Nigeria's $5.5bn Loan Request: Fiscal Strategy Explained

[00:00:00]and that let's go over now to Abuja as you switch to another matter Netta Thank You Chamberlain and welcome to our Buju we have with us the Minister of Finance mrs. Kennedy um thank you for joining us morning I hope you're doing good well alright and I think the economy is doing good I mean we just read in the papers that Ania appreciated an fx platform to about 6% or there but let's leave that aside and look at this matter of borrowing okay any time Nigeria the government is going to borrow yeah what again why well thank you and good morning I think we have to understand the context and and and to do that we've got to go back I know always go back but you have to go back sometimes to go forward when we got into office as you know the oil price had collapsed and our main source of revenue was oil so we had two choices you have to balance your books if you don't have revenue either cut what you spend or you try and increase what you have available if we cut what we spent it would have meant cutting back on public services largely laying off public sector workers and for the aapc government that was not an option the other option was to carry on with what the previous administration had been doing the previous administration had effectively been borrowing but just to pay salaries now what we recognize is if you just keep the status quo you can't grow so what we then said is no we need to do a fiscal expansion that is a bigger budget to create some Headroom for capital projects because those capital projects will actually drive growth paying salaries doesn't drive growth it's like borrowing money to eat breakfast after a while you know you have to invest in what is productive so that was the thinking when we came into office back in 2015 and that's why we expanded the size of our budget now in the short term we knew that revenues would not be there oil price was low tax collections were now so we would have to borrow in the first two years you would see an acceleration in borrowing and then as revenues as the economy begins to recover and revenues begin to come in the pace at which we're borrowing will come down now having said that Nigeria borings actually very low relative to the size of our GDP it's one of the areas where we're doing very well we have a GDP tax term debt to GDP of 17 percent Ghana is at 68 South Africa is at about 52 most developed countries are above 50 the guideline that the threshold for a developing economy is 40 we're at 17 and just by contact trust Britain's at 89 Americas are over a hundred even Germany which is probably the most conservative borrowing country in Europe he's at 68 so we're not in huge amounts of debt what we're trying to make sure we do is that we grow the debt and Link it to capital projects that's what's critical don't borrow for recurrent borrow and channel it into assets that will get the economy going power roads rail and all the various projects we're doing so that that's why that's the strategy and that's the thinking around boring now to the specific one one that's causing all the Ferrari first thing is that this seems to be some misconception so out of that five point five billion dollars two point five billion is for the 2017 budget three billion is simply to refinance money that we already owe we inherited a lot of Treasury bills so every 90 days or every 180 days those bills mature and we have to pay interest on them it doesn't make sense because we can't pay them off so what we want to do is take three billion dollars and then as the Treasury bills mature we will refinance from naira into dollars that does two things it lowers our cost of boring because obviously the interest rates in the international markets much lower than the interest rates here in Nigeria secondly are more importantly there's this issue that government is borrowing so much that it's crowding out the private sector we're making interest rates so high when banks can earn 19 percent lending to government it means that when you and I want to borrow it's 26 so if government begins to progressively reduce the amount its borrowing in an IRA we believe that will create the convergence to bring down interest rates so that's part of the stress you say out of the five point five is not five point five new long three point three billion dollars we already owe we're simply converting from naira into dollars and two point five is new borrowings you know as that as commendable as that may be the country nowadays about okay yes you're borrowing to invest in infrastructure how much of that is happening a lot a huge amount I mean you saw to think a couple of weeks ago we finish the saqqaq sue cook immediately we called the contractors and you could see you asked each contractor add up how much they got it got to be exact 100 billion we are being very disciplined about making sure that yes we're borrowing but we're making sure we do the capital projects and know that you know the ministers that are being charged with these particular areas are working very very hard thing is major capital projects take time you know Rose but their wants on for all projects if we get our railway going and we maintain it well it'll be here for the next 40 years you do a road it's there for the net you know if you maintain it well it's there for the next 3040 years so these are transformational projects and they event they are ongoing last year we did 1.3 trillion we're hoping to do the same this year now if that that being the case Nigeria at a point was debt free cancelled I mean okay foreign debts canceled don't know that and in other people we're like really rejoicing yeah and all but is this not another way of taking major into another debt situation internationally so let me explain what the Paris Club in London club debts were why there was this cancellation Paris Club and London club debts were loans and they were variable interest rate loans so what was happening was if there was a change in LIBOR which is the the British interest rate the rates would change they were and so Nigerian state and and federal governments who had borrowed found that they were in a debt trap because every month or every any time there was a change in interest rate what they the amount they old went up and it was uncontrollable and it was not just an idea it was a lot of African countries and I think you remember that time there was this debt Forgiveness me years and actually at the time if you recall they didn't want to give Nigeria debt forgiveness because they believe that Nigel was a rich country the then Minister of Finance dr. country whele was able to persuade them and and do a negotiation that basically we weren't given debt forgiveness what we would do what they did was they recalibrated the debts we paid we actually paid off the debts and got some some discount on those debts now after that came in the fiscal responsibility at the setting up of the DMO and what Nigeria did very sensibly will say okay now we don't want a situation where states and local governments can just go and borrow internationally and no one knows about it let's have a central coordination so you have the debt management office who do debt sustainability on every loan and who coordinate the the data because what was happening was people didn't know how much Nigerian state local governments and so on old so that came in and secondly the second reform was there Najee all will not do loans we don't take loans now why is that important we do bonds you bond is that a fixed interest rate you can predict what you owe it's not something that's variable so those are two huge reforms that have happened since the Paris Club and London club debt forgiveness and you know the boring we're doing now our bonds and they're tied to capital projects then they're specific and we're very clear about what we're doing it so there's no prospect of taking us back into those dark days where I'm you know government would wake up and find it what he owes has doubled overnight that's not possible anymore interesting now the other side of it is okay let's bring you down as simple as possible so we have this thing we're going to borrow but we we keep talking about revenues not being at par how is it that we're going to be able to keep our boring and our revenues are interest rates rather when we borrow can we keep it at how that we know reasonable rates um well that's what what I was telling you about the strategy behind refinancing some of the naira into dollars one of the strategies we have as a government from a macro perspective is how do we bring down interest rates and we've sat down with central bank governor and and realized that look the biggest problem with interest rates is government borrowing because at the moment we have to borrow if we continue to borrow in narrow we keep the rate high so let's refinance some of these borrowings let's stop issuing 90 day 180 day Treasury bills let's come out of that market that will begin to reduce pressure on Nigerian interest rates and allow the CB n hopefully the MPC to take the decision we all need which is to bring down money to be more available to the average man who needs to borrow absolutely smaller medium scale enterprise and what rate well you know we've got a there was time and interest rates in Idaho of pretty low and and we're moving in that right direction because you know reserves are going up those are the factors you need if you want to reduce your interest rates you've got a lot of portfolio flows foreign flows coming in they look at your reserve figure fortunately our reserves are heading upwards so the convergence criteria for the NPC being able to reduce interest rates seem to be moving in the right direction and I'm optimistic that early next year we start to see some some reduction in the MPR I was gonna ask you a question about ten lines but my colleague in Vegas has a question for you Kimba looking at the lines of our perception really because this borrowing a five point five billion dollars at a time to cause uh finance the budget and to try to push some of that into capital projects and then also service in some of our debts it's for many it's a laudable approach towards offsetting some of our debts but the concern here and I said is this is with regards to perception the concern here is that this borrowing is coming in too late and perhaps will not even achieve what you set to to get at the end of the day okay well good morning don't agree with that point remember that the budget was only passed in June so we're actually in the fourth month of the budget cycle and the budget is due to run for up to twelve months so these are 2017 budget projects that were approved by the National Assembly we've already released about four hundred and forty I think it's four sixty billion of capital since June and so we're borrowing that the money that we're raising now will hopefully be released in November and December take us through into January and make sure that those projects that are in the budget that we intend to to it execute are adequately financed now the timing is fine remember that we were already in the euro bond market this year in February so you can't keep coming to the market you've got to time it so we needed this gap and and and the market internationally has been very receptive to the Nigerian debt story because they know that we're managing our debts very prudently and I'm sure you remember they in February when we came out looking for a billion we were off at eight so I think internationally that the the debt management story is is seen as a very prudent and very acceptable one so I think we'll be able to attain our objectives