Buhari’s N22.7trn debt conversion plan stuck in limbo

Nigeria 'on cusp of debt crisis' - Rewane's FDC

With just over a month to the end of his tenure, President Muhammadu Buhari’s plan to restructure the debt owed to the central bank has not got off the ground. Lawmakers have yet to give it the green light.

Four months ago, Buhari sent a letter to the National Assembly seeking approval to convert N22.7 trillion borrowed from the Central Bank of Nigeria (CBN) to 40-year bonds that will be sold to investors at 9 percent interest, with a three-year moratorium.

The Senate considered the request on December 28, but failed to approve it after concerns were raised about the debt, with some lawmakers describing it as unconstitutional.

Few days later, Buhari urged the lawmakers to reconsider their stance on the proposed securitisation of the CBN loans, indicating that interrogation of the composition of the loans could be done after granting approval.

On January 17, the special committee set up by the Senate to liaise with the executive for necessary information on the debt said the attempts made to meet the CBN governor and the finance minister for the required details proved abortive. It asked for additional three days “for thorough work on the assignment and submission of the report.”

But the plan was not approved before the lawmakers went on recess on January 25, ahead of the general election. With the polls now over, the race for the leadership of the 10th National Assembly is hotting up amid heightened political tension in the country. The outcome of the presidential election is still a bone of contention, with major opposition parties challenging the emergence of Bola Tinubu as President-elect in court.

Bismarck Rewane, managing director of Financial Derivatives Company Limited (FDC), rules out the possibility of securitising the debt before the end of Buhari’s tenure.

Read also: Buhari seeks Senate approval to restructure CBN’s N23.7trn Ways and Means

“It’s not feasible. It is a bit tight. There is a process for making an issue. First of all, there is no approval yet. Secondly, the debt management office will have to announce an issue – the programme – and investors will have to put their money into it. The programme will have to be rated. Bonds are normally rated,” he told BusinessDay by phone.

He said the current National Assembly could approve the plan. “But even if they approve it now, what is the time between now and the issue? And why would investors buy, because basically it is not new money? It is money that is moving from one chamber to another.”

He said the Buhari administration should do what can be done effectively, hand over properly and let the new team take over from there.

CBN loans jump more than 30-fold under Buhari

The debt owed to the central bank ballooned to N23.77 trillion as of October 2022, more than 30 times what Buhari met in 2015. It was N789.67 billion when President Goodluck Jonathan left office.

The CBN overdraft is not included in the country’s public debt stock, which rose to N46.25 trillion last year from N39.56 trillion in 2021, according to the Debt Management Office. The N46.25 trillion comprises the debts of the Federal Government, the 36 state governments, and the Federal Capital Territory.

The law allows the central bank to lend to the federal government through Ways and Means Advances, a loan facility used to finance the government in periods of temporary budget shortfalls subject to limits imposed by law.

But on Buhari’s watch, the federal government’s borrowing from the central bank repeatedly exceeded the statutory limit of five percent of the previous year’s revenues despite warnings from the World Bank and the International Monetary Fund (IMF), among others.

In 2020, when the country was seeking emergency financial assistance of $3.4 billion from the IMF, the government said in its letter of intent that the existing stock of overdrafts held at the CBN would be securitised, and the recourse to central bank financing would be eliminated by 2025.

Buhari said early this year that failure to grant the securitisation approval would “cost the government about N1.8 trillion in additional interest in 2023, given the differential between the applicable interest rates, which is currently MPR plus 3 percent, and the negotiated interest rate of 9 percent and a 40-year repayment period on the securitised debt”.

The monetary policy rate (MPR) was raised by the apex bank for the sixth straight time in March to 18 percent.

Johnson Chukwu, chief executive officer of Cowry Asset Management Limited, said the planned securitisation means the CBN would have to incur a big loss.

He said: “There is no federal government debt instrument today that has a 40-year maturity with a yield of 9 percent. Given the current interest rate environment, you will be talking of 15 percent and above. But if you issue an instrument in the primary market for 40 years at 9 percent and you have to sell it to investors at 15 percent, you are going to take a huge loss.

“In effect, the central bank should be ready to write off a chunk of that bond if it has to sell it in the secondary market.”

Chukwu said the incoming government may have to confront the challenge of the CBN loans.

“The National Assembly had earlier expressed reservations about the securitisation plan, saying there is no law in the country that makes provision for such securitisation. The enabling law is that ways and means funding must be paid within one year before new ones are disbursed,” he said.

Nigeria ‘on the cusp of debt crisis’

Nigeria has seen its public debt grow steadily to levels that have left many worried as government revenues remain low despite the rally in the price of crude oil, the lifeblood of Africa’s biggest economy.

The country’s public debt-to-GDP ratio was increased from 25 percent to 40 percent in 2021 to accommodate other existing debts, including ways and means advances and promissory notes issued by the government.

“The new government must focus on growing revenues, otherwise the debt burden will continue to exert a lot of pressure on the activities of the government,” Chukwu said.

Debt service costs gobbled up 96.3 percent of government revenue in 2022, up from 83.2 percent in the previous year, the World Bank said this month.

Rewane’s FDC, in its latest monthly economic update, said Nigeria has been engulfed in “Ponzi finance”, which it described as “a situation where a government engages in a Ponzi scheme-like behaviour by issuing debt to pay for current expenses with the expectation of rolling over that debt with new debt in the future, rather than generating sufficient revenue or cutting expenses to repay the debt”.

“There is no doubt that Nigeria is on the cusp of a debt crisis,” it warned. “The fiscal sustainability scores are red for the subnationals and federal government. More so, interest rates will remain elevated globally in 2023, and this implies that the debt service burden will heighten further, capping the available fiscal headroom. With dwindling revenue amid maturing debt obligations, there is no doubt that the choices are hard and the options are few.”