Akinwumi Adesina
Akinwumi Adesina, AfDB President

The Federal Government will be heading to the international capital market to issue $1 billion Eurobond in the third quarter of this year. Mrs Kemi Adeosun, Minister of Finance who disclosed this in London recently, said that Nigeria was on the verge of securing $3 billion of funding from the World Bank and the African Development Bank (AfDB). The Eurobond is intended to finance the 2016 budget’s deficit to enable the government execute some capital projects that would reflate the economy. She said the government was committed to a budget deficit of not more than N2.2 trillion ($11.1 billion), or 2.1 percent of Gross Domestic Product (GDP). The government has said it would fund the fiscal gap with about $10 billion of debt, half of it in foreign currencies.

The minister explained that Nigeria would probably post budget deficits for at least three years and that its debt-to-GDP ratio would rise to 20 percent from around 13 percent in that period.
Under the present circumstances, it is inevitable for the government to borrow to reflate the economy. If the government relies only on what it can mobilise locally through its efforts, argued Prof. Mike Obadan, its business will be impaired and the recession will be deep. However, such borrowing must be on good terms and the funds must not be used to finance consumption. Rather, it must be targeted at financing productive activities of other sectors, such as financing power supply or road networks that can attract toll payment.

Similarly, Boniface Chizea, principal consultant, BIC Consultancy Services, noted that the country had no choice than to borrow to resuscitate the economy. According to Chizea, the economic downturn in the country might make projected tax revenue untenable. He also predicted that the deficit arm of the 2016 budget may increase beyond the proposed N2.2 trillion.

Christine Lagarde, World Bank President
Christine Lagarde, World Bank President

In 2013, Nigeria comfortably raised $1 billion in its return to the Eurobond market. At that time, investors demonstrated confidence in the country and the issue was four times oversubscribed, with just over $4 billion in bids. Also, when Nigeria made its first Eurobond issue of $500 million in 2011, it received bids worth two and a half times the amount on offer. The question is: can it achieve the same feat this time around? Winifred Iyiegbuniwe, a professor of Finance at the University of Lagos believes it is possible for the country to attain the same level of success. “In spite of the security issues affecting the supply of oil in Nigeria, discerning investors will still go for the Eurobond because Nigeria is still viable. The hard fact is that Nigeria has enough resources to maintain credit worthy. Moreover, the removal of subsidy, the introduction of flexible exchange rate and the fight against corruption have conferred some level of credibility on President Buhari’s administration,” Iyiegbuniwe said.

However, a financial analyst who craves anonymity advised that the government should carry out an inventory of its debt portfolio and how much it cost to service it (debt portfolio) before issuing the Eurobond. He emphasized that it is important for the government to know the profitability of its previous borrowings.

Nigeria’s foreign debt has grown by $7.18 billion 10 years after its historic exit from the Paris Club of Creditors in 2006. It grew from $3.54 billion to $10.72 billion. The Federal Government had between 2005 and April 2007 paid over $15 billion to exit from both the Paris Club and the London Club of Creditors after receiving a write-off of about $18 billion from the former.
For the Paris Club, the payment included the first tranche of $6.3 billion made in November 2005, the second tranche of $1.387billion made in December 2005, and the third tranche of $4.498 billion paid in April 2006, as well as a commission of over $30 million paid to the Central Bank of Nigeria (CBN).

For the London Club, the payment included Par Bond of $1.486 billion paid in December 2006; Promissory Notes of $512million paid in early March 2007; oil warrants of $82million paid on April 4, 2007 and a commission of 0.5 per cent paid to the CBN.

After the exit from the Paris Club, the country’s external debt dropped to $3.54billion as of December 31, 2006, according to statistics obtained from the Debt Management Office (DMO).
Over the years, however, the external debt of the country has gradually climbed to $10.72billion as at December 31, 2015. n

By Dike Onwuamaeze

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