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OUR EXTERNAL DEBT IS ABOUT $3.9BN

By CHRISTIAN OCHIAMA NBF News
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Nwankwo
Director-General of the Debt Management Office (DMO), Dr Abraham Nwankwo wants Nigerians to give credit to the Olusegun Obasanjo administration for its dogged fight in reducing the country's debt from a high of $36 billion to just $3.6 billion.

He said borrowing is necessary in order for the country to carry out its development programmes. In this interview, Nwankwo who is our chief executive officer of the week spoke on the duties of his office, the challenges, Nigeria's debt and its management. In particular, he dwelt on the nation's debt which he put at $3.9billion.

Excerpts
What is the job description of DMO?
First of all, I want to say that I appreciate the need to continue informing the general public about what we do. But I would also want to stress that we also appreciate the fact that the Nigerian public has been very inspiring in their interest on issues concerning public debt management. Essentially, public debt management has to do with funding the financing gaps of government by borrowing from various sources using various instruments and managing the debt in such a way that the obligations arising therefrom in terms of debt service as well as repayment are effected as at when due.

Related to that, of course, is the challenge of ensuring that the public debt is of such composition and such magnitude that it remains sustainable. By that we mean  it does not impose undue burden and stress on governance and public finances. Very closely related to that and which is DMO's positive way of looking at debt management is that it should cover the process of mobilizing debt resources for government to fund growth, to fund development and fund poverty reduction. That is, debt management should not be seen as something you do for the sake of it. It has to be targeted at certain objectives, certain goals that add value to the welfare of the people.

That is why in our vision of public debt management as specified in our strategic plan 2008-2012, we stated that our vision is to manage the country's debt as an asset for growth, development and poverty reduction. Now let me go back a little in terms of what public debt is all about it is more like an equational term. Any government anywhere in the world funds its expenditure on social and  development projects primarily with revenues and the classical source for revenue for government anywhere in the world in any age is tax revenue.

There might be other sources that are peculiar to other countries like royalties from oil and all that. But governments find out, historically, that tax revenue is not always sufficient for them to fund their immediate expenditures that are needed to bring about transformation in the living standards of their people and achieving other objectives. Therefore, they need to borrow to close the gap. So that's where public borrowing comes in so that when you augment tax revenue which is the classical source of public revenue with borrowed funds, then you have portfolio with which you can fund the totality of your planned expenditures for the period under consideration.

In the peculiar case of a country like Nigeria, there is an additional challenge of fast-tracking development, of catching up, particularly, if you take into account the history of such a country, a former colonized country that has suffered like most less developed countries the arrest of development that arose from  colonialism. In addition, when you take into account the setback in terms of  programmed and predictable development that arises from military intervention in our own case, more than one decade, you see that there is a lot of lost ground to be covered in terms of the infrastructure and other services, education and  health. Therefore, we have an additional need to look for additional resources beyond the tax revenue to fast-track development,

And you begin to appreciate the value of front loading when you take into account that ordinarily what an individual economic agent, a corporate economic agent or a national economic agent, that is what a state or government would do is to gradually save part of its current revenue so that over a considerable number of years, she must have accumulated enough to be able to carry specific big projects, construction of railway lines, building of universities, development of new generating plants.

But thinking intelligently, it is obvious that the right thing to do is to borrow immediately to provide such infrastructure, to provide such services and programme it in such a way that those savings you would have planned to make over  a long period of time will be adequate to service and repay the money you borrowed today. In essence, instead of you to wait for the next 10, 20 years to provide for your self the needed services, you borrow now so that you begin to derive  the benefit from such a service, from such a project while using the cash flows you would have saved to eventually service and repay the loan. That is the simple logic, simple arithmetic or if you like, the common sense of public borrowing.

Was this process followed in the case of Nigeria? Because there does not seem to be corresponding projects and services on ground to justify the huge public loans.

I will start from the present and go back to legacy issues. I will tell you that under the current administration, I will give you specific examples of what has been done and what is being done with borrowed money. You are aware, for example, that there is an initiative for the revitalization and modernization of the rail services in Nigeria and that locomotives are being brought to resuscitate rail transportation. I can tell you definitely that part of the funds being used for this rail transportation revitalization were sourced and borrowed funds from the domestic capital market through the issuance of Federal Government bonds.

This is a specific example. You are aware that currently the government, as part of its stimulus package, following the global financial and economic crisis which dampened economic activities in all countries of the world, decided that  to ensure that the economy does not really depress, there was the need to stimulate large commercial  agriculture and through the combined effort of the Central Bank of Nigeria and the Ministry of Agriculture and Water Resources about 200 billion naira is being made available for commercial agriculture programme that is being currently implemented. The 200 billion naira long-term money was raised by issuing FGN bonds and debt instruments for this purpose.

I am sure you are aware that the Central Bank and the Federal Ministry of Agriculture have made advertisements in 2009 specifying the procedure for implementing that scheme. It will involve various agencies. It will involve state governments. It will involve the deposit money banks. This is a specific, practical example of how government is using borrowed fund under this administration to really work directly on the real sector of the economy. You are also aware that government has a grand plan of developing and modernizing the cotton, textile and garment sector.

That programme is on as one of the real sector  programmes of the government.  Of course, I don't need to go into the details of the volume of  economic  activities it will create  in the agricultural sector, in the industrial sector and  in the export sector. But suffice it to say that the 100 billion naira being part of this programme is being provided by the DMO by issuing FGN bonds and as I talk to you this programme is being implemented through the joint effort of Bank of Industry, the Ministry of Agriculture and Water Resources and the Ministry of Commerce and Industry. I am only giving you some few examples of how you can use borrowed resources  positively to stimulate the economy particularly the real sector.

Now, this is not a question of trickling down but that of having a direct impact on the lives of the people. Because if you are talking of reviving the cotton growing, garment and the textile sector, you are talking of employment. If you are talking of rail transportation, you are talking of giving access to everybody because you know that rail transportation is usually an affordable, populist, mass transit transportation channel, opening up the rural areas, giving access to rural farmers, making it possible for them to evacuate their produce, be able to move the product of  artisan activities to other parts of the country, to the city so that they can earn good income from  produce and products. So, this is how borrowed money translates to the real sector and translates to the well-being of the individual citizen.

This is the present. Now let's go back to the past. I agree and we all know that there was a legacy problem that in the past it was difficult to account for the use of resources whether borrowed or not. And that was one of the reasons why the DMO was established in 2000 so that there would be a more organized , a more transparent, a more accountable, a more predictable approach to the use of borrowed funds in particular. So, we should not allow the problems of the past, the deficiencies of the past to bug us down . Now, there are new institutions like the DMO, new laws like the Fiscal Responsibility Act.

There are new processes like the Due Process and the Public Procurement arrangement as well as the various laws that govern it that has led to the issuance of guidelines. Nigerians will try to appreciate that we are trying to step forward, to correct the mistakes of the past through institutions, through legislations, through capacity-building to do better than we did in the past. And there are ample illustrations under the present government in which this is happening in terms of institution building, in terms of legislations and in terms of real initiatives in the agricultural, transportation and in other sectors.

What is the nation's debt profile now? How much are we owing?

We were told under Obasanjo that we were no longer owing.

Let's get the facts right. Obasanjo never told Nigerians that the country was no more owing. Rather, what he said and what Nigerians will continue to give him credit for is that when he took over government in 1999, Nigeria was under an unsustainable debt burden. Particularly, we were owing the Paris Club about $30billion. And we were not able to service that debt as at when due.

So the debt was unsustainable. Under his leadership, we were able to follow the various complex processes of negotiation, diplomatic, economic and otherwise. And then we were able to obtain a 60 per cent debt write-off. We paid off the balance of  40 per cent and we became free of the Paris Club debt. It was the odious component of our external debt. So, our Paris Club debt became zero. The Paris Club was not the only creditor we had. We had other creditors like the African Development Bank, the World Bank who we owed. These are multilateral loans. But these loans were not odious.

They were not harmful. They were soft loans. So, we never intended, never planned and it was not desirable for us to pay back those loans. These were loans, some were taken in the 1960s, 1970s and 1980s, most of them for 40 years and with no interest charge, only service charge of 0.75 per cent less than one per cent per annum. Service charge, no interest rate. These loans were useful to us and we were comfortable to carry these loans which were used to build our railways, our universities and some of the roads we still have today . They were also used to fund some of the power projects we still have today . So, it was never our intention to dispose of such loans.

Rather, it was to our interest having disposed of the onerous and odious Paris Club loans, it was advantageous to us to secure more of these soft loans in order to fund our infrastructure deficit. Also fund social development, agriculture, the fadama projects and the like. Fund education, the Universal Basic Education, UBE fund health projects like HIV, malaria. So, Nigerians should understand that we exited the odious Paris Club debt which was the unacceptable component of our foreign debt. We never planned , intended and it was not desirable for us to exit the multilateral debts , the soft loans. So, if and when we do need loans we still wish to borrow from the soft windows of the World Bank, that is the IDA window, the soft window of the African Development Bank which is the ADF window so that we can secure long term loans for long term projects, social projects, infrastructural projects.

So, that is the situation. Our external debt as at the time we exited the Paris Club,  these other mainly concessional loans were at about $3.6billion. Remember, we were having an external loan of about $36billion as at the end of 2004.We paid off the Paris Club and it came down to about $3.6billion. As at now, our external debt is about $3.9billion. So, it was never zero. It was $3.6billion and now $3.9billion. It was not from zero to $3.9billion but from $3.6billion to $3.9 billion. You have to understand that very clearly.

Do you have partners with whom you manage this public debt?

Every aspect of the job of government is collective. There is no ministry, no department, no agency that works alone . For every responsibility in government for the good of the people, there is a ministry, department or an agency that has the mandate, the responsibility to account to the people and to make sure that the services are delivered for the benefit of the people. So, as far as public debt management is concerned, DMO is the agency of government with the mandate to carry out this function for the benefit of Nigeria and her citizens. Being so, we work collaboratively with ministries, departments and agencies. Most importantly, we work closely with the Ministry of Finance and the Minister of Finance is the channel through which we reach the Federal Executive Council. Of course, there is no gainsaying that that was to be expected.

As I had earlier explained, the need for public debt arises from the fact that the resources available to government from revenue mainly tax is not enough for it to do its job and there is the need for borrowing. And in any case, it is the ministry of finance and particularly the budget office that is responsible for deciding and programming the expenditure of government. It is from the ministry  that the Financing gap is determined and which is to be filled by the DMO. We also work closely with the office of the Accountant-General of the Federation, Central Bank of Nigeria and the Securities  and Exchange Commission (SEC).

In terms of administration, it is important to note that DMO has a board that constitutes mainly of ex-officio members. The Chairman of the supervisory board of DMO is the Vice President of Nigeria. Other members of the board include the Minister of Finance, Vice-Chairman, the Attorney General and Minister of Justice, Governor of the Central Bank of Nigeria, the Chief Economic Adviser to the President, the Accountant-General of the Federation and of course, the Director-General of DMO.

Is it possible for a country to run its affairs debt-free?

It is neither necessary nor desirable for a country to run its affairs without incurring some debt. It is abnormal. Because the whole essence of managing an economy or managing your private business is that you are looking forward, you are dynamic, you want to grow. And if you want to grow like in a private business, you cannot depend on the surplus you generate unless you don't have competitors. For you to grow fast and compete effectively, you have to go to banks to borrow and expand your business otherwise, sooner or later, you will be choked off  by your competitors.

Now, every modern economy, every modern nation/state invariably borrows because, as I have explained, why would you as government wait for the next 20 years, to save a particular amount to be able to carry out a particular project instead of borrowing the money now and using the expected cash flow you will save over 20 years to service and repay it. It does not make sense. It is not reasonable. Another reason why most prosperous and modern states like the USA, Germany, the UK, who are so prudent in their fiscal and financial management, still borrow. You should ask yourself why they still borrow. They borrow because apart from the fact that they want to continue modernizing their economy and they would not need to depend on revenue alone if they must catch up with competitiveness across the borders, they also have responsibilities beyond their territories.

For example, the USA accepts the responsibility to police the rest of the world. They appreciate the challenge of conquering the space. It is not feasible that the USA economy as big and as prosperous as it is, will be able to generate all the surpluses to be able to fund all these other extra-territorial responsibilities. They have to borrow, thinking forward. But the challenge really is for that nation state to define its objectives, what it wants to achieve with the use of its resources and therefore, what value it can add by using borrowed funds in addition to achieve those goals and also how efficiently it uses its resources borrowed or not. How it can track the input to the output. How much it has borrowed, how it has utilized it.

React to the allegation that these World Bank loans, soft as they are, come with conditions such as insisting on particular consultants and their fees which are deducted at source.

Now I can tell you this, as a Nigerian and as a professional, if I am involved in any such loan, I will look at the cost benefit analysis. If the consultant fees are not necessary, desirable and it is not going to add value, if the work of the consultant is not going to add adequate compensatory value to the project of course we will not accept the loan. It is not feasible, it is not possible for any loan to be forced on us. They are soft loans and this means they are cheap.

And when you are talking of cheapness, you are taking into account all the costs. If you know that the cost is not favourable to you, why should accept it? Again for every item of cost, for instance, the consultant issues you are raising, it is our position that for every project, on a case by case basis you have to scrutinize the various components. We have to evaluate it to know if it is appropriate or not. Whether or not it will add value to us. We are not under any obligation to accept the loan. The principle is that we should not accept any offers of loans that do not meet our own terms, conditions, expectations and are not favourable to us. That is the bottom line and there should be no compromise about that.

What are your challenges, if any?
Every human being, organization, nations have their challenges. Why we exist is for us to be able to confront these challenges and find the best solutions to them. We have challenges of resources. Invariably, we do not always have enough resources to carry out our mandate. But also it is pertinent to point out that the whole country has serious resource constraints.

We believe that if we want to show example of leadership, instead of complaining of not having enough resources, we have to make a point that even an organization that does not have adequate resources can contribute more outstandingly than those with resources just because the people involved, the team is ready to make the necessary sacrifices.


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