The Federal Government has over-borrowed from domestic sources compared to the relatively low level of foreign debt, the Debt Management Office has said.
The Director-General, DMO, Dr. Abraham Nwankwo, said this on Thursday at a press conference to unfold the details of the nation’s Middle Term Debt Management Strategy, which was approved by the Federal Executive Council on Wednesday.
Nwankwo said there was an urgent need to rebalance the structure of the nation’s debt because the interest payable on domestic debt was too high.
He said at present, the percentage of the Federal Government’s domestic debt stood at 88, while that of the foreign debt was 12 per cent.
Nwankwo said the appropriate ratio should be 60 for domestic debt and 40 for foreign debt, adding that the newly approved MTDMS would seek to achieve that.
According to him, one of the ways of doing this is through the establishment of a sinking fund for retiring local debts that get matured; while the second way is by borrowing more from foreign sources.
Our correspondent had reported that with the coming on board of the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, the nation would see a reduction in local debts and an increase in foreign debts.
As Managing Director of the World Bank, Okonjo-Iweala had criticised Nigeria’s debt structure on the grounds that the Federal Government was crowding out private sector borrowers from the debt market.
Although she had championed the exit of the country from the Paris Club of Creditors during her first tenure as Finance Minister she had insisted that the nation’s ballooning domestic debt was not healthy for the economy.
She had reasoned that the Federal Government could do with more foreign sources than domestic borrowing. It is this scenario that is playing out in the new MTDMS.
Nwankwo said, “The main objective of the medium term debts is to develop a strategy that will meet the financing needs of the government at minimum cost, maintain risk at a prudent level and support the development of the market.
“The exercise reflects and addresses, among other realities the disproportionate reliance on the domestic bond market to fund government deficits – the ratio of domestic and external debt stock as at the end of 2011 was 88:12, whereas the appropriate ratio would be 60:40.”
Other issues addressed by the new thinking, he said, included high rate of domestic debt accumulation, rising debt service payments occasioned by growing debt stock coupled with upward pressure on the average cost of funds and the risk of crowding out the private sector.
The DMO boss said the time of high borrowing from the domestic had served its purpose, which included developing a market structure and culture for long term savings and investment.
He said the new strategy had the capacity to reduce the rate of public debt in general and domestic market debt in particular to ensure debt sustainability and make budgetary provisions for the repayment of part of maturing FGN Bond obligations, instead of refinancing them by creating a sinking fund.
It will also reduce the amount spent on debt service by achieving an optimal mix between the relatively more expensive domestic debt and less expensive debt.
At present, he said, the difference between the domestic and external average cost of borrowing was about eight per cent per annum.
The strategy was planned to attain appropriate mix in terms of currency composition, interest rate structure, and concessional versus commercial borrowing, Nwankwo added.
The World Bank recently reclassified Nigeria’s economy, rating it healthy enough to take on commercial loans from the International Bank for Reconstruction and Development’s lending window.
The IBRD is a commercial lending window where countries that are able to pay commercial interests can borrow from.
While the window will make more resources available to the country, it attracts higher interest rates as opposed to the International Development Association lending window, which provides only concessional loans.