The Debt Management Office (DMO) has said that the first component of the USD2.5 billion, out of the total USD5.5 loan sought by the federal government recently, represents new external borrowing and was provided for in the 2017 Appropriation Act to part finance the deficit in that Budget.
In a statement, the DMO said that the plans of the Federal Government to source for capital from the International Financial Markets was for the good of the economy, adding that the proposed USD5.5 billion comprised two components: USD2.5 billion new borrowing and USD3 billion for refinancing.
“ The first component of USD2.5 billion, represents new external borrowing provided for in the 2017 Appropriation Act to part finance the deficit in that Budget.
“It will be recalled that the 2017 Appropriation Act provided for new External Borrowing of N1.067 trillion or USD3.5 billion at an Exchange Rate of USD/N305. Out of this amount, USD300 million has been raised through a Diaspora Bond that was issued in June 2017 leaving a balance of USD3.2 billion out of which USD2.5 billion is to be sourced through a Eurobond Issuance.
“The USD2.5 billion proposed Eurobond, will be used to finance critical road and rail projects included in the 2017 Appropriation Act. Some of the projects are: construction of a Second Runway at the Nnamdi-Azikwe International Airport; rail projects including Lagos-Kano, Calabar-Lagos, Kano-Kaduna, Ajaokuta-Itakpe-Warri, Kaduna-Idu; and the Bodo-Bonny Road with a Bridge across the Opobo Channel.
“These infrastructural facilities will lead to job creation and improve the climate for business thereby contributing to economic growth.”
On the issue of the proposed USD3 billion External Borrowing, DMO said that it will be used to repay some of the existing domestic debt, adding that this is purely a portfolio restructuring activity that will not result in any increase in the public debt as it is an exchange of one type of debt (Domestic) for another (External).
The DMO said that the Domestic Debt Stock as at June 30, 2017 included about N3.7 trillion of Nigerian Treasury Bills (NTBs) with tenors of less than one year and at interest cost of about 17% per annum.
“The short term nature of the NTB stock and the high interest rate, expose the public debt to refinancing risk and high Debt Service Costs. By converting them to External Debt, the tenor will be extended to at least 5 years while the Interest Cost will drop to about 7% p.a. The savings in Debt Service from this exercise is estimated at over N90 billion p.a.
It listed the benefit of the laon, including reducing the Interest Cost of Borrowing as external borrowing in US Dollars is much cheaper at about 7% per annum compared to up to 17% p.a. in the domestic market.
It will also increase stability in the debt stock and that extend the tenor profile of the debt stock as longer-dated External Debt is used to replace short term domestic debt. This would make the debt portfolio more stable, thereby reducing refinancing risk.
“The pressure in the domestic market created by the large government borrowing will be reduced. This will create more space for borrowing by the private sector which will enable them contribute to the growth of the Nigerian economy.
“External Borrowing represent foreign currency into the nation’s External Reserve thereby allowing for a stable exchange rate for the Naira.”
The statement emphasized that the proposed USD2.5 billion new borrowing through Eurobonds to part finance the deficit in the 2017 Appropriation Act and the refinancing of existing domestic debt through external capital raising of USD3 billion, are consistent with Nigeria’s Debt Management Strategy, whose main objective is the increase external financing with a view to rebalancing the public debt portfolio in favour of long-term external financing in order to reduce the cost of debt and lengthen the maturity profile.
The DMO added that in contracting external debt, a conscious effort is made to exhaust all opportunities available from the concessional sources in order to reduce the level of External Debt Service.
It said that all Borrowings are approved by the National Assembly and are included in the Annual Budgets and the Medium Term Expenditure Framework (MTEF).
