Re: Downside of Debt Sustainability Claim

By Abraham Nwankwo

After reading the above captioned article on the back page of Thisday of Monday, May 21, 2012 we have considered it necessary to make observations and clarifications for the benefit of the general public.

It is pertinent to state upfront that the Debt Management Office (DMO) subscribes to the principle that effective and efficient use of resources to generate maximum output and overall budgetary/fiscal discipline, are imperative not only for debt sustainability, but for overall economic sustainability. It is fair to observe that these elements are among the target change parameters in the country’s Transformation Agenda.

Ordinarily, in any economy, government borrowing from the domestic debt market has the potential to crowd out the private sector. However, it is pertinent to note that before 2003, the market for long term debt (bonds) had been abandoned for nearly 18 years – mainly by the military governments. From 2003, the DMO worked with other government agencies and market operators to resuscitate and develop the market. In doing so, it took advantage of the need to fund fiscal deficits as contained in the annual Appropriation Acts to issue long-term bonds. Deliberately, the DMO set up the structures, institutions and procedures that led to the development of the market for 3-year, 5-year, 7-year, 10-year, and 20-year bonds. These bonds in combination with the Treasury Bills of 91-day, 180-day and 360-day tenors have led to the establishment of a sufficiently reliable yield curve. More than 16 companies have issued long term debt instruments in the market since 2003.

Meanwhile, having used its borrowing operations to develop the market, the government is conscious of the need not to crowd-out the private sector. Accordingly, it plans to progressively reduce its borrowing from the domestic market over the next few years along the path of fiscal consolidation as stated in the Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), 2012 -2015.
In this regard, the article under reference misrepresented the statement of the Coordinating Minister for the Economy/Honourable Minister of Finance (CME/HMF) by stating that she “promised” to reduce Nigeria’s debt to N500bn in 2015. What the CME/HMF has repeatedly explained is that in line with government’s strategy to create more borrowing space for the private sector in the domestic debt market, government’s new domestic borrowing will be reduced progressively from N852bn in 2011 to N500bn in 2015. This is clearly a statement that the flow, which is new borrowing, will be reduced progressively and in no way means that the total outstanding debt stock will be reduced to N500bn. For the avoidance of doubt, it is important that analysts and commentators do not mix up stocks and flows in the analysis of public debt.

The article, relying on a number of invalid presumptions, repeatedly attempted to question the DMO’s Debt Sustainability Analysis (DSA). Hence, the need for clarifications. The DMO conducts DSA every year in collaboration with the Central Bank of Nigeria (CBN), Budget Office of the Federation (BOF), Federal Ministry of Finance (FMF), National Bureau of Statistics (NBS) and National Planning Commission (NPC). The DSA makes 20-year projections on the country’s debt sustainability based on baseline, optimistic and pessimistic scenarios for external and domestic debts. The stress test analysis takes into account reduction in revenues in the event of a drastic fall in oil prices to arrive at conclusions about sustainability. In particular, it considers that oil is the major contributor to government revenue and this has influenced the decision to be guided by a more conservative debt/GDP limit of 25% against international peer group standard of 40%.

For the avoidance of doubt, the DMO borrows in accordance with the annual Appropriation Acts where the projects to be executed are clearly stated. The writer tended to mislead the public to think that the DMO is responsible for both the demand for borrowing and the implementation of the borrowing. This is false. The demand for borrowing is strictly an element of the budgeting process, reflected in the size of the fiscal deficit. When the Appropriation Bill, containing the fiscal deficit is enacted by the National Assembly and signed into law, the DMO is under national obligation to borrow money so that the planned resources are available for MDAs to execute the planned projects and programmes.

The bearing of AMCON Bonds on the public debt was also inaccurately presented in the article. As at date, the FGN has guaranteed AMCON bonds to the tune of N1.742 trillion, and not N4.5 trillion. However, based on the AMCON Act 2010, the FGN is required to guarantee all AMCON bonds. Thus, if AMCON appropriately approaches the FGN to guarantee additional bonds, the FGN would oblige. The guarantee of AMCON bonds does not automatically constitute an addition to the public debt stock; rather, it is a contingent liability.

Since AMCON bonds are a contingent liability, they should and are not included in the debt/GDP ratio or any other indicator of solvency and liquidity. However, they are included in the sensitivity analyses and stress tests, which reflect possible shocks that could derail the direct ratios. This is the right approach and the DMO Nigeria adheres to this globally tested and accepted methodology in the preparation of the annual debt sustainability analysis.

It is completely incorrect for the writer to claim that “DMO has failed to grapple with the public debt implications of the activities of the AMCON.” For the records, the DMO has worked cooperatively with AMCON to develop a credible package for self-redemption of the bonds it is issuing in exchange for the non-performing assets of the banks. The deposit money banks are contributing into a Sinking Fund, 0.3% of their total balance sheet, annually to cover any shortfall AMCON could have after recoveries from the assets it has acquired. In addition, the CBN is contributing N50 billion per annum to the Fund. So far, AMCON’s performance in assets recoveries is better than projected.

The article is also outrightly misleading in respect of its position on MDAs’ outstanding obligations to local contractors. For the avoidance of doubt, the DSA conducted by the DMO takes into account outstanding obligations of MDAs to local contractors. Verified data on the obligations are available at the BOF. Furthermore, it is necessary to differentiate between structured public borrowing (external and domestic) and operational obligations that arise from the routine implementation transactions of MDAs, which are part and parcel of the implementation of the annual budgets. While the former falls squarely within the purview of the DMO, the latter is managed by the BOF. In this regard, the various improvements being introduced by the FMF and the BOF in budget preparation, implementation, monitoring and evaluation are aimed at, among other goals, ensuring timely payment for completed jobs and minimization of arrears of obligations to local contractors. However, for debt sustainability analysis, obligations to local contractors are adequately captured.

To equip investors and creditors (local as well as foreign), the DMO maintains an elaborate website with detailed quantitative and qualitative information. In addition, the DMO proactively organises local and foreign roadshows. In line with this practice, and as a complement to regular interactive fora with the local media and other stakeholders, between February and April this year, the DMO organised non-deal roadshows in two European and four USA cities. The purpose was to give existing and potential investors, first hand information and answers to questions on, not only the Nigerian debt market, but on broader issues of the Nigerian economy and polity.