FG raises debts/GDP ratio to 40% to accommodate new borrowings Plan

THE Federal government of Nigeria has increased the debt to gross domestic product (GDP) ratio to 40% in an effort to accommodate new borrowings.

According to the Debt Management Office, the borrowings are meant to finance budget deficits, and other obligations of the government.

At its meeting on Wednesday, the Federal Executive Council (FEC) approved a new Medium Term Debt Management Strategy (MTDS) for Nigeria, for the period 2020-2023.

The Debt Management Office said the MTDS was a policy document that provides a guide to the government’s borrowing activities on the medium-term (four years).

It explained that the policy is also recognized as one of the best practices in public debt management, and also recommended by the World Bank and International Monetary Fund (IMF).

The action was taken to ensure that public debt management is driven by a well-articulated strategy that is structured to meet a country’s broader macroeconomic and public debt management objectives.

“The MTDS, 2020-2023 has been prepared by the DMO, in collaboration with Federal Ministry of Finance, Budget and National Planning and the Central Bank of Nigeria.

“Other collaborating stakeholders are the Budget Office of the Federation, National Bureau of Statistics and the Office of the Accountant-General of the Federation.”

The DMO office further revealed that Nigeria has had two previous Strategies, MTDS (2012-2015 and 2016-2019), had been utilized by the Nigerian government before the current Strategy, which was formulated due to the impact of the coronavirus pandemic.

“The new Strategy had to be re-worked to reflect the global and local economic impact of the COVID-19 pandemic and it incorporates data from the revised 2020 Appropriation Act and the Medium-Term Expenditure Framework 2021-2023.

“The new MTDS adequately reflects the current economic realities and the projected trends. The preparation of the MTDS usually involves the consideration of alternative funding strategies available to Government.

“It seeks to meet its financing needs, taking into consideration the cost of borrowing and the associated risks, while ensuring debt sustainability in the medium to long-term.”

Fiscal sustainability is one of the MTD targets for the four years in view, and sets the total Debt/GDP ratio at a maximum of 40%.

The Debt Management Office gave its reason for ratio increase, stating that it was order to accommodate new borrowing to fund budget deficit and government obligations, promissory notes to be issued to settled government arrears and Ways and Means advance at the Central Bank of Nigeria.

“The ratio is still below the International Monetary Fund and World Bank recommended threshold of 55% for Countries in Nigeria peer group,” it explained.

Also, the portfolio composition was adjusted to 70% domestic borrowing and 30% external, according to the DMO, which stated that the target is set to further strengthen the domestic market and optimize access to both concessional and commercial sources of funding.

Meanwhile, on refinancing risk, the new MTD set has a minimum of 10 years as average tenor of debt portfolio, while its targets minimum of 75% long and maximum of 25% short term domestic debt mix.

“This is to sustain issuance of longer-tenored instruments with tenors of 10 years and above, in order to effectively manage refinancing risks,” DMO stated.

The implementation of the Medium-Term Debt Management Strategies over the years, has helped in managing the structure of the growing public debt, and ensured debt sustainability as well as effectiveness in public debt management.

The Debt Management Office further stated that: “With the approval of the Federal Executive Council of the MTDS, 2020-2023, the Strategy will be implemented to support economic development while ensuring that the Public Debt is sustainable.”