Budget Constraints: FG Goes on Borrowing Spree Again

Budget Constraints: FG Goes on Borrowing Spree Again
Chris Steven, Abuja 

Federal Government may have settled for another round of borrowing from external sources,particularly the World Bank and African Development Bank(ADB) as it appears to be facing constraints of fiscal resources to implement the 2016 budget.

Although it is not clear how much government was considering to borrow to augment its funds for implementation of the N6.06trillion 2016 budget,the decision contravenes its earlier stance not to borrow and incur more debts for the country.

The new borrowings is expected to be structured around the Medium Term Expenditure Framework(MTEF) with a three year time-frame 2016-2019. 

Beyond this,the Federal Executive Council (FEC) agreed to a more stringent debt management strategy to create reasonable impact for the citizens in the long run.

This much was revealed after the FEC meeting which held Wednesday at the Presidential Villa,Abuja.

The Minister of Finance Kemi Adeosun  who briefed State House Correspondents of the new development,explained that government considers external borrowing more cost effective in view of the low interest rate.

She said owing to high domestic debt profile especially coming from government,it intends to reduce it drastically from 1percent to 0.7percent by 2019.

She said she was able to convince her colleagues at the FEC, which gave its nod that government should evolve from internal borrowing in order not to cripple the banking sector’s ability to fund the private sector to stimulate the economy,especially the real sector.

“Government had taken a strategic decision that where possible we would need more external borrowing.

“We would need to be borrowing. We need to borrow at the most cost effective rate and at the most cost effective and beneficial terms.

“These external debts would be in dollars or in any other currencies because the interest rates are cheaper, the tenures are longer and there is more room for banks to lend to the private sector especially Small and Medium Enterprises(SMEs).

“Government recognizes that there is a need to stimulate the private sector, for the private sector to really grow, banks must lend to the private sector, so we don’t want government borrowing crowding out the private sector.

“FEC made it very clear that we must make sure that our costs are low and manage the foreign exchange risks. They agreed that it is cheaper to borrow externally but we must manage the risk involved.

“I presented a memo to the FEC which was approved for the debt management strategy for the years 2016-2019.

“Nigeria started producing debt management strategy in the year 2012 and three years debt management Programme and the previous ones had expired December 2015 and there was a need for a new one.

“There was a need for a new one for two reasons, first was that the previous one had expired,secondly, given the current economic challenges and the economic circus of this government to reflate and diversify the economy.

“We felt there was a need for a new debt strategy, so the debt strategy to be used is based on Medium Term Expenditure Framework which as you know was prepared and presented by the Ministry of Budget and National Planning.

“MTEF assumes that we would reduce our domestic debt from 1 percent of GDP to 0.7 percent by 2019 and the reasons for this is that the government recognizes that for the next 3 years, to really stimulate the economy and to provide the infrastructure that we need,”Adeosun said.

According to the Finance Minister,government hopes to repay the loans through dollar earnings from non-oil exports and strategic reforms to make the Nigeria economy export friendly.

She said,FEC suggested some guidelines which was that as we are moving more of our debt to dollars we need to focus more on exports especially non oil exports and discussion was held around how to make export easier.

Her words,”There was a lot of discussions around reforms that we would be needing in customs and other ministries to make it easier to export Nigerian goods and agricultural produce and solid minerals that there is demand for at the moment.

“Some of the bottle necks that exits in customs and those under quarantine that needed to be removed. If we do this, it would create foreign exchange earnings, so that these borrowings which are in dollars, when they need to be repaid we would have dollar revenues to pay them.

“There was a long discussion about multilateral loans which are loans from agencies like the World Bank, African Development Bank and so on.

“Ministers have raised concern that some of the previous  agreements that Nigerian government entered into were not optimal and Cabinet agreed that these are not grants but loans and therefore Nigeria should be confident enough to negotiate with some of these multilateral agencies to make sure that those loans we take either from the world bank or ADB are on terms that are advantageous to Nigerians.

“FEC unanimously supported us and mandated the Ministry of Finance which is the main negotiator that henceforth such loans will need to be structured so that they benefit Nigerians.

“We also agreed that there will be new instrument in the domestic market, particularly Sukuk bonds,  infrastructure bonds and inflation linked bonds to deepen the domestic market and create greater opportunity in the domestic market.

“This strategy would govern how we manage our borrowings for the next three years”.

Meanwhile, Minister of State for Budget and National Planning,Zainab Ahmed collaborated Kemi’s position,insisting that the MTEF loan strategy would reduce the level of debt from what it is in 2016 to 25% in the next three years.

“I need to empathize that the importance of this strategy is that there is a debt strategy that aligns with the MTEF and it is important for us to do this to move away from short term borrowing to longer term borrowing and to move away government borrowing from the domestic market as much as possible to cheaper external loans.

“The purpose is that the financial system will have more resources to lend to the real sector, the productive sector.

“The MTEF has a plan to reduce the level of debt from what it is in 2016 to 25% in the next three years and that is what this plan is really conforming to,”She said.

Recall that Nigeria was notorious for foreign debts during past administrations, such that it had to appropriate a substantial part of its annual budget to service the interest on such loans.

The administration of former President Olusegun Obasanjo,had to rally funds through the assistance of former Minister of Finance, Okonjo Iweala to exit Nigeria from the paris club debtor nations.