Debt Office raises alarm on domestic debt



The Debt Management Office has raised an alarm over the sustainability of Nigeria's domestic debt.


According to the DMO, the country's domestic debt, which stood at ₦2.3 trillion at the end of 2008, may hit unsustainable levels by 2010.


In its report entitled National Debt Management Framework: 2008 to 2012, the office stated that though Nigeria seems not to have any domestic debt sustainability problems over the medium term, the country may face challenges servicing the debt by 2010.


"Interest payments/domestic budget revenue is within the threshold boundaries in the medium term. The only exception is the interest payments/domestic budget revenue ratio in the year 2010. Its value is higher than the upper boundary of the threshold," the report added.


Possible liquidity problem


According to the report, the threshold set by Debt Relief International (DRI), which is the internationally acceptable benchmark in domestic debt sustainability analysis, is between 4.6 per cent to 6.8 per cent ratio of interest payment and revenue. Nigeria's interest payment/revenue ratio, which stood at 5.2 per cent in 2007, is expected to rise to 8.2 per cent in 2010.


"The rise above the threshold value of the interest payment/domestic budget revenue indicator could be seen as a warning. Since most values throughout the period under review are already in the middle range, it could easily lapse into liquidity problem if sound debt management practices are not maintained."


Abraham Nwankwo, the director general of the DMO, said as part of effort to adopt sound debt management practices, the federal government will continue to subject itself to the discipline of the market by raising funds from the domestic bond market instead of the initial practice of ways and means to sustain government funding.


Strong bond market necessary


In his keynote address at the one-day workshop with the theme, "The Nigerian Federal Government Bond Market: Safe Haven in Times of Crisis" held in Lagos last week, Mr. Nwankwo said a strong bond market is an essential component of a viable financial market. He observed that the domestic bond market has evolved rapidly in the last six years as seen in the trends in the sub-national and corporate bond segments funding the budget.


According to him, about ₦700 billion in the 2010 budget will be sourced from the domestic bond market.


"From 2003 to date, the DMO has offered Federal Government of Nigeria (FGN) Bonds worth ₦2.51 trillion, recorded a total subscription of ₦4.54 trillion and allotted ₦2.52 trillion. The bonds were issued in tenors of 3, 5, 7 and 10 years until November 2008 when a 20-year bond was issued." He, however, projected that Nigeria could float longer tenor bonds in future. "We will have to wait for about five years before we go beyond what we already have," he said.


He said efforts are on to deepen the domestic bond market in order to provide a platform to enable government and corporate bonds to thrive.


"When the DMO first issued FGN Bonds in 2003, its intention was driven largely by the need to restructure the federal government's domestic debt from predominantly short term Nigerian Treasury Bills (63 per cent) to a combination of short, medium and long term." Mr. Nwankwo explained that as at December 2008, 80 per cent of Nigeria's domestic debts were held in longer tenor bonds, development stocks and treasury bonds.


In order to create a vibrant secondary bond market, the DMO introduced primary dealers and market makers system in 2006. Since then 107,836 transactions worth ₦14.68 trillion has been traded on the secondary bond market thus creating liquidity in federal, state and corporate bonds.


According to the DMO, "drawing a sound domestic debt management strategy must be prioritised to prevent the drift into an unsustainable debt position in the longer run."



(Source: NEXT)

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