Nigeria to increase external borrowing to 40 per cent under new debt strategy

Minister of Finance, Kemi Adeosun

The federal government is to raise its domestic and foreign borrowing ratio under the new debt management strategy (DMS) unveiled by the Debt Management Office (DMO) for the next four years.

The DMS is about how funds are borrowed, internally and externally. It is a medium term project from 2016 to 2019 setting out the broad guidelines for four years.

A review of the new debt strategy shows that it would slant significantly in favour of external borrowing than domestic borrowing.

Director General of the DMO, Abraham Nwankwo, said domestic and external borrowings would now be in the ratio of 60:40 per cent as against the previous ration of 84:16 per cent respectively.

The new borrowing strategy, Mr. Nwankwo explained, would progressively increase the percentage share of external financing, taking into account the need to moderate foreign exchange risk in the short to medium term.

He said the reason for the shift towards more external borrowing was because external borrowing was cheaper, apart from the advantage of lower cost of fund to avoid the risk of crowding out the private sector.

Despite the new arrangement, the DG of DMO said the private sector would still be expected to play a leading role in mobilizing more funds as well as compliment government’s efforts towards national development.

He reassured that the current foreign exchange crisis would not pose any challenge to servicing those debts, as Nigeria has abundant opportunities to diversify her economy and earn foreign exchange other than from the export of crude oil.

Mr. Nwankwo pointed out that existing sources of financing and instruments would be used going forward, although the DMO was planning to introduce new products to further diversify the investor base.

He said the new product would also boost financial inclusion and national savings culture for increased gross capital formation, create more benchmarks and deepen the domestic and external markets for Government securities.

The new debt instruments to be introduced, subject to market condition, include those for the domestic debt market; retail bond, inflation-linked bond and domestic Sukuk.

For the International capital market, he said it would include the diaspora bonds, whose issuance process was ongoing, in addition to International Sukuk.

Other components of the new debt management strategy was targeting a domestic debt mix of 75:25 for long and short-term debts, respectively, (currently at 69:31 as at end-2015), so as to reduce the cost of debt service and roll-over risks.

Funding sources for the new debt management strategy, Mr, Nwankwo said, include maximisation of available funding envelopes from concessional and semi-concessional external sources, taking into account what may be readily available within a given period, for the financing of key infrastructure projects.

The interest rate and refinancing risks of the DMS was to keep the share of debt maturing within one year, as a percentage of total debt portfolio at not more than 20 per cent, relative to 29.15 per cent as at end-2015; and an average time-to-Maturity (ATM) at a minimum of 10 years as against 7.15 years as at end -2015.

The preferred DMS by government, Mr. Nwankwo said, was based on current economic realities, requiring an increase in external financing to rebalance the public debt portfolio in favour of long-term external financing to reduce the debt service cost and lengthen the maturity profile.

“To achieve a significant reduction in cost would require that the government accesses relatively cheaper long-term external financing in a way that it first maximizes the available funds from the concessional and semi-concessional sources, taking into consideration what may be readily available within a given period.

The main constraints to the preferred DMS, Mr. Nwankwo said, include an increase in the foreign exchange risk, due to the rise in external debt relative to domestic debt, and, the need to maintain liquidity in the short end of the government domestic securities market.