FG Restructures Debt Profile, to Issue Dollar-backed Treasury Bills
Extends Maturity to Three Years
Approves 2018-2020 MTEF, pegs oil benchmark at $45
Retains N305/$1 exchange rate
External reserves hit $31.2bn
Badly weighed down by the debilitating effect of Nigeria’s huge debts, the federal government Wednesday sought a way out, approving the issuance of dollar-backed Treasury bills even as it extended the maturity period from between 91 and 364 days to two and three years respectively.
The initiative, according to an economic expert, who spoke to THISDAY Wednesday, is an impressive policy that would enable the government to restructure the country’s debt profile by borrowing less in naira but more in foreign currencies, explaining that it would bring down interest rate and facilitate the economy’s exit from recession.
The federal government also approved the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper (FSP), pegging oil benchmark at $45 and retaining the prevailing N305/$ exchange rate.
Briefing newsmen at the end of the weekly FEC meeting Wednesday, the Minister of Budget and National Planning, Senator Udoma Udo Udoma, said the MTEF targeted 3.5 per cent growth rate in 2018, 4.5 per cent in 2019 and 7 per cent in 2020, adding that government projected at 2.3 million barrel per day production volume.
Throwing light on the shift from naira denomination of treasury bills to dollars, the Minister of Finance, Mrs. Kemi Adeosun, said the council approved a memo restructuring the issuance of treasury bills using dollar instruments subject to the approval of the National Assembly.
According to her, the extension of the tenor of Treasury bill from the current 91 and 364 days to two and three year period would provide the government with relief from the pressure to repay the debt.
She also said the new initiative would reduce government borrowing to $3 billion, create more room for banks to lend money to private investors and consequently force down interest rates.
She explained that issuing the Treasury bills in dollar instrument was not synonymous with paying interest in dollars but would instead, provide the government with the opportunity to obtain a bond in the international capital market and pay the debt in a cheaper way.
She insisted that it should not be construed as transacting the Treasury bill in dollars.
Adeosun explained: “We are not issuing dollar denominating Treasury bills (TB). No, we are not. What we are doing is that the naira Treasury bill, when it matures, we will then issue bonds in the capital market, international capital market. We are not issuing dollars’ TB at all – erratic dollar bonds.
“You will recall that when we went to the capital market about three times this year, our average cost of borrowing was longer than 7 per cent. But with Treasury bills, we are paying up to 18 per cent. So, what we are doing is simply substituting the maturing naira debt with cheaper dollar denominating debt. We are not dollarising the economy.
“In terms of the impact on naira, it’s going to be positive because it means that $3 billion will be coming into our foreign reserve. It will actually increase our foreign reserves.
“We are not issuing Treasury bills in dollars. Nigerian government doesn’t transact in dollars at all. We are not paying anybody in dollars. What we are simply doing is that as the Nigerian government treasury bills mature, we are now going to pay off by proceeds of dollar denominating bond, a three year-bond. Instead of the treasury bill of 91 to 364 days, we are taking short term money and we refer them to the Treasury bills because anytime we run out of cash to borrow with interest and we cannot pay back, we run to the capital market. It actually increases our debt.
“What we are saying is that in the long run because we are coming into recovery, we need a little bit more time to repay. Instead of saying we are paying back in 91 days, we say, ‘let’s be realistic, we need two to three years to pay off this money.’ So, we are taking dollar denominating long term bonds. It is cheaper than the naira loans and we refer them to the Treasury bill. We are not dollarising our economy in any way.
“Also, if you look at the debt profile, 80 per cent of them is in naira. That stretches a challenge to the economy. Because government borrows heavily, there is no room for the private sector to get loans. Also, there is no incentive for the bank to lend to the private sector.
“What we think we need to do to create jobs and get the economy moving is for private sector lending to be commenced from this $3 billion dollars but we will not take from the domestic market. Our strategy is to restructure our debt in the international market.
“When the National Assembly resumes, we need a resolution to do this. We borrow less because it is cheaper to pay back. It makes it cheaper and we refer them to the economy.
“So, we are taking dollar denominating bond which is cheaper and we refer them to the Treasury bills.”
Reacting to the move by the federal government, the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, described it as a good policy initiative that would help to lower interest rate and take the economy out of recession.
Rewane who spoke in a telephone interview with THISDAY Wednesday night explained: “Take the $3 billion and convert to naira and pay off the treasury bills. In all, it will give you about N1 trillion. N1 trillion is about 20 per cent of our outstanding debt stock. If you retire N1 trillion of treasury bills, the demand for treasury bills will go down and interest will go down.
“And when the interest rate of treasury bills goes down, the interest rate on public debt would also go down and that would help reduce the cost of borrowing, for even the private sector.”
Responding to the question on the implication of the initiative of the FEC on the country’s total debt stock, the economist clarified: “You are not increasing your debt. You are using $3 billion debt to pay off. So, the total debt stock will not increase. The structure is going to change. So, you are using debt, which is of lower cost and longer maturities to take out the short term debt. That is the best thing that can happen to Nigeria.”
On the MTEF, the Budget and National Planning Minister, Udoma, said the document was a product of extensive consultations with major stakeholders in the economy.
He said: “As we know, we have been having extensive consultations in the last few weeks with the governors, members of the public, the leadership of the National Assembly about the MTEF. So, we submitted it and it was approved by the council. The highlight of it is that we have committed to achieving a 7 per cent growth rate by 2020 at the end of the three-year plan in accordance with the economic recovery and growth plan (ERGP).
“MTEF is based on the economic recovery and growth plan and in terms of the trajectory of getting the 7 per cent. We have approved a slightly different trajectory in the sense that by next year, our target is 3.5 per cent in 2018; in 2019, it will be 4.5 per cent growth rate and of course, in 2020 it will be 7 per cent growth rate.
“In terms of crude oil production, our estimate projection for the next year is 2.3 million barrels per day. We expect it to be broken down to 1.8 million barrels per day regular crude and 500,000 barrels per day in terms of condensate. The price we projected for next year is $45 (oil benchmark).
“We are also committed in the MTEF to explore ways of raising additional revenue to reduce debt service to revenue ratio. As the Minister of Finance said, that is part of the policy of this government to make sure that borrowing is controlled and to make sure to keep a reasonable debt service to revenue ratio which will, of course, help to bring down interest rates.”
Also briefing, the Minister of Communications, Mr. Adebayo Shittu, said the council approved a N100 billion ICT infrastructural backbone project in the Information Communication Technology (ICT) sector with a view to achieving service wide connectivity for all government agencies.
According to him, the project which is known as NIPTI 2 is the second phase of the initial NIPTI 1 project which he said was 80 per cent complete, explaining that it will ensure that the country is fully covered by fibre optics.
“Council considered and approved a memo for the national ICT infrastructural backbone project. It is popularly called NIPTI 2 and it is domiciled within the galaxy backbone. Galaxy Backbone is a federal government owned agency which engages in service-wide connectivity of all government offices, agencies, ministries and departments across the country. There has been NIPTI 1 project which is 80 per cent complete. Essentially, it covers most of the southern states and also has a data centre project.
“NIPTI 2 is the concluding component of it, to ensure the entire country is fully covered by fibre optics connectivity. Connecting the whole of the country by way of the federal government’s ministries, agencies and departments. The China NEXIM Bank has graciously supported Nigeria. They funded phase one and they are funding this phase two. By this approval, the Ministry of Finance will enter into negotiations for the full implementation of the funding proposal with us. Essentially, the funding will cost $328 million, approximately N100 billion.
“When concluded, it will not only cover federal ministries, department, agencies and all of that but there will be enough for commercialisation to the private sector particularly GSM companies and other ICT industries. So, we hope that Nigeria will be making a lot of money from this particular facility when completed,” he stated.
Nigeria’s External Reserves Hits $31.2bn
Meanwhile, the Central Bank of Nigeria (CBN) has put the latest figure of Nigeria’s external reserves as at August 8, at $31.22 billion.
The latest value of the reserves, which is derived mainly from the proceeds of crude oil sales, shows that it has risen to a two-year high.
Nigeria’s increased crude oil production, as well as the newly introduced Investors and Exporters’ (I&E) foreign exchange window, have provided impetus to dollar inflows into the country.
The improved crude earnings reflected in the amount of funds disbursed by the Federal Account Allocation Committee (FAAC) which climbed to a total of N3.010 trillion to the three tiers of government between January and June this year; figures compiled by THISDAY had shown. The amount shared by the three tiers of government was significantly higher, compared with the N2 trillion allocated to them in the first half of 2016.
A breakdown of the disbursement gathered by THISDAY showed that the federal government received a total sum of N1.216 trillion as FAAC in the first half of 2017, higher than the N854 billion it was allocated in the comparable period of 2016. While the states received a total of N798 billion in the first six months of 2017, also higher than the N701 billion in the comparable period of 2016; local government got N599 billion in the first half of 2017 as FAAC, higher than the N429.4 billion they received between January and June this year.
On the other hand, the I & E currency window for investors and exporters has traded around $3.83 billion since it was established with the naira trading more strongly in the market. The window, where buyers and sellers are free to agree to an exchange rate, was introduced in April to try to attract foreign investors into the country and boost the supply of dollars.
“The new Investor and Exporter FX window has provided impetus to portfolio inflows, helped increase reserves above $30 billion, and contributed to reducing the parallel market premium,” the International Monetary Fund (IMF) acknowledged in a report last week.
“The economic backdrop remains challenging, despite some signs of relief in the first half of 2017. Economic activity contracted in the first quarter of the year by 0.6 percent, mainly as maintenance stoppages reduced oil production.
“However, following four quarters of negative growth, the non-oil economy grew by 0.6 percent (year-on-year), on the back of a rebound in manufacturing and continued strong performance in agriculture. Various indicators suggest an uptick in activity in the second quarter of the year. Helped by favourable base effects, headline inflation decreased to 16.1 percent in June 2017, but remains high despite tight liquidity conditions,” the IMF had added.
By Omololu Ogunmade in Abuja and Obinna Chima in Lagos
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