MTDS Nigerian Govt. Opens Borrowings Flood Gate –Afrinvest

MTDS: Nigerian Govt. Opens Borrowings Flood Gate –Afrinvest

In a growth-starved economy with a lack of strategic blueprint, designed and targeted towards improvement in revenue generation capability, borrowing has become the most sought out strategy for Nigeria.

Following the recent adjustment made to the medium term debt management strategy (MTDS), a leading investment firm, Afrinvest, said adjustment opened the borrowings flood gate for Nigeria.

For Nigeria, debt is not the problem when compared with peers in Africa but the country is underperforming its capability.

The government of the day has chosen the easy way, which some pundits believe is no rocket science but could starve the country from achieving a deserved milestone.

However, despite the addition of more than N20 trillion to the nation’s debt burden, economic growth has not been impressive. Instead, macroeconomic indices have weakened, inflation and unemployment rates have been on ascendancy.

It is not clear if the current administration includes in its short to medium term plans on how to offset rising debt profile and related costs. Despite the humongous amount in its debt book valued at more than ₦32 trillion, the government also plan to borrow to finance budget deficit.

It is not clear now at what point the Nigerian government plans to halt borrowings despite improvement in the global price of oil.

Oil price has maintained an upward trajectory, as international benchmark Brent crude price rose above $60 per barrel.

Nigerian debt management office raised debt to gross domestic ratio by 15% in order to accommodate government’s plan to ramp up credits from both local and foreign markets.

Afrinvest said the approved strategy for the 2020–2023 fiscal period is a careless deviation from the prior years’ strategies

The new debt strategy proposes a debt-to-GDP ratio of 40%, up from 25.0% in the 2016-2019 MTDS and local-to-foreign debt mix of 70:30 from a 60:40 mix in the prior framework.

Additionally, an average debt portfolio tenor of 10 years (minimum) was proposed while the long-term– to short-term domestic debt mix of 75:25 years was maintained.

Afrinvest explained that the MTDS is a framework developed by the World Bank and IMF with the goal of linking government borrowings with macroeconomic policies.

“Additionally, the MTDS helps to maintain sustainable debt levels and drives the development of the local debt market.

“However, the 2020 – 2023 strategy appears to deviate from this objectives as it proposes wider room for the government to increase debt with little attention to debt sustainability and servicing costs”, the investment firm posited.

It added that the strategy suggests that government is less concerned about debt service amidst weak revenue prospects as it proposes a higher debt-to-GDP ratio (40.0%).

“The actual debt-to-GDP ratio for 2020 of 29.2% -including Ways and Means- is in breach of the 2016–2019 framework”.

Meanwhile, the actual debt service-to-revenue ratio worsened to 82.9% in 2020 from an average of 55.9% over the past 3 years, bringing to question the optimality of the strategy.

The Debt Management Office (DMO) had disclosed that the increase is to accommodate new borrowings for budget funding.

This includes ways and means to accommodate the proposed transfer of the debts of some state-owned enterprises (SOEs) and asset management corporations (AMCON) to the FG’s balance sheet.

Afrinvest advised that with the weak prospects for recovery in government revenue, the Nigerian government needs to exercise caution on increasing debt levels going forward.

“We hold the view that the return to a debt mix ratio of 70 (domestic):30 (external) from 60:40 may have been driven by the low-interest rate environment in 2020.

“For external borrowing, the strategy to reduce the ratio to 30% (from 40%) appears prudent as global yields are expected to pick up with economic recovery”, it added.

The investment firm stated that on the domestic front, the government is confident of its ability to issue at a lower cost given the current demand and supply dynamics in the market.

Hence, this justifies the increase to 70%.

“In an environment with increasing uncertainty on the direction of interest rates, the targeted debt mix could result in higher borrowing cost.

This, given the elevated medium-to-long-term outlook on interest rates, while also crowding out the private sector from the local debt market, Afrinvest stated.

Nigeria Raised Debts/GDP Ratio to 40% over New Borrowings Plan

Some experts believe that there is a lack of clarity of purpose in the country’s economic management and strategy design as experts at Cowry Asset Management noted that there is a wide gap between the level of borrowings and infrastructure additions.

MTDS: Nigerian Govt. Opens Borrowings Flood Gate –Afrinvest