Dr. Abraham Nwankwo, Director-General, Debt Management Office, DMO, was guest at the Nigerian Newsworld Leadership Forum, where he highlighted Nigerian's debt portfolio among other issues

 

 

What are the achievements, policies and programmes of the DMO since it was set up some seven years ago?

 

What I want to do is to update us on the continual achievement in public debt management in the last one year. In doing so, I will like to deal with the subject in terms of what is happening at the domestic front, especially the bond market at the primary and secondary levels; helping all the 36 states to establish their own debt management office; a situation report on the external debt and possibly round up with an outline of DMO'S new strategic plan which we have designed.

You will recall that the bond market was resuscitated in 2003 when we re-introduced the FGN bond in the market after about 18 years. I am sure you will also recall that from July 2005 we have commenced, on a regular monthly market outing, the issuance of bonds of various tenures. Of course there were a number of reasons for issuing the bonds. The most obvious is the normal need to fund government deficit in a market determined manner, and therefore, since 2005, whatever budget deficit is approved, the Federal government has subjected itself to the discipline of the market in order to mobilize the funds to close the gap that has been approved in the national budget.

 

The second reason of course, why we raise bond in the market is not for new finances but for the purpose of real financing from existing maturities which needed to be improved upon in terms of quality.

Because as you know before we reintroduced the FGN bonds, the domestic debt portfolio was dominated by short. Bonds, precisely 91-day treasury bills accounted for more than 50 per cent of the portfolio, and that   is not healthy. Government borrowing to fund deficits and development projects should be from long-term sourcing, not short-term sourcing. And so one of the reasons why we have continuously gone to the market on a monthly basis to raise money is for the purpose of really financing the short dated securities and then into the longer ones which are more appropriate for the maintenance of macro-economic stability which are more appropriate for financing good and development. Along the way, there have been other special occasional reasons why we have issued bonds. You will recall that about two years ago, one of the major challenges facing the federal government was the issue of arrears owed to   pensioners and there was need to find a way of solving those problems. Optimally, the way it was solved was for the DMO to go the market on behalf of the federal government to borrow long term funds from those who had them and use it to settle their pensioners. Similarly, the same procedure was used to settle arrears owed to contractors over many years, arrears that have become long overdue, that has become problematic to include in the annual budget because they have accumulated over many previous years and difficult to incorporate them in current budget without compromising the resources needed to solve correct problems. So implicitly, what I have done is to bring out the usefulness of issuing FGN bonds. FGN bonds achieve specific national development and social objectives.

I wish to emphasise that over the past 12 months in particular, a lot more has happened in the bond market because the environment has been favourable. I think for two major reasons. First is that DMO was very sensitive to the vision and mission of president Yar'Adua, his declaration to make Nigeria one of the 20 richest economics in the world by the year 2020 and his target of Nigeria achieving minimum of 13 per cent annual growth rate. It dawned on us that if this mandate as it were, for the president is to be delivered head-on every agency, every individual, every institution has to double its efforts and ensure that its own productivity is at least such that generates a 13% growth rate and therefore we as the DMO; took it as a challenge that in our activities, we are going to expand tremendously, effectively in such a way that we will contribute our minimum of growing economic activities by at least 13 per cent per annum.

The second of course is that we have to appreciate that the character of Mr President himself, has changed the overall atmospherics and ideas of the economy, the atmospherics of business, the expectation of both international and domestic investors. Overall, perception has been positive as to where Nigeria is moving and we ought to capitalise on this to take initiatives which have reflected in some of the results we have recorded over the past 12 months. In terms of the bonds issue in the market, in 2007 for example, the DMO was able to raise N492 billion from the market and each of or 12 houses in the market was over-subscribed, most of the time, by over 100% and that shows the type of confidence both domestic and foreign investors are having in the Nigerian economy because of the new direction of the administration. It is also important to mention that in 2007, we were able to extend the tenure of the securities issued to 10 years and you will recall that before 2003 the portfolio was dominated by 91-day treasury bills and the idea of borrowing long in the economy was strange. People could only borrow short-term for the purpose of buying and selling.

 

It will be important to note also that as at March, which is two months ago, the composition of the domestic debt portfolio is such that has much as 66% of it is a long term funds which ranges between 3 and 10 years. Whereas treasury bills of 91 days tenure, now constitute only 26% of the overall portfolio. You will recall that in the 1960s and 70s, the federal government and the regional government used to issue developmental loan stock at 20, 30, 40 years. So, it is only those residual that were left over that were in the portfolio at the beginning of 2003 because during the military era, the government were not issuing long-dated instruments, they where borrowing short-term. Before, the long tenural bond in the portfolio of public debts was virtually zero, now it is as much as 66 per cent, while the short tenural ones have dropped to 26 per cent. The efficacy of what is being done in the Nigerian economy not only in the public debt management segment, but in the other sectors of the economy.

You will also recall that one of the initiatives we have taken, as DMO in collaboration with other government agencies is that of ensuring that these records, these achievements, modest as they are, are sustained and enhanced over the years. To do that, we have to take initiative to develop the secondary market as well, because the secondary market enables those who have invested in the primary market, who have invested in the FGN bond, to realize cash whenever they need it. And so, it is important to have this secondary market because it encourages people to participate in the primary market. The 19 primary dealer market makers that were licensed by DMO in 2006 are doing marvellously well. Initially they were 20, but two of them merged during the cause of consolidation. These are strong financial institutions including banks, discount houses that are in a position, in terms of capital base as well as, technical competence to manage funds, to underwrite FGN bond issuances, including having an open position for those who want to buy into or buy from or sell to them. This system is working very well, to the extent that for now, the monthly transaction averages about 4,000 units. In 2007, over 30,000 deals were closed among the primary dealer market makers.

 

With this development in the market, we are also receiving implicit commendation from specialized, discerning foreign portfolio managers. For example, the World Bank has a product whereby they invest their own funds in local bonds, such as the FGN bonds. They have approached the federal government, to participate in investing in FGN bonds. That is in itself, a show of confidence in the direction of the Nigerian economy. They also have a second instrument called the local currency linked but offshore issued bonds whereby they issue bonds to raise money for their own purpose as offshore. But in doing it, they do so in a basket of currencies: dollars, pounds sterling etc. Now, they have approached the Nigerian government to say they want to include the Naira in the basket, and that bond will be linked to FGN bond performance.

Thirdly, the International Finance Corporation, IFC, which is the fastest major arm of the World Bank also has the practice of issuing their own bonds in local currencies. They approach various countries and issue their own bonds to raise local currency for the purpose of their own objectives, including helping to develop the domestic package.

 

IFC has approached the government of Nigeria to do same in the Nigerian economy. Essentially, these are signs that the performance of the Nigerian bond market, the overall achievements in the economic reform programmes, direction and vision of President Umaru Musa Yar'Adua, are being validated, accepted and commended by the international community, through the international capital market and sophisticated international investors. This does not mean in anyway that we have arrived our destination as far as development of the domestic bond market is concerned. It only means that within a relatively short time of about two years, we have been able to lay the foundation to a reasonable extent. But, we appreciate that there are still a lot more challenges to face in the years ahead. In deed, for us, one of the most important issues that we are giving priority attention is how to help the private sector to ride on the back of the foundation we have laid.

 

Already, under the leadership of the Ministry of Finance, the DMO is working closely with the capital market operators to identify and map out strategies for removing the constraints that are inhibiting the private sector from taking a cue from the FGN bonds. We are looking forward that before the end of this year, a lot of progress would have been made.

As I have already mentioned, you will see corporate issuing bonds for building roads, for developing the power sector, for agriculture. This indeed is our dream at DMO, to be able to actuate the private sector to play the lead in the growth and development of the country. That takes me to the next stratum of activities which have to do with public debt management at the sub-national level, particularly at the state level.

 

In July last year, DMO designed a new focus. At one of the major introductions was the commitment of the DMO team to assist all the states of the federation to have their own debt management departments. We appreciate that there is federalism, and states have wide public finance power, they enjoy a high degree of fiscal autonomy and therefore it is obvious that if we are talking of having a country that is counted as one of the best in terms of public debt management, the states cannot be left out. So, unless all the spheres of government are committed to the principles and practice of effective, efficient, prudent debt management, Nigeria will not be among the best in public debt management. It is my pleasure to mention here that between July last year and now when we started, lot of progress has been made to the extent that we have had at least three interactive fora with stakeholders here in Abuja, including officials of all the states, development partners, the media, the civil society. We have gone further to hold zonal workshops where all the states participated. We have gone further to ask for expression of interests for experts in public finance and debt management so that all the states can be simultaneously assisted to have their own debt management departments, because if DMO is to do it alone, it means the states have to queue up to take their turns and that will take possibly the next five years to accomplish. But since all the states are very enthusiastic in solving this problem, or in addressing the challenges of having effective debt management institution and practices, DMO thought it wise to mobilize experts, and deploy them, or make them available for states to engage for the purpose of implementing the programme. And as I speak to you, we have advertised, we have received submission, we have interviewed, we have short-listed over 100 representatives of 57 consultancy companies. Now, I wish to emphasise that the success that we will record in this programme, will be a measure of how much progress we have made because we believe that if the federal government, as well as, the 36 state governments become competent in effective debt management, then we would have gone a long way in terms of effective utilisation of resources; a long way in terms of ensuring transparency, accountability and of course, in ensuring that Nigeria will never be under unsustainable debt situation again.

 

In terms of external debt, I will quickly mention that our external debt remains very, very robustly sustainable. As you know, our external debt as at now is less than $3.7 billion and that means that it is less that six per cent of our GDP. Indeed, when you combine both our external and domestic debts, at the ratio of our GDP, it is just about 10 per cent and that is as good as it could be anywhere because the combined ratio should reach about 50 per cent or more before it becomes problematic.

Our mission is defined by how much we contribute to development as we manage the nation's debt, and to provide an enabling environment for the private sector to capitalise and have access to long-term funds, to develop the real sector of the economy.

We appreciate that all these problems summarise to one thing: the present generation of Nigerians have a challenge they must address and that is the challenge of development, committing itself to ensuring that in the next four to five years, Nigeria would have been recognised as a country that was able to extricate itself from under-development, march forward and be recognised as a fast-track effective, efficient, productive and respectable country. And that challenge is the challenge facing our generation. It is not for government, but for each and every one of us, as individuals and as organisations, to take it as our own responsibility.

 

How much local debt do we owe and what ratio is it to the GDP?

 

Our local debt as at the end of March is about N2.6 trillion. And I did mention that it is approximately about six per cent of our GDP. The external debt which when you combine is just about 10 per cent of the GDP. And the benchmark which the ratio would have reached and you want to get concerned whether you are sustainable is 50 per cent and we are operating at just 10 per cent of the GDP.

 

How much was the external debt by the time we exited from the London and Paris Clubs? Secondly, we are told that a loan of about N2.5 billion is waiting for Nigeria courtesy of Chinese government. May we know the terms and when you are to collect this loan?

 

Well, not only is our external debt very low, but the quality is also very robust. Over 84 per cent of that $3.7 billion is accounted for by loans from concessionary sources. Here, we are talking about the concessionary window of the World Bank, International Development Bank, the Africa  Development Bank, etc. These are loans that are obtained at very low charges; charges of about 0.57 per cent, at the highest is about 1.2 per cent. So these are the debts that now dominate our external debt portfolio. These are loans that are poverty reduction oriented; they are loans that are used to fund the UBE, health, water supply, the various FADAMA and agricultural projects.

 

Before we exited from the Paris Club, of course, our external loan was about $35 billion.

Then on the Chinese loan, N2.5 billion which was made available for Nigeria, that is, if Nigeria is interested in negotiating for those loans on terms and conditions that is acceptable to it. When the present administration came on board, it emphasized that the public sector, the federal government and its agencies, as well as state governments would not take loans except those at concessionary rates. And because of that, about six or seven weeks ago, Mr. President visited China. On the other hand, whatever additional resources that China made available for Nigeria would be, not as a public sector loan, but loans that will be to the private sector. In that regard, the various agencies of government led by Ministry of Finance, are perfecting a mechanism that will enable the Nigeria private sector access these loans from China and indeed from other countries too.

 

Why did it take your office so long to sensitize the states?

 

DMO was established in the year 2000 and the first priority which all Nigerians, not just DMO, had was that we had various external debts overhang. The priority then was to exit from the Paris Club debt overhang, and that was important, because that also adversely affected our private sector. Now, we are talking about foreign direct investments in the various sector, and the various other stages in FGN bonus etc. These are things we wouldn't have thought possible, five years ago. But as far as 2003, we had already began to resuscitate the domestic bond market and it is only natural that you resuscitate what was there before you begin to think of extending it to another level of governance. Today, we are comfortable with our debt, we can sit down, plan, do analysis and develop the busy market. And as a federation, after establishing all these and more in the centre, we are now moving to the states. So, I don't think that within the seven years DMO has been in existence, if we have done all these, I won't say it started late.