Nigeria’s Debt Profiling: DMO Reacts To Daily Trust Report

The Debt Management Office, DMO, has swiftly reacted to a report published by Daily Trust on Nigeria’s debt profiling.

In a statement made available to Aproko247, the body shed more light on the issue. Below is their reaction.

The Debt Management Office, DMO, routinely briefs stakeholders and the general public on pertinent issues relating to public debt management.  In this context, we have noted some newspaper publications such as the one on the front page of Daily Trust of May 11, 2015 titled, “Nigeria’s debt rises by $18bn in 4 years”.  The connotation of the headline could wrongly suggest that there was something peculiar with the growth of public borrowing during that period.  This is misleading the public. Accordingly, it is necessary to:

(a) compare the growth rate of public debt during 2011-2014 with those of previous periods: 2004-2007 and, 2008-2011.

(b) Understand the relative contexts of the three periods being compared.

(a)     The comparative debt stock growth rate is shown Table I

TABLE I

Period	Growth of Public Debt Stock
2004-2007	USD24.0 billion
2008-2011	USD20.1 billion
2011-2014	USD18.3 billion

It is evident, that contrary to the insinuation of the media, 2011-2014 experienced the lowest growth in public debt among the three periods.

(b)     Moreover, it is necessary to understand the context of the three periods being compared:

• A most important observation is that unlike the other two periods, 2011 – 2014 includes the domestic debts of States and the FCT.  The domestic debt data of States were not included in 2004-2007 and 2008-2011 because they were not then available.  It is a credit to the Government during the period that the long-standing problem of lack of accurate knowledge and records of what States owed domestically was solved.
• The period, 2008 – 2011 was impacted by two major developments:
• In 2010 there was a general wage increase (53.7% average increase) for all categories of public servants, including political appointees. The funding of this depended largely on increased domestic borrowing.
• The global economic and financial crisis (2008-2010) occurred within the same period. All economies engaged in counter-cyclical public spending, using what was popularly referred to as stimulus package. In Nigeria, the Government was able to effectively play this role by borrowing from a domestic bond market, which to the country’s credit, had been developed as an alternative source of funding after the exit from the Paris and London Clubs debts in 2005 to 2006.

The impact of the spike in the domestic debt stock resulting from the two developments described above has remained a major factor in the high level of public domestic debt stock, not only of that period but also of the later period, 2011 – 2014.

In view of the above,  it is worthy of commendation that during 2011-2014, in spite of the exceptional pressures, the growth rate of the debt stock was even lower than during the other periods.

Further, to make 2011 – 2014 more comparable with the other periods, it is necessary to use data that excludes States and FCT domestic debt data, since the data were not even available during the other two periods. This is the essence of Table II.

The resulting comparative public debt growth data are as follows:

 TABLE II

Period	Growth of Public Debt Stock
2004-2007	USD24.0 billion
2008-2011	USD20.1 billion
2011-2014	USD15.2 billion

Indeed, on a more comparative basis, 2011 – 2014 happens to be the 4-year period among the three, which has the lowest increase in public borrowing. This is in spite of the fact that it was subjected to the impact of the high level of domestic borrowing caused by two special domestic and global developments in the previous period – the 2010 wage increase and the 2008-2010 global economic and financial crisis, which the period 2004 – 2007, in particular, was free from.

The Claim in the Publication that “Current debt profile higher than it was before Nigeria secured debt relief from Paris Club”

While the Federal Government’s debt stock has grown, a comparison with the figures before the exit from the Paris Club should not be on absolute figures alone. The size of the GDP and the structure of the debt must also be taken into consideration.  The GDP was N11.8 trillion in 2004 but N89.0 trillion in 2014; relatively, in net present value terms, the Debt-GDP ratio was 51.6% in 2004 but 12.6% in 2014, which indicates a much better sustainability condition.  While external debt accounted for 77% of the debt stock, the domestic debt represented 23% of the stock in 2004. The comparative ratios as at the end of March 2015 were external: 18% and domestic: 82%. The reduction in the proportion of external debt has reduced the Government’s currency risk, which should be appreciated at this time when the Naira has been depreciating against major currencies. The Government has also, through domestic borrowing, developed the domestic capital market to create an avenue for the private sector to access long-term finance.

The Daily Trust quoted an anonymous Harvard trained economist making remarks on high interest rate paid on government securities, the high yields earned by banks in the securities market, use of borrowed funds to fund salary and overheads and the assertion that “No serious country gives such high interest rate on securities except Nigeria”.

It is necessary to clarify that interest rates are not given out by government: they are determined by market realities.  It is not useful to remark on interest rates on securities without linking them to the Monetary Policy Rate (MPR) and the rate of inflation.  Such a fragmented analysis by the Harvard expert is misleading and dangerous.   A comparison of interest rates should be based on economies with similar characteristics and level of development. Comparing interest rates in Nigeria with rates in countries such as the United States or the United Kingdom would be inappropriate. A sampling of the current rates on the 10-year Bonds of the following countries shows: Nigeria – 13.72%; South Africa – 8.09%; Brazil – 12.69% Kenya – 12.59%; and, Uganda -17.190.  Ghana does not presently have a 10-year local currency bond, its 5 and 7 years Government bonds have coupons with rates as high as 18% and 26%.

The increase in the domestic debt stock was due principally to the financing of the deficits as appropriated in the annual budgets. The budgets include both capital and recurrent expenditure, thus, the deficit cannot be attributed to a single item in the budget. The Government’s borrowing also increased due to the need for additional spending by the Government to provide a stimulus package for the economy between 2008 and 2010 as a countercyclical measure at the time of the global economic and financial crisis. This intervention limited the effect of the crisis on the Nigerian economy and prevented a recession.  Moreover, the criticism of reliance on borrowing to fund the wage bill should be tied to the size of the public sector wage bill resulting from the 2010 general wage increase of more than 53%.

In the case of external borrowing, which are mostly from the multilateral financial institutions, the utilization of the proceeds are tied to projects – in power, agriculture, health, education – and other infrastructure and human development projects.

In view of the foregoing, the expert economist’s blame on the “Finance Ministry’s Poor Planning and reliance on bonds………”  is misplaced and mischievous.  For the avoidance of doubt, all public sector borrowings are done in accordance with the mandate of the National Assembly via the Appropriation Act.