A statement from the Minister of Finance, Dr
Ngozi Okonjo-Iweala
There has recently been a lot of
misinformation and misconception in our
public debate on debt. My goal in this
article is to shed some light on the public
debt, to clarify the real state of Nigeria’s
debt position, and hopefully, provide a
knowledge platform for constructive
debate.
Let me say at the outset that no one in
government is supportive of a Nigeria
that returns to a high state of
indebtedness. On a personal note, having
gone through tremendous stress during
the quest for Paris Club debt relief, I am
committed to a Nigerian economy that is
fiscally prudent, balances its books and
remains at a low state of indebtedness.
To begin, Nigeria’s overall debt is comprised
of external and domestic debts. The external
debt is typically owed to foreign creditors such
as multilateral agencies (for example, the
Africa Development Bank, the World Bank, or
the Islamic Development Bank), to bilateral
sources (such as the China Exim Bank, the
French Development Bank or the Japanese Aid
Agency), or to private creditors such as
investors in our Eurobonds. The domestic
debt, however, is contracted within Nigerian
borders, usually through bond issues which
are then purchased by Nigerian banks, local
pension funds, and other domestic and foreign
investors. The resources raised typically go to
help fund the budget or other domestic
expenditures, such as infrastructure projects.
We also have some contractor arrears, and
other local liabilities which are normally
handled through the budget.
Both federal and state governments borrow
domestically and externally. However, no
state government can borrow externally
unless guaranteed by the Federal
Government. Similarly, state governments’
domestic borrowing is subject to federal
government analysis and confirmation – based
on clear criteria and guidelines that a state can
repay based on their monthly FAAC allocations
and internally generated revenues (IGR).
As a nation, we have had a difficult history
with debt. As such, no one can forget the
challenging times we went through from 2003
to 2005 trying, in the end, successfully to get
relief on our large external debt. Neither the
government nor any Nigerian wants a repeat
of the country’s past history of large debts.
That is why the current President Goodluck
Jonathan administration, the Legislature, the
Ministry of Finance, and the Debt
Management Office, are very focused on a
conservative and prudent approach to
managing the national debt. Our current
approach balances Nigeria’s needs for
investment in physical and human
infrastructure with a strong policy to limit
overall indebtedness in relation to our ability
to pay. Above all, any debts incurred must go
for directly productive purposes which yield
results that Nigerians can see.
First the numbers:
a. In 2004, prior to the Paris Club debt relief,
Nigeria’s overall debt stock was very high.
External debt stood at US$35.9 billion while
the stock of the domestic debt amounted to
US$10.3 billion resulting in a total of about US
$46.2 billion or 64.3% of GDP excluding
contractor and pension arrears.
b. After the successful debt relief initiative,
Nigeria’s stock of foreign debt declined
dramatically. Indeed, in August 2006, when I
left office, Nigeria’s foreign and domestic
debts amounted to US$3.5 billion and US$13.8
billion respectively – a total of US$17.3 billion
or 11.8% of GDP.
c. By August 2011, when I resumed for the
second time as Finance Minister, the domestic
debt stock had grown substantially to US
$42.23 billion, while the external debt was
still a modest US$5.67 billion. This implied a
total debt stock of US$47.9 billion or 21% of
GDP. Note that while the debt stock grew, our
national income also grew so that debt to GDP
ratio (the parameter used globally to measure
a country’s debt sustainability) remains
modest and manageable.
d. Thus, the key noticeable change in Nigeria’s
indebtedness in recent years has been the
growth of domestic debt. There were two
main reasons which resulted in this outcome.
First, the initial growth of the domestic debt
stock was because the federal government
wanted to deepen the domestic debt markets
and generate a yield curve for Nigeria which
ultimately could help our corporate bodies to
access the capital markets and borrow funds at
more affordable rates. The DMO through its
work has been successful in doing this.
Nigerian corporates can now raise money at
reasonable rates at home and abroad, helping
them secure resources to invest in the
economy. Secondly, however, domestic debt
was also raised to finance increased budget
expenditures including consumption. For
example, in 2010, the 53% salary increase for
civil servants was financed by raising domestic
bonds. Borrowing for recurrent expenditure
or consumption, as was the case here is a
practice that is less than ideal and one that we
should endeavour not to repeat. We must
learn that domestic debt should be incurred
sparingly at modest and manageable rates so
that government is able to service it and pay
back domestic creditors. Failure to do so
would severely undermine the finances of our
private and institutional creditors to the
detriment of the economy.
It is with this background in mind that we have
put in place several measures to limit and
manage the national debt. There are a
number of specific policies we have
introduced in the current administration to
slow down the increase in our overall debt
stock.
a. First, we have brought expenditures and
revenues much more in line, through a low
fiscal deficit of 1.81% GDP, to reduce the
need for domestic borrowing. For example,
we reduced annual domestic borrowing from
N852 billion in 2011, to N744 billion in 2012,
and to N577 billion in 2013. Our objective is
to reduce government’s domestic borrowing
to below N500 billion in the 2014 budget.
b. Second, for the first time, we have paid
down part of our domestic debt rather than
rolling all of it over. Beginning in February
2013, we successfully retired N75 billion
worth of maturing domestic bonds. And we
will continue with this practice in the coming
years.
c. Third, we have established a sinking fund
with an initial capitalisation of N25 billion. This
fund will enable the government to retire
maturing bond obligations in the future.
d. Fourth, we are working increasingly with
states to get a clearer picture of domestic
debts acquired by state governments, thanks
to the comprehensive review recently
completed by the DMO. Our particular
concern is that state governments limit
borrowings in line with their incomes and put
any borrowings made to work on specific
projects and programmes that bring direct
beneficial results to their citizens.
[Please find attached the Debt-to-GDP ratio of
selected economies]
e. Fifth, instead of the previous practice of
contracting foreign loans in an ad hoc manner,
we have streamlined the process for federal
and state governments and made it
transparent through the Medium Term Rolling
External Borrowing Plan, which is reviewed
and approved by the National Assembly. This
plan presents the anticipated loans to be
contracted by the government over a three-
year time window, so that we can target funds
to priority projects, and also make trade-offs
where necessary. Notice that this covers
planned foreign borrowing by both the federal
and state governments for projects that will
yield results in infrastructure, education,
health, etc. Most loans contracted are on
concessional or very favourable terms. For
example, many of the multilateral loans are at
zero interests, 40-year maturity, and 10 years
grace. Others are at less than three per cent
rate of interest.
f. And finally, we have put forward a Medium-
Term Debt Strategy with a mix of limited
external and domestic borrowing that is
appropriate for the economy.
But let me repeat that we shall never be
complacent about our national debt. We need
to be constantly vigilant to limit the amount of
debt and create room for the private sector
instead to borrow. As such, we need to stay
focused on three main priorities.
First, we should continue to monitor our
external borrowing and ensure that we do not
slip back to our high indebtedness prior to the
debt relief programme. As I mentioned
earlier, the External Borrowing Plan, helps to
address this concern by ensuring that we
always have a comprehensive, transparent
view of our foreign borrowing. As at now, our
external indebtedness is low at $6.67 billion
or about three per cent of GDP.
Second, we should closely continue to monitor
and limit our domestic debt, and ensure that
it stays within a prudent and conservative
range. We should pay off debt that is due to
the extent of our ability.
And third, we should also continue to closely
monitor borrowing by states to ensure that
the debt burdens of our state governments
remain within manageable levels and that
borrowings are applied to specific projects
that yield results for citizens of the state. In
that regard, we enjoin banks and other
lenders to be careful and prudent when
lending to ensure that this is done within the
existing rules, regulations and guidelines.
Former UN Secretary-General Kofi Annan
once said: “Information and knowledge are
central to democracy – and they are the
conditions for development.” That is precisely
why I have gone to some length to throw light
on the real facts and the real issues regarding
our debt situation and what the federal
government is doing to address them. We
need to create the basis to have a healthy and
constructive public conversation on this issue,
not a distorted and partisan battle.
• Dr. Okonjo-Iweala is Coordinating Minister
for the Economy and Minister of Finance.
