President Muhammadu Buhari yesterday requested the National Assembly to approve $5.5 billion foreign loan to fund capital component of the 2017 budget and refinance maturing domestic debt obligations.
The president’s letter dated October 4 was separately read by Senate President Bukola Saraki and the Speaker of the House of Representatives, Yakubu Dogara yesterday.
The letter was read a week after the Minister of Finance, Kemi Adeosun claimed approval of the loan request was being delayed by the National Assembly.
Tagged, “Request for the approval of external loans”, the foreign loan is in two parts. The first part of $2.5bn was for the implementation of the external borrowing approved in the 2017 appropriation act. The second part of $3bn is to refinance maturing domestic debts.
Buhari referred the National Assembly to 2017 Appropriation Act, which has a Deficit of N2.356 trillion and provision for New Borrowings of N2.321 trillion, respectively. The Act also provide for Domestic Borrowing of N1.254 trillion and External Borrowing N1.067 trillion (about USD3.5 billion).
Issuance of $2.5 billion for 2017 budget
Buhari told the National Assembly that in order to implement the External Borrowing approved in the 2017 Appropriation Act, the FGN issued a USD 300 million Diaspora Bond in the International Capital Market (ICM) in June 2017.
He said the balance of the 2017 External Borrowing, in the sum of USD3.2 billion is planned to be partially sourced from issuances in the ICM of USD2.5 billion through Eurobonds or a combination of Eurobonds and Diaspora Bonds, while USD700 million is proposed to be raised from multilateral sources.
“It should be noted that the intention is to issue the Eurobonds first, with the objective of raising all the funds through Eurobonds, and that Diaspora Bonds will only be issued where the full amount cannot be raised through Eurobonds,” he said.
He noted that the proceeds from the proposed issuance of Eurobonds (and Diaspora Bond) in the ICM would be used to finance the deficit in the 2017 Appropriation Act and provide funding for the capital projects in the Budget.
The President listed the Projects to include: the Mambilla Hydropower Project, Construction of a Second Runway at the Nnamdi Azikiwe international Airport, counterpart funding for Rail Projects and the Construction of the Bodo-Bonny Road, with a Bridge across the Opobo Channel.
$3bn for Re-financing of Domestic Debts
Buhari said in addition to the implementation of the External Borrowing approved in the 2017 Appropriation Act, in order to reduce debt service levels and lengthen the tenor profile of the Debt Stock, the FGN seeks to substitute maturing Domestic Debt with less expensive long term External Debt.
“The FGN plans to source USD3.0 billion through the issuance of Eurobonds in the ICM and/or loan syndication by Banks, as approved by the Federal Executive Council at its meeting of August 9, 2017.
“It is important to note that the proposed sourcing of USD3.0 billion from external sources to re-finance maturing Domestic Debt will not lead to an increase in the public debt portfolio because the debt already exists, albeit in the form of high interest short term Domestic Debt,”
Rather, Buhari said the substitution of Domestic Debt with relatively cheaper and long-term external debt will lead to a significant decrease in Debt Service Cost.
“This proposed re-financing of Domestic Debt through External Debt will also achieve more stability in the Debt Stock, while also creating more borrowing space in the domestic market for the private sector.
“You will recall that in the 2017 Appropriation Act, Debt Service at N1.663 trillion represents 32.73% of the FGN’s Total Expenditure, which makes it important to take urgent steps to reduce debt service costs. Failure to rebalance the FGN’s debt portfolio through substitution of Domestic Debt with less expensive long term External Debt will continue to expose the country to the risk of high debt service-to-revenue ratio, thereby limiting the ability of the government to execute capital projects and other priority expenditure,” he said.
He said in line with the provisions of Sections 21 (1) and 27 (1) of the Debt Management Office, (Establishment, Etc.) Act, Cap D.12 Laws of the Federation, the approval of the National Assembly is required for external borrowings.
He said with respect to the Terms and Conditions of the proposed External Borrowings, the National Assembly may wish to note that being market based transactions, the terms and conditions of the borrowings can only be determined at the point of issuance of finalisation based on prevailing market conditions in the ICM.
“It is important to state that the previous issuances of Eurobonds by Nigeria were at the following coupons- USD500 million (2011/10-year): 6.75%; USD500 million (2013/5-year): 5.125%; USD500 million (2013/10-year): 6.375%; and USD1,500 million (2017/15-year): 7.875%, while the USD300 million Diaspora Bond (5-year) issued in June 2017 was at a coupon of 5.625%.
“These coupons were based on the prevailing market conditions at the respective times. It should be noted that current market conditions are considered more favourable than at the time of Nigeria’s last issuances of the Eurobond in March 2017 and the Diaspora Bond in June 2017, with secondary market yields lower than the coupons.
“The Federal Ministry of Finance, the Debt Management Office and the Federal Government’s appointed Transaction Parties for the proposed External Borrowings will work assiduously within the context of the market to secure the best terms and conditions for the Federal Republic of Nigeria,” he said.
At the Senate, immediately after Saraki read the President’s request, the Minority Whip raised a point of order, saying the misinformation by the minister of finance on the request should be corrected.
External loan: Experts call for detailed, doable repayment plan
Experts have expressed worry over Federal Government’s capacity to repay the country’s rising foreign debt profile considering declining revenue inflows into the country.
The experts, who spoke exclusively to Daily Trust yesterday on the $5.5 billion foreign debt approval sought by the President said the foreign loan will no doubt have positive impact on the economy, if invested in infrastructure with a detailed and doable repayment plan.
Professor of Financial Economics in the University of Uyo, Awka Ibom State, Leo Ukpong, said the foreign debt will affect the nation’s inflation and may reverse the downward trend being recorded in recent months.
“Personally, I think borrowing outside the country is not a bad thing but the magnitude of the debt is very high,” he said.
An investment Research Analyst, who heads the Investor Relations Department of the United Bank for Africa Plc, Abiola Rasaq told Daily Trust that the country’s total debt profile was still within acceptable limit considering the size of the economy saying “What becomes concerning is our ability to pay back on those obligations because these are loans and we have to pay them back.”
He said government was trying to reduce the level of domestic borrowings to stop crowding out private sector credit.
“The more government borrows domestically, the less funds will be available to lend to the private sectors,” he said.
Recall that recently, the National Bureau of Statistics reported that Nigeria’s total debt profile rose by $4.33 billion in two years to hit $15.05 billion in 2017.
The foreign and domestic debt statistics of the country as at June 2017 showed that the country’s domestic and foreign debts as at June 30 were $15.1 billion and N14.1 trillion respectively.
