Limiting domestic/external borrowing

THE decision of the Debt Management Office (DMO) to set a ceiling for the domestic and external loans that the Federal Government can take in the current fiscal year is a welcome development. The new debt ceiling was fixed at $22.08 billion (about N6.4 trillion). We support this limit because it will, among other things, promote compliance with the government’s policy of balancing domestic debts with external ones to avoid economic shocks.

It will also help us tackle our huge debts, which had amounted to N19.16trn in March 2017.  Few months ago, the DMO had expressed concern about Nigeria’s rising debt profile. Even though it remains within the internationally accepted threshold, the vulnerability of our economy points to a likelihood of risk in the near future, if urgent steps are not taken to shore up revenue collection. By putting a ceiling on the total amount of debt the country can incur, the DMO has sent a signal to foreign investors about Nigeria’s dedication to fiscal discipline. According to the DMO, new domestic borrowing has been pegged at $5.52bn (about N1.6trn) while new external borrowing ceiling is fixed at $16.56bn (about N4.8trn).                                          

The new maximum borrowing limit is part of the key policy recommendations of the 2016 Debt Sustainability Analysis conducted by the debt office. Entitled: “Annual National Debt Sustainability Analysis”, the report stated that “the end-period Net Present Value (NPV) of total public debt-to-GDP ratio for 2016 for the Federal Government is projected at 13.5 percent, and given Nigeria’s threshold of 19.39 percent for NPV of total public debt-to-GDP ratio, the borrowing space available is 5.89 percent of the estimated GDP of $374.95bn for 2017.”            

The DMO also explained that the maximum limit was arrived at after “taking into account the absorptive capacity of the domestic debt market and the options available in the external market.” Out of the total national debt stock of N19.16trn, the domestic component is N11.97trn, while the external component is $13.81bn as at March 31, 2017.  Government, the agency advised, should deploy external loans to the funding of priority projects that can boost output and drive the economy to the path of sustainable recovery and growth.

We recall that the Debt Management Strategy 2016-2019 provides for the rebalancing of the debt portfolio from its composition of 84:16 as at the end of December 2015, to an optimal composition of 60:40 by the end of December 2017, for domestic and external debts respectively. It says that such arrangement supports the use of more external finance for funding capital projects in line with the focus of the present administration on speeding up infrastructure development by substituting the relatively expensive domestic borrowing with cheaper external financing.          

By restricting the total amount the country can borrow, Nigeria has joined the league of countries like the United States, Denmark, Poland, Pakistan, Kenya, Malaysia and Namibia. The USA is seen as a poster child for debt ceilings, which it put in place after World War II to streamline all debts that Congress had to approve. However, it does not stop deficits, but it restricts the Treasury Department (which issues debts) from paying obligations on outstanding debts.                      

Only last week, the US Senate approved legislation to raise the debt limit and keep the government funded until December 8, 2017. In Denmark, the borrowing limit is 960 Danish Kroner (DKK) (about $175bn). The closest Denmark got to breaching the limit was in 2010 when its national debt reached 75 percent of the ceiling, while in Malaysia, the ceiling is 53 percent of its GDP. For Kenya, the borrowing limit is 1.2trn Shillings (about $14.1bn), while that of Namibia, Poland and Pakistan are 35%, 55% and 60%, respectively, of their GDP.              

In all, we urge the Federal Government not to breach the new ceiling. Staying within the range will save the economy from a debt overhang. Indeed, balancing the sources of debt will ensure access to more funds from external sources where the interest is lower than interest on domestic borrowing. Whichever way, prudent management of loans taken, whether from domestic or external sources, is key to driving sustainable recovery and inclusive growth, especially now that Nigeria has officially exited recession.