DMO: Why Nigeria Needs to Borrow

By Emele Onu, 09.22.2010 


The Debt Management Office (DMO) has said that Nigeria has every reason to borrow to support the development of the country through reflating the economy as well as deepening of the bond market.The DMO made this disclosure in a newspaper advertorial signed by its Director-General, Abraham Nwankwo, yesterday with a view to giving a fuller and contextual picture on the nation’s debt position. 


The explanation might have stemmed from the public criticisms – especially that of former governor of the Central Bank of Nigeria (CBN), Prof. Chuk-wuma Soludo, who expressed worries that the country’s debt profile, both foreign and domestic, was rising. The immediate past governor of the CBN had said while it was desirable to exit the odious external debts, there was need for the country not to remain unduly under-borrowed to avoid holding back economic growth. 
Soludo had expressed concern that the government was piling up domestic and foreign debts with no improvement in the economy.


Soludo said: “In spite of the heavy external debt of $34 billion and oil prices ranging between $25-$50 during the (ex-President Olusegun) Obasanjo’s second term, we managed to grow the economy at about 6-7 per cent per annum (from average of 2.8 per cent in the 1990s). We started saving for the rainy day when oil prices reached $35 and by 2007, despite paying $12 billion to write off the Paris Club debt in 2006, we had saved about $22 billion as ‘Excess Crude’.”


But the DMO pointed out that Nigeria had a finance gap that needed to be filled through borrowing, stressing that in doing that, preference was given to domestic borrowing not only because of the need to minimise exposure to external vulnerability but also to seize the opportunity to develop the domestic debt market. The DMO boss said that the decision to borrow was to the advantage of both the government and private sector that are benefiting from long-term funding.


He said the increased public sector borrowing was part of government’s stimulus package and was a counter-cyclical response to prevent the economy from a free-fall during the global economic downturn. It said the examples of such borrowing used to counter economic decline are the N200 billion realised for commercial agriculture; the N100 billion for the revival of the cotton, textile and garment industry and the N12.5 billion for the purchase of 25 locomotives for railway revitalisation.


The development of the domestic bond market, said the DMO, had given the private sector access to long-term capital and had accelerated investments in agriculture, solid minerals, manufacturing and energy among others. He said owing to the impact of the Federal Government bonds, the yield curve for the market had been elongated from 91 days to 20 years.


“The Nigerian equities market was badly affected between 2008 and 2009 because of the global crisis exacerbated by some local factors. If government borrowing was not generating effective demand for funds at the time when the equities market had been shocked to down-spin and the inter-bank market was stultified by loss of confidence and uncertainty, there could have been an intolerable level of liquidity trap and the financial system as well as the real sector would have been the worse for it,” the DMO further pointed out.


Nigeria’s total domestic debt stock stood at N3.8 trillion as at June 30 this year while the external debt was put at $4.3 billion. Nigeria’s current total debt stock is about 14 per cent of Gross Domestic Product (GDP), which is below the international threshold of 30 per cent – meaning that that debt is sustainable.





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