Funding Economic Growth And Development Through Debt

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Amarachi Eshiogu

Economists have several theories on how to fund economic growth in a time of recession, and one of these is through public debt management. This entails the initiation and execution of a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and meet any other goals the government may have set. It is related to the composition (the types of securities sold) and the refunding of the debt held by the public within a country.

In Nigeria, it is the Debt Management Office (DMO), under the Ministry of Finance, that does this job, of course in collaboration with the Central Bank of Nigeria (CBN) and the government’s economic team. Since the inception of the administration of President Muhammadu Buhari, the DMO has assumed a more central and critical role in the economic strategy of the government.

The administration’s key economic objectives are to reduce unemployment and promote growth through diversification of the economy, infrastructure development, revenue growth and more transparency in governance. The administration has prioritised the development of infrastructure, notably roads, railways, power, aviation and the development of non-oil sector especially agriculture and solid mineral resources.

These are the top economic priorities of the government and every other measure is focused on achieving these objectives. It is expected that these policies will take the economy out of recession and make it retain its position as Africa’s largest economy and eventually its strongest. The Debt Management Office (DMO) whose mandate it is to manage the public debt has consistently supported government in financing infrastructural development and other priority areas through its borrowing activities.

Given the important role of debt in the growth of most countries, public debt management has been recognised as a strategic component of economic policy. That is why the borrowing activities of DMO are governed by a number of legislations, amongst which are the constitution of the Federal Republic of Nigeria, the Debt Management Office (Establishment) Act, 2003, and the Fiscal Responsibility Act, 2007. The DMO’s activities are also guided by the National Debt Management Framework, which guides government’s borrowing decisions and ensures that the cost and risk profile of the public debt portfolio remain within acceptable limits.

The Nigerian Debt Management Strategy is embedded in the National Debt Management Framework and it is reviewed every four years. Nigeria’s current Debt Management Strategy (2016 – 2019) was unveiled last year. It aims to move the public debt portfolio away from domestic financing in favour of relatively cheaper long-term external financing. This is in order to reduce debt service cost and lengthen the overall maturity profile; use external loan proceeds to fund priority infrastructure to boost sustainable economic growth. The overall aim is to achieve a diversified export-oriented production, boost foreign exchange earnings, strengthen the Naira exchange rate and ensure sustainable external debt service, in the medium to long term.

The new strategy encapsulates a significant departure from the debt strategy developed after Nigeria’s exit from the Paris club, which emphasised domestic borrowing. But subsequent strategies and activities of the DMO have been directed towards increasing the external debt component in order to achieve the objectives of the National Debt Management Framework. It must be said that the DMO, through its borrowing activities in the domestic market enabled the government to raise funding on a regular basis through the issuance of Nigerian Treasury Bills (NTBs) and Federal Government of Nigeria Bonds (FGN Bonds). Equally important is the fact that through domestic borrowing, the DMO enabled the evolvement of a robust and vibrant domestic fixed income market. It is to DMO’s credit that a sovereign yield curve extending to 20 years now exits and is used by other borrowers such as State Governments and corporates for pricing debt securities.

Several state governments and corporates have tapped into the market for funds while two multilateral institutions have also issued Naira Bonds in the domestic market. Thus, it was not surprising that an Over The Counter, OTC, market for fixed income securities, the Financial Market Dealers Quotations (OTC/FMDQ) was established in 2014.

In line with its strategy of including more external debt to lower cost (and by extension Debt Service) and extend the tenor profile of its debt by refinancing its short term domestic debt, DMO issued Eurobonds in the International Capital Market (ICM), starting from January 2011. From that first US$500 million 10-year Bond issued at a coupon rate of 6.375 per cent, the DMO has issued an additional US$2.5 billion Eurobonds and US$300 million in Diaspora Bond, bringing the total to US$3.3 billion. This is apart from borrowing from bilateral and multilateral sources which are often concessionary – long tenors and low interest rates.

Data from the DMO’s borrowing activities from January to June 2017 show that it had borrowed N3, 931.47 billion from the domestic market and US$1.8 billion from ICM.

From DMO’s activities, it is expected that it would remain active in the domestic and external markets for the rest of the year.

As with similar institutions in other countries which were established primarily to support government in financing development, DMO has demonstrated commitment to fulfilling its mandate of supporting government’s initiatives and plans, particularly the Economic Recovery and Growth Plan (ERGP), to transform the Nigerian economy through addressing the infrastructural deficits in the critical sectors of the economy, notably, Power, Roads, Railways, Aviation and Agriculture.

In pushing some of its initiatives, DMO has also become a critical institution helping government secure public buy-in of policies and programmes. For instance, its marketing of the Federal Government Savings Bond across the country to critical stakeholders brought government closer to the people. It created mass awareness about government’s economic vision and how the people could help in its realisation. Moreover, it also helped promote the culture of savings among the population in a unique way.

The road shows in Europe and the United States to promote the country’s Diaspora Bond generated interest in Nigeria’s economy and the investment opportunities therein. There is no doubt that in the coming weeks and months, this will translate into concrete foreign direct investments that would fast-track economic recovery and growth.

The new Director General of the DMO, Patience Oniha, is a tested technocrat and is sure to deepen the role of the agency in the economic transformation of the country, in line with the change mantra of the Buhari-led administration.