Flash: Nigeria To Increase Foreign Borrowing, As Debt Hits N6 Trillion

The Federal Government will increase its foreign borrowing using part of the loans to offset its domestic debt, the Minister of State for Finance, Yerima Ngama, has said.

Mr. Ngama who briefed journalists after the weekly Federal Executive Council meeting said the Council approved a medium term debt management strategy. The strategy is expected to free more cash for domestic lending for the private sector in the country.

He said part of the new policy is to reduce the domestic borrowing as well as access concessionary windows and raise foreign loans which will be used to actually pay the more expensive domestic debts.

The minister said the policy was put together by the Debt Management Office, Central Bank, Ministry of National Planning, the World Bank, and the National Bureau of Statistics.

The new government strategy is expected to follow the restructuring of the high domestic debt profile, which makes it less expensive to service .

The strategy will also through a comprehensive plan exit the corridors of high domestic debts.

Low foreign debt, High domestic debt

The finance minister explained that Nigeria’s current foreign debt was insignificant and could not create problems for the country as it is just 12 per cent, with the remaining 88 per cent as domestic debt.

“We had four options. One option is to continue as we are doing. Option (two) is to say ok, we are not going to do much but let us borrow more of the twenty year bonds where we raise them and use them to pay down the one year, two years and five year debts so that space will be left for the private sector to operate, which means we are reliving ourselves, giving ourselves time in order to retire the bonds that will actually free some resources for us.

“The third option is to see how we can access concessionary windows or raise cheaper foreign loans and use them to actually pay down the more expensive domestic debts.

“Once we tilt the structure, from 84% to 16% , 84 is concessional while the 16% is non concessional, then the domestic and foreign will also tilt to that. So we can have maybe 40 percent foreign debt and 60 percent domestic debt.

“If we do that after we play it out we are going to reduce out total debt burden to .5% by the year 2015 and we think that is better than the level we are today which is just 2.2%,” he said.

The minister explained that contrary to fears being expressed about increased foreign borrowing, it would help the country. He said the foreign borrowings would be gradual.

“When we do that we can bring a lot of benefits to the country and we will manage the finances free and also reduce the cost of borrowing and that mixed option is the one that the federal government approved and we are happy for that approval.

“One thing is that we are not just going to do it overnight we won’t just start taking loans from abroad or selling bonds we will do it very gradually. We are going to have a smooth transmission so that everything is well managed and that there is no shock to the system,” he said.

N6 trillion debts not high

The Finance Minister said at N6 trillion, Nigeria’s debt was not too high, but for the cost of servicing the debts.
“Nigeria has one of the highest interest rates in the developing world and if you have high level of debt, then the debt servicing will become very expensive”.

He also announced that the government was working to reduce the cost of domestic debt servicing to bring it to as low as 0. 5 % of the Gross Domestic Product, GDP from the current level of 2.5% of the GDP.

He listed the major factor that increased domestic debt as wage increase to civil servants in 2010 which increased wages by as high as 54 % forcing government to borrow N 3.6 trillion to pay salary; adding that since then, federal government budget had incurred deficit of N1 trillion annually.

He gave other reasons for the high domestic debt to include non-payment of local contractors who have executed contract not captured in the budget, and the payment of the pension and gratuity to former staff of the Nigeria Telecommunications Limited, NITEL.

N699 n to service debts in 2012

Mr. Ngama further disclosed that in 2012 alone, the federal government had spent the sum of N699 billion to service debts.

“Government had no choice but to borrow to sustain the level of funding. The new objective is now to reduce growth of such funds and ensure that the rate at which the debt is increasing is decreasing”.

“So, we think that the position as its at the moment is not good for us. We have high interest rate, high debt servicing, last year alone, we paid about N699 billion to service the debt and that compared to the other budgetary provision for our capital expenditure which just over a Trillion, then you realized that we are having a disproportionate cost of debt financing,” he said.

He explained that when government borrows that much, the private sector’s main source of fund will have part of its portfolio in government securities, which means that there is little money left for the private sector to borrow from because government has borrowed most of the money and this will affect the rate at which the economy is growing.

“Intact the entire sector had a liquidity ratio of over 50 per cent which means that there is little money left to the private sector to borrow because government has borrowed most of the money and this is affecting the rate at which our economy is growing,” he said.

Foreign Reserve increases

Mr. Ngama also disclosed that Nigeria’s reserve is now above $53 billion. This, he said, is made up of foreign reserve of $45 billion; excess crude of $7 billion and Sovereign Wealth Fund of $1 billion.

Courtesy Premium Times

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