Federal Government is seeking to borrow yet another $5.5 billion form external sources to fund the 2017 budget that is about to run its full circle. President Muhammadu Buhari in this respect has written to the Senate, asking for the approval of an External loan of $5.5 billion to enable the Federal government finance the 2017 budget. Buhari’s request for external borrowing to the tune of $5.5 billion is contained in a letter to the Senate President, Senator Bukola Saraki which was read on the floor of the Senate.

The four- page letter which was addressed to Senate President, Bukola Saraki is entitled, ” Request for the approval of External Loans for the implementation of the External Borrowing Approved in the 2017 Appropriation Act; external borrowing to Re- finance maturing domestic debts through the issuance of $3.00 billion Eurobond in the International Capital Market or through a loan syndication.”

According to the letter, while $3 billion would be sourced through Eurobond, the remaining $2.5 billion would come from other sources in the international capital market. President Buhari however allayed fears of Nigerians on possible effect or problems that may come up, saying that the proposed external borrowing of $3.0 billion re-finance maturing Domestic Debt would not lead to an increase in the public debt portfolio against the backdrop that the debt already exists.

According to Buhari, the substitution of Domestic Debt with relatively cheaper and long-term external debt will lead to a significant decrease in Debt Service Cost, just as he said that government’s moves in re-financing Domestic Debt through External Debt would also achieve more stability in the Debt Stock. He said that it would create more borrowing space in the domestic market for the private sector. President Buhari said that the Senate had in the 2017 Appropriation Act, put Debt Service at N1.663 trillion which represents 32.73 per cent of the federal government’s total expenditure, adding that with this, it has become very imperative to take urgent steps at reducing debt service costs.

He said that failure to rebalance the federal government’s debt portfolio through substitution of Domestic Debt with less expensive long term External Debt, will continue to expose the country to the risk of high debt service-to-revenue ratio, thereby limiting the ability of the Government to execute capital projects and other priority expenditure.
In the letter dated 4th October, 2017, President Buhari said that “The Senate may wish to refer to the 2017 Appropriation Act, which has a Deficit of N2.356 trillion and provision for New Borrowings of N2.321 trillion, respectively. The Act also provide for Domestic Borrowing of N1.254 trillion and External Borrowing N1.067 trillion (about USD3.5 billion).

On Issuance of $2.5 billion for financing the 2017 Appropriation Act, the President said that ” The Senate may wish to note that in order to implement the External Borrowing approved by the National Assembly in the 2017 Appropriation Act, the federal government issued a $300 million Diaspora Bond in the International Capital Market (ICM) in June 2017. The balance of the 2017 External Borrowing, in the sum of $3.2 billion is planned to be partially sourced from issuances in the ICM of $2.5 billion through Eurobonds or a combination of Eurobonds and Diaspora Bonds, while $700 million is proposed to be raised from multilateral sources. It should be noted that the intention is to issue the Eurobonds first, with the objective of raising all the funds through Eurobonds, and that Diaspora Bonds will only be issued where the full amount cannot be raised through Eurobonds.

“The Senate may wish to note that the proceeds from the proposed issuance of Eurobonds (and Diaspora Bond) in the international capital market ICM, would be used to finance the deficit in the 2017 Appropriation Act and provide funding for the capital projects in the Budget. The Projects include the Mambilla Hydropower Project, Construction of a Second Runway at the Nnamdi Azikiwe international Airport, counterpart funding for Rail Projects and the Construction of the Bodo-Bonny Road, with a Bridge across the Opobo Channel.

On $3 billion for Re-financing of Domestic Debts, President Buhari said, “In addition to the implementation of the External Borrowing approved in the 2017 Appropriation Act, in order to reduce debt service levels and lengthen the tenor profile of the Debt Stock, the FGN seeks to substitute maturing Domestic Debt with less expensive long term External Debt. The FGN plans to source USD3.0 billion through the issuance of Eurobonds in the ICM and/or loan syndication by Banks, as approved by the Federal Executive Council at its meeting of August 9, 2017.

“It is important to note that the proposed sourcing of $3.0 billion from external sources to re-finance maturing Domestic Debt will not lead to an increase in the public debt portfolio because the debt already exists, albeit in the form of high interest short term Domestic Debt. Rather, the substitution of Domestic Debt with relatively cheaper and long-term external debt will lead to a significant decrease in Debt Service Cost. This proposed re-financing of Domestic Debt through External Debt will also achieve more stability in the Debt Stock while also creating more borrowing space in the domestic market for the private sector.

“The Senate will recall that in the 2017 Appropriation Act, Debt Service at N1.663 trillion represents 32.73 per cent of the FGN’s Total Expenditure, which makes it important to take urgent steps to reduce debt service costs. Failure to rebalance the FGN’s debt portfolio through substitution of Domestic Debt with less expensive long term External Debt, will continue to expose the country to the risk of high debt service-to-revenue ratio, thereby limiting the ability of the Government to execute capital projects and other priority expenditure.

“The Senate may wish to note that, in line with the provisions of Sections 21 (1) and 27 (1) of the Debt Management Office, (Establishment, Etc.) Act, Cap D.12 Laws of the Federation, the approval of the National Assembly is required for external borrowings as proposed in Paragraphs 2-5. The summary of the requests in Paragraphs 2 to 5 are as follows: i. USD2.5 billion issuance in the International Capital Market, through Eurobonds or a combination of Eurobonds and Diaspora Bonds, for the financing of the deficit in the 2017 Appropriation Act and capital expenditure projects in the Act as stated in Paragraph 3; and, $3.0 billion external borrowing for the refinancing of maturing domestic debt obligations through the issuance of Eurobonds or through a Loan Syndication.

“With respect to the Terms and Conditions of the proposed External Borrowings, the Senate may wish to note that being market based transactions, the terms and conditions of the borrowings can only be determined at the point of issuance of finalisation based on prevailing market conditions in the ICM. It is important to state that the previous issuances of Eurobonds by Nigeria were at the following coupons- USD500 million (2011/10-year): 6.75%; $500 million (2013/5-year): 5.125%; $500 million (2013/10-year): 6.375%; and $1,500 million (2017/15-year): 7.875%, while the $300 million Diaspora Bond (5-year) issued in June 2017 was at a coupon of 5.625%. These coupons were based on the prevailing market conditions at the respective times. It should be noted that current market conditions are considered more favourable than at the time of Nigeria’s last issuances of the Eurobond in March 2017 and the Diaspora Bond in June 2017, with secondary market yields lower than the coupons. The Federal Ministry of Finance, the Debt Management Office and the Federal Government’s appointed Transaction Parties for the proposed External Borrowings will work assiduously within the context of the market to secure the best terms and conditions for the Federal. Republic of Nigeria.

“Accordingly, the Senate is requested to kindly approve the following external borrowings: i Issuance of $2.5 billion in the ICM, through Eurobonds or a combination of Eurobonds and Diaspora Bonds, for the financing of the FGN 2017 Appropriation Act and Capital Expenditure Projects in the Act; and, Issuance of Eurobond in the ICM and/or Loan Syndication by banks in the sum of USD3.0 billion for re-financing of maturing domestic debt obligations of the FGN.
While looking forward to the timely approval of the National Assembly to enable Nigeria take advantage of these opportunities for funding, please accept, Distinguished Senate President, the assurances of my highest esteem.”

It will be recalled that that 2017 budget is predicated on a deficit of N2.1 trillion which Nigeria hopes to secure from both local and external sources to fund the country’s infrastructure deficit.
Minister of Finance, Kemi Adeosun and Minister of National Planning and Budget, Udoma Udo Udoma had last week during a meeting with the Senate Joint Committee on Finance and Appropriations, appealed for urgent resolution of the National Assembly to secure the external borrowing, explaining that the loans have become imperative for Nigeria to fix priority projects such as roads, power and National Security.