Eurobond: Thinking Through The Debt Challenge.

In the last couple of days, the Nigerian media has been awash with government officials congratulating themselves on the back of the successful $1bn Eurobond outing. Nigeria borrowed the sum of $1bn from the international capital market on an annual coupon of 7.875 per cent over a 15-year period. From the Minister of Finance to the Director General of the Debt Management Office, opinions have been freely expressed that despite Nigeria’s downgrading by international rating agencies, this represents the resilience of the economy and investors’ confidence in the economy. This assertion is made against the background that the bond was oversubscribed by 780 per cent.

Other stakeholders, especially investment analysts, have also joined this choir of great achievement for merely raising a Eurobond. But the poser is whether Nigeria could have raised this loan at a more reduced interest rate. Evidently, the rate priced in the risk elements associated with the fiscal and political governance of Nigeria. Also, some other emerging markets would have raised this loan at a lower interest rate. Wait a minute, the Federal Government by this action has merely secured a loan which will be fully repaid in 15 years’ time and will need to be serviced over the period with the annual sum of $78.75m. It is the preliminary submission of this discourse that it is not yet time for celebration but one for sobriety and deep thinking.

We are informed that the loan will be used for critical infrastructure provided in the 2016 federal budget and also to fund the budget deficit. Borrowing in February 2017 to fund the 2016 capital budget when the financial year should have ended is a demonstration of tardiness in fiscal governance. This does not show due diligence and mastery of the fiscal governance space. It does not speak about a government well-prepared for the task of governance. Unlike loans from international financial institutions and bilateral sources which are tied to specific projects, the current Eurobond is not so tied. Further, the Federal Government has not stated any specific projects where this money will be channeled. The Fiscal Responsibility Act only permits borrowing for capital expenditure and human development. It has therefore become imperative in the spirit of transparency and accountability that the Federal Government states the particular projects where these funds will be channelled so as to provide an opportunity for stakeholders to monitor the investments. This has become necessary because this is not the first or second time that we have raised Eurobonds with nothing to show for them at the end of the day.

By the borrowing, we are further increasing the stock of national resources that will be laid out for debt service in subsequent years. The trajectory of debt service and capital budget implementation over the years speaks to the challenge. In 2014, the Federal Government spent N941.67bn to service debts whilst deploying only N585.61bn to capital expenditure. Again in 2015, the Federal Government spent N1.060tn for debt servicing whilst investing only N384.07bn for capital expenditure. As of the end of 2016, available figures indicate that we fully utilised the N1.361tn set aside for debt service. As of the end of October 2016, N635.770bn had been released for capital expenditure which was an investment of 127.14bn every month for the five months of implementation; projecting to the end of the year 2016 will be a capital expenditure of N889.98bn which is 56.08 per cent of the overall capital vote. Again, this shows a wide margin between the debt service and capital expenditure. We have been spending more on debt service than on capital expenditure.

The rising debt service is crowding out expenditure in critical infrastructure and human development. The proposed debt service for the 2017 Federal Government financial is 22.78 per cent of the overall vote. But when added to the sinking funds for the retirement of maturing bonds adds up to 25.21 per cent of the overall vote. This is one quarter of the expenditure. At the end of the day, if there is a shortfall in revenue, salaries and overheads will be drawn down, debts will be serviced whilst capital projects suffer. At 25.21 per cent of overall expenditure, the debt service is high. When it is considered that in 2017, some of the expected sources of revenue may not likely materialise, the high debt service becomes an undue burden. This also raises issues around the large deficit proposed in the 2017 budget which in subsequent years will further increase the sums set aside for debt service and repayment.

Further, debt service as a percentage of retained revenue is growing. The retained revenue in 2017 is N5.078tn whilst the debt service is N1.663tn. Therefore, debt service is 32.76 per cent of the retained revenue; adding sinking funds to the debt service gives 36.25 per cent of the retained revenue. This is on the high side. To understand the opportunity cost of debt service, the 2017 provisions for debt service will be compared to the capital expenditure of key and strategic ministries. The total capital allocation to the Ministries of Works, Power and Housing, Education, Health, Transportation, Water Resources, Agriculture, Science and Technology and Defence is a total of N1.247tn whilst debt service is N1.663tn, meaning that the capital vote of all these sectors combined is 75 per cent of the debt service.

The foregoing makes a clear case for us to be strategic in the procurement and management of public debts. The fact that many debts are long term and the full payment will not become due until after the expiry of the term of incumbents seems to promote a lackadaisical attitude to debt management. Another part of the challenge is that a good part of what is documented as capital expenditure in the budget is administrative capital which goes to service the bureaucracy. Yes, it is important to provide for the needs of the bureaucracy so that it can effectively drive governance. But when a good part of the requests are simply inappropriate and frivolous like the repetitive requests for cars, computers, software, endless and unnecessary capacity building, then the country will be wasting borrowed money on frivolities. At the end of the day, the expected stimulation of economic growth drivers will not happen and this will erode the capacity to repay the debt when it is due.

In conclusion, there is the need for very careful and meticulous use of the borrowed $1bn. It should be invested in regenerating projects which will help expand the revenue base of the economy and the capacity to repay when due.