• We’ll exit club of under-developed nations by 2018 – Nwankwo, DMO boss

By Amechi Ogbonna

Director General of Debt Management Office (DMO), Dr. Abraham Nwankwo, recently spoke on efforts by the Federal Government, through his office, to create a virile bond and securities market that would ease the funding constraints of the three tiers of government and the private sector.

He explained that the economic transformation programme of President Goodluck Jonathan had further bolstered the global business community’s confidence in Nigeria’s economy. Nwankwo believes that government’s rising reform profile has also been responsible for the overwhelming patronage of its sovereign bonds sold in recent times.

Commenting on why international investors subscribed to Federal Government’s $1 billion Eurobond sold a couple of months ago, Nwankwo stated that investors were excited at Nigeria’s transformation agenda, her agricultural revolution, power sector reform and infrastructure transformation going on in several sectors of the economy. Other factors that may have attracted them, according to the DMO boss, include the dramatic changes in the aviation sector, job creation initiatives, institutional building, reforms in transportation and railways as well as administration’s new philosophy of transparent structures being created for the management of public finance at all tiers of government.

“They came to the conclusion that the economy is doing well and that it would continue to grow in the next five years,” Nwankwo stated.

Excerpts:

 

How we sold $1.0bn Eurobond to international community

The job was done by Nigerians, investors looked at the fact that the transformation agenda of President Goodluck Jonathan is on course. They looked at various components of the various sectors of the economy and saw what the government is doing in agriculture and the fact that the distribution of fertilizer, seedlings and other inputs had been rationalised and made very efficient and are reaching the real farmers.

There is also the fact that the power sector has been successfully privatised and we are at the threshold of private sector power-led initiative that will ensure adequate and stable supply of electricity. They looked at the infrastructure transformation going on, especially on roads, and the fact that the railway lines have been revitalised and some lines have started operating and more are underway to be reactivated. They also saw the dramatic changes that have taken place in the aviation sector and with our airports.

They looked at the fact that in terms of institution building, a lot has happened. For example, in public debt management in Nigeria, efforts have been made over the couple of years to ensure that not only the Federal Government but every state of the federation has a functional debt management department.

When they look at all these as part and parcel of the transformation agenda of President Goodluck Jonathan, they came to the conclusion that the Nigerian economy is doing well and that it is on the right part and if we continue the way we are going. There is no doubt that in the next five to seven years, Nigeria would have arrived at a stage where it would be so obvious to everybody that we have left the group of underdeveloped countries and more importantly, they are looking at the various measures government is taking to ensure that the growth process is inclusive, that in the process of growth even though we have been registering very credible growth rates in the world over the past five or more years, the current efforts being made by government to ensure that the growth process is inclusive, like I said earlier, is generating employment and reducing poverty.

These are the things that private investors all over the world are taking into account. Of course, when we went to sell the bond under the leadership of Dr. Ngozi Okonjo-Iweala, the Coordinating Minister of the Economy and Minister of Finance, we told the Nigerian story as forcefully and as factual as we could; all aspects of the Nigerian economy, including politics, agriculture, banking, infrastructure, human resources and media. We told all the stories about Nigeria effectively with facts and figures and it was obvious to international investors that Nigeria is on the right path. Essentially, we are crossing the threshold and that Nigeria, given her potentials, has eventually come to terms and we have taken advantage of those potentials, transforming them so that they will lead to welfare for the generality of the Nigerian people.

Flexible market instruments as part of medium term strategy

 I want to assure Nigerians that some of the products are already coming in the near time, while some will be in the medium term. For example, the Global Depository Note we talked about, which is a way of encouraging special classes of international investors who would not invest directly in the domestic bond market except through a depository arrangement, is likely to come on stream this year subject to approval by the National Assembly.

The inflation-linked bond, we are working on it and we believe in the near time, it will come to fruition. The other flexibility arrangements we talked about, including the securities lending, certainly will come on stream before the end of the first half of 2014. So many of these measures coupled with the concrete new products as well as the flexibility instruments, are coming in the near to medium term, I can assure you.

Foreign investors holding FGN securities

We are used to emphasising statistics that our public debt is so much and that is why we focus on talking about what are the benefits to the Nigerian economy, particularly the private sector that derives from these beautiful statistics we talk about.

So is it good enough to tell Nigerians our debt is so much? We have spent some time explaining to financial journalists the implications of those statistics. What are the opportunities in real terms embedded in them that will translate to good standard of living for our people and that’s why our emphasis is on pointing out the opportunities we have created for the private sector so that they will issue their own debt instruments in the markets.

We have developed so that they can raise long-term money to invest in the real sector of the economy, in infrastructure. By so doing, they will create jobs for our teeming population and it will lead to more income in the society because for every Nigerian who earns income by being gainfully employed, you know that there are many other dependants relying on that person, so there will be spread in welfare and reduction in poverty.

Federal Government’s total debts

Our focus now is not talking about figures. Yes, let me say in summary that our debts as usual remain sustainable and the statistics are there but it’s not an issue of statistics. Over the past seven years, we are one of the least borrowed countries in the world in terms of statistics. However, government has continued to emphasise from the public debt management point of view that yes, our debt is sustainable.

All of us should appreciate there is the need for us to diversify our economy because we are overly dependent on oil revenue for driving our economy as a source of foreign exchange and revenue for government. But I strongly believe there is need to diversify that. So, the focus of everyone of us is how to diversify the sources of revenue for government. If we do this, we will observe that beyond the statistics, our debt will even be more sustainable instead of depending on oil and gas for about 80 per cent.

For instance, it will be good if we are dependent on oil and gas for about 30 per cent, while we also depend on revenue from agriculture. Yes, agriculture is the biggest sector of Nigeria’s economy but it is high time we operated it in such a way that many of our farmers would be more productive and competitive and would be exporting their products, including processed goods and as they export them, government earns income in terms of duties, while the farmer also earns more income. In that way, our economy will be diversified both for the private sector and as a source of revenue for government and our debt will therefore be more sustainable. Today, our debt to GDP ratio is still below 21 per cent and it is quite sustainable.

Now, in terms of participation of foreign investors: in the wake of the global financial meltdown and because of Ben Bernanke, chairman of the Federal Reserve, the Central Bank of the United States’ statement that quantitative easing was going to taper because there is a belief that the US economy is getting better, investors all over the world started recalling their investments wherever they were in anticipation of higher yields so they could also diversify their investments into the US economy to take advantage of it.

So you could expect that the level we achieved in 2012 has come down to anything around five and seven percent but certainly we are not in a position to stabilise yet. All over the world, if you listen to the financial market news from the CNBC or Bloomberg, you will appreciate that recently, the additional reports coming from the UK show that their economy is getting better to the extent that there was a huge drop in the unemployment figure, which is positive for the US economy.

The fact that it is positive for the US economy means that for investors, there is a higher prospect that they can earn more by investing their money in the US economy. Therefore, it’s a time for them to wait a little longer, hold their money and take advantage of the positive development in that economy.

The global economy in respect of that stimulus from the US economy in terms of possibility of the quantitative easing being drastically reduced, that intermediate period is still on and I guess it will take us up to the next two or three months to be able to settle at the new level.

IMF raising Nigeria’s borrowing threshold

The International Monetary Fund (IMF) didn’t raise Nigeria’s borrowing threshold, maybe indirectly. Countries are classified in various groups, so Nigeria belongs to a particular category and because of change in Nigeria’s per capita income, she has changed categories and the one in which we belong to now is allowed technically to borrow up to 56 per cent of our debt GDP ratio without raising eyebrow in terms of credit worthiness just as it’s much higher in developed countries.

So, it’s an appreciation from the point of view of those global financial institutions that Nigerian economy is moving to the next level and in doing so, it has been reclassified in terms of its capacity to borrow. However, President Goodluck Jonathan, the Coordinating Mminister of the Economy and the DMO have made it clear that despite the technical space created, Nigeria would continue to be conservative in its borrowing as if nothing had happened in terms of more space for it. So, we will continue to be prudent and continue borrowing as if it’s using the old limits because the emphasis is not for government to do more borrowing but to create space for the private sector to do the borrowing and that is why the theme of our interaction was on the opportunities created for the private sector from debt management achievements so they are now being encouraged based on the benchmark created in the international capital market. Based on the benchmark and market we have developed locally, the private sector is now being challenged to take advantage and be the borrowers to invest in agriculture, solid mineral, infrastructure and so on.

Diversification of investible instruments and customer base

Government is already working on alternative financing sources and generally the non-interest financing products, including the Sukuk. Just recently, there was a workshop in Abuja organised by the Africa Development Bank (ADB), which involved other African countries and we deliberated on how to go forward, such that Nigeria would be seriously working on establishing the necessary frameworks for tapping into alternative sources of funding, including Sukuk.

Nigeria is going to take advantage of all available and appropriate sources. At the Abuja forum, I did say that it should not be taken that developing alternative financing should be restricted to government just as in the conventional debt instruments whereby we are encouraging the private sector to take advantage. We are also for the non-interest financing, including Sukuk. While encouraging the private sector to play the lead role, it’s not for government to start issuing sovereign Sukuks. At the appropriate time, they will do that but the private sector should understand this new financing alternative so they could take advantage of it.

Credit enhancement for Nigerian corporates

There are various credit enhancements that are already in place for Nigerian corporates. For instance, the partial risk guarantee offered by the World Bank Group and this usually comes through the Ministry of Finance. I’m aware there are a couple of projects seeking funding through this alternative.

There are arrangements in place if some foreign investors, possibly in collaboration with Nigerian partners, want to invest in the country and they need some form of political guaranty that can be assessed from the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group.

Let me also mention that something related to that is the fact that the Minister of Finance has made known on a number of occasions that before the year ends, government would have established the mortgage liquidity facility, which is to help the private sector to be able to fund mortgages. These are some of the credit enhancement schemes in various forms.

The Collaterised Mortgage Obligation (CMO) has made it clear on many occasions that government has obtained $300 million from the World Bank as a mortgage liquidity facility and that is being finalised before the end of the year. So there is a lot the government is doing to ensure it provides the necessary support for the private sector to overcome some of the structural constraints it has.

Nigeria’s N10.8trn 2012 revenue

Everything happens on yearly basis and in 2013, I have raised $1.0 billion from Eurobond. Like I said earlier, the government is going to use the money in providing infrastructure. We are developing a framework to ensure there is accountability as we disburse the funds and status update will be given on work done so far.

Whenever local or foreign critics, no matter how highly placed, want to divert Nigeria’s attention from moving in the right direction, they begin to criticise. We are saying yes Nigeria has always had a number of deficiencies and defects, that’s true. For instance, questions were put to me when I made a presentation about the power sector; everybody knows that our power sector has not done well over the past three or four decades.

Is there anybody who has a better idea as a solution than what the government is currently doing as regards the power sector reform? But if we know that for having privatised the Power Holding Company of Nigeria (PHCN), is it the right approach to solving the power problem?

Government has established the National Electricity Regulatory Commission (NERC) to set up a price structure that covers returns to all the value chains because if we don’t do this, we will run into problems. You have to take into account from generation, transmission and distribution and find out what would be spent at the end of the day by the man who consumes electricity? Is it enough to ensure the return on investment for investors in the sector. Otherwise, people would not invest and consumers would continue to complain.

Boosting private sector participation in bond market

It’s not the responsibility of government to force private sector operators who are always in search of profit. Now, what government has done is to provide that bigger framework, especially the infrastructure. Government has done the best thing it can for the private sector as far as the bond market is concerned. It has used the opportunity of the fact that just like any another government, it would need to borrow money from the market to fund its fiscal deficit, which is what every government does.

The government is subjecting itself to the discipline of the capital market, borrowing from the capital market. The government didn’t simply go to borrow from the capital market, it made sure that it’s structured in such a way that it borrowed from the capital market. It developed the market for a long time fund for the private sector so that’s the best the government can do in that respect and it has done so.

Government knows that it also needs to establish a benchmark for the private sector and it has done that successfully, making sure that it succeeds in raising funds at competent coupons, to ensure that when the Nigerian companies go to raise their benchmark on the sovereign bond. Go and look at other countries that have issued bond since we issued ours and what their own coupons are, compared to ours.

So, government has done its best as far as debt market is concerned. It’s permanently working with the private sector to ensure its various concerns are addressed whether in terms of tariffs, duties or infrastructure. But even as the private sector makes proposals to the government on how to get appropriate infrastructure, it should also be encouraged not to abdicate its own duty because in every economy, we have three agents, the household, the firms (private sector) and the government that can work on its own while interacting with others.

Go and monitor all the countries in the world over the past 10 years, there are few countries that have achieved the type of macro-economic stability that Nigeria has achieved and that’s one of the major things our private sector requires, a stable macro-economic environment and I’m sure if you conduct a research of countries in the world that have achieved high level of macro-economic stability, Nigeria is among the first 20.

Also, among the emerging market economies, Nigeria is on the top five list. These achievements were as a result of government’s deliberate policies in terms of monetary, fiscal, public debt management, exchange rate and banking policies. These are some of the things that government has done to ensure the economy is relatively stable which also means that if government has not been performing optimally as it has done in the last two or three years, we will not have been doing as well as we are doing now.