Correcting misconceptions about government borrowing, by Patience Oniha

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In what appears to be inadequate understanding of public debt and its dynamics, opinions of debt management have included negative assertions about the public debt which can only be described as misrepresentations. Information about public debt and the debt management strategy are among the most publicised in Nigeria.
The same applies to new borrowing and the purpose for the borrowing, since these go through the rigors of the approvals of the Federal Executive Council and the National Assembly. Notwithstanding these, there seems to be a lack of understanding of the role of debt in economic development, therefore, some analysis of issues relating to public debt, expectedly arrive at the wrong conclusions.
This Opinion seeks to clarify some of the misrepresentations contained in the editorial of a local newspaper on March 6, 2018, in the interest of several stakeholders in the domestic and international capital markets, and, indeed the general public.
For the avoidance of doubt all borrowings by the Debt Management Office on behalf of the Federal Government of Nigeria, irrespective of the type of security issued to raise the funds, are approved by the Federal Executive Council and the National Assembly before they are issued.
In addition to these statutory approvals, the securities are issued in accordance with regulations in the domestic financial markets in the case of Federal Government of Nigeria Bonds, Federal Government of Nigeria Savings Bond, Sukuk, Green Bonds and in the International Capital Market, for Eurobonds and Diaspora Bond.
Each of these securities is a direct obligation of, and backed by the full faith and credit of the Federal Government of Nigeria. The Interest Rate on securities issued in the domestic market is determined by the forces of demand and supply, which is consistent with the theory of efficient markets.
The same applies to the Eurobonds and Diaspora Bond issued in the International Capital Market where Nigeria is benchmarked with countries with similar profiles, such as Sovereign Rating.
Again, inspite of the fact that advertorials were published by the DMO in two (2) national newspapers February 12, 2018 to dispel false claims in the media that the USD300 million Diaspora Bond issued in June 2017 was not approved by the National Assembly prior to issuance, a newspaper in a recent editorial still reported to the contrary. DMO wishes to re-confirm that the approval of the National Assembly was secured before June 17, 2017 when the Diaspora Bond was issued. Still on the Diaspora Bond, it is common knowledge that remittances by Nigerians in the Diaspora are not monies given to the Government.
They are personal funds sent by Nigerians in the Diaspora to family, friends or business associates back home usually through Western Union and MoneyGram. Any argument that suggests that the issuance of the Diaspora Bond was not necessary because of remittances by the Nigerian Diaspora displays a weak understanding of Remittances and Bonds. Nigeria is one of the only few countries with a well-established DMO and its achievements, amongst which are the existence of accurate debt database, prompt settlement of debt service (read as zero default on payment of interest and principal), and funding of the budget deficits have more than justified its establishment.
A key component of the functions of the DMO is to formulate and implement a Debt Management Strategy for Nigeria. One of the objectives of the subsisting debt management strategy is to replace some high cost domestic debt with low cost external capital in order to reduce Debt Service Costs.
Using external funds sourced at Interest Rates of 6.50% to 7.875% p.a. to replace domestic debt sourced at 16.5% to 18% p.a. is great savings for the citizenry. Prior to the refinancing of domestic debt with external debt which started in December 2017, Nigerian Treasury Bills whose tenors are not more than 12 months accounted for about 30% of the Domestic Debt Stock. Replacing these short term domestic debt with longer tenored external funds, has the additional benefit of stabilising the Public Debt Stock. Most analysts agree that a country’s Budget represents the Government’s plan for each year. Budgets are a potent tool for achieving economic targets including GDP Growth, Inflation and employment levels.
The Government of President Muhammadu Buhari GCFR has effectively used the Budgets to stimulate the economy. The outcome of which is a GDP Growth Rate of 1.4% in 2017. It is worthy of note that Nigeria’s Budgets include deficits which have been financed largely by borrowing. Herein lies the link between borrowing and development.
The economic management strategy however doesn’t end here, the Revenue Strategy now being implemented by the Government is yet another tool that will complement the debt management strategy
–Oniha wrote in from Abuja

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