviously by the government for COVID-19 related issues whether on social welfare or on infrastructure. But it also included the fact that they are several activities that are going on that will affect the debt stock. So you probably must have heard about the promissory loans that we are issuing to settle the arrears of government, there’s also the Ways and Means advances at the CBN, and then the debt stock of some state-owned enterprises which, because we’re a signatory to IMF, we are required to include in the debt stock. So what I am saying essentially is there is some debt that would come on the balance sheet that has before now, except for 2018 when some promises started appearing. So those were the key considerations, and I think the other considerations which probably came as a shock also to everybody is that the sources of borrowing of course had changed. You remember we were very active in the International capital market before, but with COVID-19 things changed. So those were the key considerations behind the strategy.

Q: What are the contributions and considerations from the Ministry of Finance, central bank and others in putting it together?

Oniha: Okay, let’s just put it this way, it is a direct responsibility of the central bank because in working on a debt management strategy, obviously external reserves are important, exchange rates are important. With the Federal Ministry of Finance, we’re looking at revenues and even with the National Bureau of Statistics we are looking at targets for inflation and interest rates. So, those are the contributions that come from all of those and we analyse and then determine which strategy should be adopted. So those are like inputs into the process but in terms of what that strategy should be in terms of should we be borrowing more or less? What should be the ratio between domestic and external? Those are then left to the debt manager (DMO) to advise on.

Q: Walk us through the three parts to the MTDS targets: the fiscal sustainability, portfolio composition and refinancing risk.

Oniha: I think the very first one to explain is that before now the total public debt to GDP ratio was fixed at 25 per cent, and we have largely operated within that limit even though it has been increasing but we have operated within that limit. But given the facts, some of which I have articulated, we have to increase that from 25 per cent to 40 per cent of the GDP. Remember I said we are going to add, apart from the increased borrowing. So if you look at the medium term expenditure framework you will see that the levels of borrowings are high all the way to 2023, exceeding N4 trillion each year. There was no point leaving it at 25 per cent when you know that you’re going to do new incremental borrowing, you are going to add Ways and Means, you’re going to issue more promissory notes to settle the arrears of government and then you’re going to add the debt of some state-owned enterprises. So the debt to GDP ratio was the first thing that went up.

In terms of fiscal sustainability, truth be told, even at 40 per cent we are within the World bank and IMF limit of 55 per cent. The reality is that that ratio could have been higher, but for consideration of debt services which speaks to fiscal sustainability really. We kept it conservatively at 40 per cent while we watch revenue grow. Similarly, in terms of the debt mix, our target in the previous MTDS was that domestic should be a maximum of 60 per cent and external 40 per cent. We started January 2016, with that ratio being about 85:16 per cent. Meaning 85 external and 16 domestic, and in the implementation of that strategy in the end of 2019 we were able to bring the domestic down to 67 per cent and external 33.

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But what have we done this time in this strategy? We have tried to be realistic and set that ratio to be 70 per cent domestic and 30 per cent external. And the reason for that really is that we have seen that things can happen in the international market that would reduce your ability to access funds from the international market, so it means we have to rely more on the domestic market and this strategy actually recognises that there would be more borrowing from the domestic market than external.

For the refinancing strategy, what we’ve done is that we set target as well there, and said that not more than 20 per cent of the debt stock would mature within a year and also that the average term to maturity of the debt stock would be 10 years. And how have we been implementing it or plan to implement it? Thankfully, we have a 30-year bond in the domestic market and if you observed from the options that we have, we really are not issuing short term instruments, we’re issuing long term instruments all the way to 30 years, so we think with that we would be able to achieve it. In the international market as well we have a 30-year bond, so we think we can continue with that, but ultimately we expect the government revenue profile to improve. But for now, we’re actively borrowing in the long term. And thankfully the rates are reasonable and that has been extremely useful.

Q: But do you know that not many investors are happy with you and maybe with the CBN as well that yield or treasury bills and government securities went to ground zero last year?

Oniha: The reality is, and that speaks to the question you asked about the financing risk. The DMO is actually not actively borrowing to finance the budget using treasury bills. So that gap that investors have some interest at the short end, was previously filled by OMO Bills. We simply refinance the treasury bills because we know that our preference is for longer term instruments so I think the gap came from a shortage if I may use that word, of OMO bills. So we have remained, we haven’t actually decreased the stock of Nigerian treasury bills, we have continued to refinance that so that there would be some liquidity in the market. Having said that, low interest rates are fairly common across the world, whether it is the US dollar rate or the Euro rates. Rates were generally low, typical of periods of recession. So Nigeria wasn’t unique in that direction.

Q: Is the DMO looking into issuing longer dated bond papers locally and what tenor are you looking at and how soon would that hit the market?

Oniha: Typically we work with stakeholders (investors). We have a fairly diverse portfolio for investors, the banks are typically at the short end, so we have the pension funds and then the assets and the fund managers who are becoming extremely significant. So we have those discussions with them before we extend any tenure. Because in reality we’re offering a product and we want that product to be successful, not just one time but on a continuous basis. So we would consider those discussions again. If you remember we introduced a 25- year as well after the 30 years because the longer term investors wanted something between 25 and 30 years. So let’s just say we’re open to considering more than 30 years but we would need to engage with our stakeholders because liquidity is also important not just that we want to issue it to raise funds we also want to be sure that there is liquidity so that we can continue issuing it. That’s the only basis on which investors would buy those securities.

Q: In terms of FX, it seems we have a very serious liquidity problem, what do you at DMO going forward?

Oniha: Well, I would say that the central bank is aware of it. Don’t forget several years back, not so long ago, maybe up till early 2015 we had both an active FGN securities market and active FX market, and those helped to keep both the FGN and FX securities markets going. We know what happened to external reserves and FGN inflows, I think that’s why they’re challenges with FX markets. Having said so, not speaking for the central bank, I’m sure we have seen several things changing from last year to this time regarding FX.

Q: If you look at the debt portfolio, is it likely that Nigeria would request for a debt referral anytime soon?

Oniha: Put it this way, we’re extremely conscious of the debt at this level, which is why we have kept the debt to GDP ratio still at 40 per cent. We didn’t take up the offer from the debt suspension initiative which the World bank and the IMF championed last year because the amount was extremely small relative to our total debt because it was only bilateral debt and then it was for six month. Most of our debt is either multilateral, or Eurobonds and diaspora bonds. So let me just say that we’re looking at all options, but if at all we get to the point of looking for debt relief, I can assure you that it would be looked at with very serious considerations and approvals from very high levels. But the challenge really is to increase revenue. That’s the truth.

Q: Is Nigeria’s debt currently sustainable?

Oniha: I would say that very frankly in terms of debt to GDP, yes. But debt service to revenue we could do much better. So far let’s be very clear that there has not been any default, whether of local or international debt. You’re aware that some countries have had challenges in servicing their external debts but we redeemed the Eurobond that matured on the 28 January, so we are committed to servicing our debt for several reasons.

Q: Are there any concerns about Nigeria’s debt relations with China that the market should be aware of or be concerned about?

Oniha: No. I know that last year there were a lot in the public space about borrowing from China. So all of the loans we had from China, the stock of the bilateral credits which is where China belongs, that we have, is small relative to the total stock. So loans from China are about N3.2 trillion which was about 11 per cent of our total external debt. But that was small. To add, those are all concessional loans and there are no reasons to be worried about them, they’re all project tied which I think Nigeria should be happy about. We can see the physical infrastructure whether it’s the airport, whether it’s the rail lines, whether it’s the roads. So we don’t see any reasons for concerns, they’re all project tied and they’re all concessional really. There was a lot of debate, but we did get proper interpretations both from China and the Ministry of Justice. We also as the DMO had China loans on our website way back june 2020. They’re all concessional loans that are project tied and we are not concerned about them.

Q: Are we looking at a return to double digit yield on government assets — financial papers — anytime soon?

Oniha: You know we are in the market, so it’s a demand and supply thing. We don’t pre-determine the rate, so we look at where the secondary market is. Securities are offered by auctions, it’s the bid that investors bid that we take and compare that to where the secondary market is, because all of those securities are traded in the market. It is unfortunate that inflation is on the upward trend but we are operating the market. It’s a bid offer matter. I think on a second note as well, really the interest rates are lower, it’s good for debt services. Really, really, on our side we shouldn’t be looking for double digits, we pray that inflation comes down.

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