Nigeria’s fiscal challenges dent domestic debts refinancing agenda

These debts remain spread across government’s issued securities, raging from bonds of various types to Treasury Bills, which were earlier contracted at high-interest yields, in efforts to attract and retain foreign investors, amid ebbing foreign earnings’ capacity.

The securities investment, mostly dominated by foreign investors, no doubt, has been a quick source of foreign exchange for government, especially in this round of volatile crude oil prices, that has lasted more than five years now. But it is not without its challenges.

First, described as “hot money”, the permutations of the foreign investors, given any political and economic events, can create sudden capital flight and the country would be scampering for the foreign exchange. The implications are sudden depreciation of the naira, through increased pressure for dollar and consequent depletion of the reserves. Nigeria has witnessed this severally in the last five years. Also, it comes with huge provisions for yield payments, which further erodes the country’s fiscal space.

The external borrowings, at cheap rates, were used to redeem a part of the costly local debts at maturity, as well as enable a new yield benchmarking for the private sector to source funds too, locally, at a relatively cheap rate. But it has never stayed long.

Again, some of the borrowings, according to the Debt Management Office (DMO), come with longer period than those of the local debt, hence when refinanced, it allowed the government time to repay the loans, when the economy must have fully recovered from the recession and possibly, deepened its diversification.

But it appears that the strategies and expectations are not being realised. The nation’s fiscal challenged such that the government has resorted to borrowing more locally, despite the associated huge interest payment.

The total domestic debt outstanding at end-June 2019 stood at ₦13.41 trillion, representing an increase of ₦1.26 trillion or 10.38 per cent, over ₦12.15 trillion in the corresponding period of 2018.

The debt stock during the review period comprised FGN Bonds worth ₦9.69 trillion or 72.26 per cent, Nigerian Treasury Bills (NTBs) worth ₦2.65 trillion or 19.77 per cent and FRN Treasury Bonds of ₦125.99 billion or 0.94 per cent.
Others were FGN Promissory Notes of ₦707.76 billion or 5.28 per cent; FGN Sukuk, ₦200 billion or 1.49 per cent; FGN Green Bonds, ₦25.69 billion or 0.19 per cent; and FGN Savings Bonds of ₦10.43 billion or 0.08 per cent.

However, despite higher debt stock, the cost of debt servicing declined by 15 per cent to ₦800.73 billion at end-June 2019, compared to ₦941.99 billion in the corresponding period of 2018, due to declining yields in the fixed income market during the review period.

Apex bank’s auctions
CBN Bills offered at the open market amounted to ₦11.89 trillion, while total subscription and sales amounted to ₦13.1 trillion and ₦11.87 trillion in the first half of 2019, respectively, compared with ₦13.92 trillion, ₦11.65 trillion and ₦9.74 trillion offered, subscribed to and sold respectively, in the corresponding period of 2018.

The high level of activity arose from the monthly disbursements to the three tiers of government by the Federation Account Allocation Committee (FAAC) and maturing CBN Bills during the period. Thus, the cost of liquidity management in the review period rose to ₦1.29 trillion compared to ₦848.32 billion in the corresponding period of the previous year.

Treasury bills
The Nigerian Treasury Bills (NTBs) issued and allotted was ₦1,473.84 billion apiece, indicating a decrease of ₦179.52 billion or 10.86 per cent below ₦1.65 trillion apiece in the corresponding period of 2018. The decrease was attributable to fewer NTB issues in the review period.

Total public subscriptions stood at ₦4.15 trillion, compared to ₦3.22 trillion in the corresponding period of 2018. The rise in public subscription was traceable to the increased level of liquidity in the system and the favorable appetite for government securities.

The holding structure of the instrument indicated that Deposit Money Banks (DMBs) and foreign investors took up ₦766.37 billion or 52.00 per cent, mandate and internal funds customers (including CBN Branches) ₦581.08 billion or 39.43 per cent, CBN take-up N73.45 billion or 4.98 per cent and merchant banks ₦52.94 billion or 3.59 per cent.

The outstanding NTB holdings structure indicated that DMBs accounted for 41.69 per cent of the total at end-June 2019 compared with 27.59 per cent in the corresponding period of 2018. Mandate and Internal Account customers (parastatals) accounted for 45.51 per cent, Merchant banks 0.81 per cent, while the CBN accounted for 11.99 per cent.

Treasury bonds
Though there were no new issues in the first half of 2019, the Nigeria Treasury Bonds (FRNTBs) remained the major source of government deficit financing. Hence, the outstanding stock of the instrument at end-June 2019 stood at ₦125.99 billion, compared to ₦150.99 billion at end-June 2018.

The decline in the amount outstanding was due to the redemption of ₦25 billion at the end of 2018. A breakdown of the amount outstanding showed that the CBN held ₦41.03 billion, while ₦84.95 billion was held in the Sinking Fund. In 2018, the CBN held ₦50.44 billion, while ₦100.55 billion was held in the Sinking Fund.

FGN Bonds 
The total value of FGN Bonds offered to the public was ₦700.00 billion, while public subscription and sale stood at ₦1,160.45 billion and ₦615.39 billion, respectively. The amount offered comprised new issues and re-openings of FGN Bonds.

In the same period of 2018, FGN Bonds issues, subscription, and allotment amounted to ₦500 billion, ₦829.42 billion and ₦425.35 billion, respectively. The increase in issues, subscriptions, and allotment in the first half of 2019 was attributable to the government’s efforts to rebalance domestic debt structure in favour of longer tenored instruments and cost reduction.

Consequently, the total value of FGN Bonds outstanding at end-June 2019 stood at ₦10.17 trillion, compared with ₦9,407.53 billion at end-June 2018, indicating an increase of ₦763.76 billion or 8.12 per cent.

The FGN Bonds holding structure showed that ₦3,669.98 billion or 36.08 per cent was held by DMBs, ₦170.48 billion or 1.68 per cent by merchant banks, and the balance of ₦6,330.83 billion or 62.24 per cent held by non-bank public.

FGN domestic debt service was ₦800.73 billion at end-June 2019, representing a decrease of 15 per cent when compared to ₦941.99 billion at end-June 2018. The decrease was attributable to the fall in yields on the securities issued in the markets.

A breakdown of the cost showed that interest expense on NTBs stood at ₦166.63 billion or 20.81 per cent, coupon payments on FGN Bonds, FGN Savings Bonds, and FGN Green Bonds accounted for ₦609.84 billion or 76.16 per cent, ₦0.66 billion or 0.08 per cent and ₦0.72 billion or 0.09 per cent, respectively. Rental payments on FGN Sukuk was ₦16.02 billion or 2.00 per cent, while the interest paid on FRN Treasury Bonds was ₦6.87 billion or 0.86 per cent.

FGN savings bonds
The total value of ₦2.75 billion FGN Savings Bonds, comprising 2- and 3-year tenors, were issued and allotted during the review period, representing an increase of ₦1.42 billion or 106.77 per cent when compared to ₦1.33 billion in the corresponding period of 2018.

The increase was attributable to increased awareness and the government’s efforts to encourage household savings in the economy. The range of coupon rates for the two-year spanned from 11.276 to 12.125 per cent and 12.276 to 13.125 per cent for the three-year tenor.

The range of coupon rates for the corresponding period in 2018 was lower from 9.480 to 12.098 per cent for the two-year and 10.480 to 13.098 per cent for the 3-year tenor.

FGN Green bonds
Total value of ₦25.69 billion FGN Green Bond was outstanding at end-June 2019. The five-year and seven-year tenors were issued at coupon rates of 13.4800 and 14.5000 percent, in December 2017 and June 2019 respectively. The bond was issued to finance sustainable development projects with a positive impact on the environment and the economy.

FGN Sukuk
The total FGN Sukuk Bonds outstanding at end-June 2019 stood at ₦200.00 billion. The two issues of the 7-year Sukuk of ₦100.00 billion each attracted rental rates of 16.47 and 15.74 percent, respectively, payable semi-annually. The proceeds were targeted at the rehabilitation of roads across the six geopolitical zones.

Federal Government of Nigeria Promissory Notes
The total value of ₦707.76 billion FGN Promissory Notes was outstanding at the end of June 2019. The one, two and three-year notes were issued to settle part of the inherited local contractors’ debts, outstanding obligations to oil marketing companies and state governments.