External and Domestic Debt: Edo debt profile is the lowest in South-South

March 30, 2017

The latest Nigeria Extractive Industries Transparency Initiative (NEITI) Quarterly Review shows debt profile and a drastic drop in the revenue profile of most states of the federation. In South-South States Edo State has the lowest cumulative debt (both foreign and domestic) of N94 billion, Bayelsa State with cumulative debt of N116 billion, Rivers State with a cumulative debt of N147billion,Akwa Ibom with a cumulative debt of N162 bilion Cross River State with cumulative of N154billion and Delta State with a cumulative debt of N332 billion, According to NEITI report, Edo State has the lowest debt profile in the South-South. The debt profile of the state governments, NEITI observed, were on the increase; consisting of domestic and external debts as at December, 2015 and June 30th, 2016. For instance, Lagos state has the highest cumulative debt of N603.25 billion as against the state’s revenue of N410.5bn for 2016. The second on the debt table is Delta state with N331.95 billion growing debt as against N142.78 of the state revenue. Akwa Ibom states took the fourth place on rising debt profiles with N161.23billion . NEITI has clearly vindicated Edo State on both domestic and foreign debt. The World Bank loan Edo State took is cheaper to service and attracts about 1% interest rate compare to domestic borrowing that attracts 18% interest rate.

 

The cases of Cross River and Delta states raised major concerns in the debt analyses giving the fact that their total borrowings over the years were found to have more than doubled the total revenues accruing to them in 2016. The report maintained that “Considering that most states already have a high debt burden, the possibility of even higher debts for the states remain quite high.”

In a document titled “Nigeria’s Debt Management Strategy 2016-19”, the Debt Management Office (DMO) expressed concern on the high risk collateral of servicing and refinancing the nation’s N13.88tn domestic debt. The DMO is clearly worried that refinancing of about 30% (N13.88tn) of the domestic debt, which will fall due, in the next 12 months, poses a threat to the economy because maturing debts will have to be refinanced at market rates which could be oppressively higher than the almost 11% average of existing debt.”

The Debt Management Office DG, has pointed out that the domestic debt stock of the Federal Government of Nigeria, the 36 states, and the FCT accounted for about 80 percent of the total debt, while their external debt stock accounted for about 20 percent. The DG explained that the total debt profile of $57.39 billion was made up of external debt stock of $11.41 billion (N3.48trillion) which accounted for 20 percent and domestic debt stock of $45.98billion( N13.88trillion) which accounted for 80 percent, out of which the 36 states of the federation and the Federal Capital Territory accounted for about 32.45 per cent and the Federal Government, accounting for the remaining 67.55 per cent.

The Federal Government, the 36 state governments, and the Federal Capital Territory Administration currently owe foreign creditors a total of $11.41bn, the Debt Management Office has said. Statistics obtained from the DMO on Monday showed that while the Federal Government’s foreign debt stood at $7.84bn as of December 31, 2016, the 36 states of the federation and the FCTA owed $3.57bn.

Of the country’s foreign debt, $7,988,221,870 came from multilateral agencies, including the World Bank and the African Development Bank. Another $198,245,989 came from France’s Agence Francaise De Development, while $3,219,808,738 came from bilateral agencies such as the China EXIM Bank and the Japanese International Cooperation Agency.

Among the subnational governments, Lagos, Kaduna, Edo, Cross River and Ogun states retained the top spots on the list of foreign debtors. If Nigeria external debt accounts for 20% of Nigeria debt profile, how does Edo debt constitutes one of the highest? Is 20% more than 80%? Is the external debt stock of $11.41 billion (N3.48trillion) which accounted for 20 percent more than domestic debt stock of $45.98billion( N13.88trillion) which accounted for 80 percent?

I am worried that instead of analysts to discuss Nigeria’s domestic debt which accounts for 80% of Nigeria debt profile and attract 18% interest rate, most of the analysts always end up discussing Nigeria’s external debt that accounts for just 20% of Nigeria’s debt profile. This is my position, total debt profile of $57.39 billion is made up of external debt stock of $11.41 billion (N3.48trillion) which accounted for 20 percent and domestic debt stock of $45.98billion( N13.88trillion) which accounted for 80 percent. How does the external debt of 20% now amounts to the highest? Analysts should stop to categorize Edo State as the most indebted states in Nigeria. The rate of the rise in foreign debt has been slower than that of domestic debt. In recent times, the Federal Government has been making attempts to increase the proportion of foreign debt, because of the higher interest rate charged on domestic debts.

Edo state is just as privileged as Lagos state in Sub-Saharan Africa, to access World Bank loans at less than 1% for 20 years, and in some cases, 10 years moratorium.

For a shared understanding of Nigeria’s domestic debt, a major source of concern is that Nigeria’s public domestic debt has experienced rapid growth over the past ten years and that debt service outlay is quite high. The domestic debt-GDP ratio is only about 10%; the total public debt-GDP ratio is 12.25%, and compares favourably with the peer group threshold of 56%.
Although the debt service-revenue ratio is high, the problem needs to be unbundled so we can all agree on the appropriate solution path. Indeed, following the rebasing of Nigeria’s GDP in 2010, the DMO observed that the increase in the GDP did not enhance the country’s ability to service its debts. Nigeria’s tax revenue-GDP ratio is still below 6% compared to the average for the country’s peer group, which is 18%. Essentially, therefore, from this perspective, what is being experienced is a revenue problem which impacts the debt service-revenue ratio.

The domestic debt profile of some states is scary. The states are so much in debt that only a small amount of their allocations get to them at the end of the day because most times money for debt servicing is removed from source,” he said while addressing participants in Course 23 for security agents at the National War College, Abuja. The federal government is to raise its domestic and foreign borrowing ratio under the new debt management strategy (DMS) unveiled by the Debt Management Office (DMO) for the next four years. The DMS is about how funds are borrowed, internally and externally. It is a medium term project from 2016 to 2019 setting out the broad guidelines for four years.

A review of the new debt strategy shows that it would slant significantly in favour of external borrowing than domestic borrowing.

Director General of the DMO, Abraham Nwankwo, said domestic and external borrowings would now be in the ratio of 60:40 per cent as against the previous ration of 84:16 per cent respectively.

The new borrowing strategy, Mr. Nwankwo explained, would progressively increase the percentage share of external financing, taking into account the need to moderate foreign exchange risk in the short to medium term.

The new borrowing strategy, Mr. Nwankwo explained, would progressively increase the percentage share of external financing, taking into account the need to moderate foreign exchange risk in the short to medium term.

He said the reason for the shift towards more external borrowing was because external borrowing was cheaper, apart from the advantage of lower cost of fund to avoid the risk of crowding out the private sector.

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