Nigeria’s “appetite” for Eurobonds has stoked controversy between the manager of the nation’s debts and the Monetary Policy Committee of the Central Bank of Nigeria (CBN).
Details of the members’ comments at the May 2022 meeting of the MPC have shown that some of them raised concerns over the country’s current debt profile, warning it could lead into debt distress in the near term.
But the Debt Management Office (DMO) has in a statement responding to the alarm, argued that the current structure of the nation’s debt is a product of the funding needs of the federal government and the imperative of diversifying the sources.
“Particularly worrisome about the debt structure is the increasing accumulation of Eurobonds in the external debt component while minimising concessionary loans,” a member of the MPC, Mr. Asogwa Robert observed in his contributions at the meeting.
“The unexplained government preference of Eurobonds at high-interest costs, with the associated exchange rate risk may likely hurt Nigeria sooner than anticipated. Unfortunately, several other African countries are involved in this excessive rush for Eurobonds, he added.
The attraction for the government to issue Eurobonds is the freedom of the use of proceeds from such securities. This is a good trade-off for the higher pricing compared to the so-called concessional loans from bilateral and multilateral agencies that are rarely cash and cannot be used for budget support and paying subsidies.
Mr Robert drew attention to the fact that Nigeria has been cited by the International Monetary Fund as one of the countries that may drift into debt distress, with a staggering $100.07 billion of public debt stock as of March 31, 2022.
But responding to Mr Robert, the DMO said that his comment may have been made without due consideration of the government’s borrowing needs as captured in the annual budgets, Medium-Term Expenditure Framework, as well as the Debt Management Strategy.
DMO explained that while the borrowing needs are derived from the annual budgets, the borrowing mix is based on the country’s subsisting Debt Management Strategy.
“Successive Debt Management Strategies have often indicated that the Federal Government of Nigeria’s (FGN) preferred source of external borrowing is concessional sources rather than commercial sources such as Eurobonds. For instance, one of the objectives of the Debt Management Strategy 2020 – 2023 is “Maximising funds available to Nigeria from multilateral and bilateral sources in order to access cheaper and long-tenured funds, whilst taking cognisance of the limited funding envelopes available to Nigeria, due to Nigeria’s classification as Lower-Middle-Income country,” DMO said.
Given the size of new borrowings in the annual budgets over the years, the debt management agency said it would not have been proper for the FGN to raise all the funds from the domestic market “As this would result in the government crowding out the private sector and raising borrowing rates. Consequently, some part of the required funding has to be raised externally”.
It explained further that while loans from concessional sources such as the International Development Association (an arm of the World Bank) are relatively cheaper as stated above, they are limited in amount. “In addition, they are not available for financing infrastructure and other capital projects. Thus, Nigeria accesses concessional and semi-concessional loans as may be available, while issuing Eurobonds to part finance the annual budgets and the infrastructure projects contained therein,” it said.
On the issue of Eurobonds likely leading to debt distress, the DMO reiterated the need to generate more revenues significantly beyond their current levels. Data from the World Bank show that compared to a number of advanced and developing countries that have higher public debt to GDP ratios than Nigeria, Nigeria has a much lower revenue to GDP ratio. The World Bank’s Economic Outlook for 2020 showed that in 2020, Nigeria’s revenue to GDP ratio was 6.3% placing it at number 194 out of 196 countries.
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The DMO further explained that while the government continues ongoing efforts to diversify and grow revenues, the public should take into cognisance other benefits of Eurobonds, which include an increase in the level of external reserves and opening up opportunities for the private sector to issue Eurobonds since January 2011 when the debut Sovereign Eurobond was issued by the DMO on behalf of the FGN.
The attraction for the government to go Eurobond is the freedom of the use of proceeds from such securities. This is a good trade-off for the higher pricing compared to the so-called concessional loans from bilateral and multilateral agencies that are rarely cash and cannot be used for budget support and paying subsidies.
Nigeria’s Eurobonds fell on Thursday, with the February 2027 Eurobond losing $2.25 on Thursday at a yield (Ask) of 14.37%, while the February 2032 Eurobond lost $3.375 with a yield of 15.38%.
