By Louis A koko, Esq (PhD, ACA)
Recently, the Debt Management Office ( DMO), a government agency established pursuant to the Debt Management Office ( establishment) Act 2003 and the provisions of the Presidential executive order No 16 of 2023 on Foreign currency denominated financial instrument local issuance programme and related matters order, 2023 offered for subscription US$500 million, 5 year 9.75 per annum series 1 Domestic FGN US Dollar Bonds due in 2029 on behalf of the Federal Government of Nigeria.
The eligible investors are :
**Nigerian residents
**Nigerians with savings abroad.
**Nigerian Diasporans
**Qualified Institutional investors.
The coupon rate ( interest rate) is 9.75% annually, payable twice yearly and the debt redemption date at maturity is 2029.
The analysis of this so-called domestic bond revealed that the country will be paying US$4.875million as interest annually to the bond holders for a period of 5 years which translates to an aggregate of US$24.375million. At the bond redemption date in 2029, FGN would have incurred a cash outflow in dollars of approximately $525 m assuming no tax deductions.
The fact that the domestic bond would be issued in dollars, a foreign currency makes it an Eurobond, hence a type of external borrowing or creation of external( public) debt at a time when the country is currently in a debt trap. Nigeria is in debt trap because over 97% of the country’s revenue is use in debt servicing alone and only 3% is left to fund the other items in the federal government budget.
The negative impact of debt service is worst when it is denominated in foreign currency as in the recent US$500m domestic dollar bond or other forms of external borrowing because it will require the outflow of resources either in cash or other form of assets such as crude oil and gas for repayments of the debts to the creditors.
The repayment of external debt at the expense of critical sectors like education, health, power, agriculture and other physical infrastructure is partially responsible for low real sectors outputs and the poverty in the country.
The fact that Nigeria is in a vicious circle of poverty due partly to high unsustainable external debt which stood at $43.5 billion dollars in June, 2023 is a major concern for all those who truly appreciates the enormity of the debt burden of the country. Therefore, it is imperative that FGN prioritise her public expenditures to align with the budget items that are not only necessary but urgent.
It is equally important for FGN to to avoid the mismatch of debt type and its application ( use). It does not make economic sense to use external debt like this current $500m Eurobond whose maturity date is just five years to fund long-term projects like the Lagos to Calabar coastal Highway whose gestation period (10years) is twice the redemption period for the dollar denominated domestic bond. It amount to a mismatched public investment incapable of yielding positive economic outcomes that may enhance private and public investments in the country.
However, every year the FGN is expected to pay interest of about $5m dollars less tax for this (domestic) dollar denominated bond. Where will the revenue to fund the repayment come from at a time debt services takes more than 97% of our revenue? I pray Nigerians are not plunged into escalated tax burden as a wayout.
Eternal debt, in whatever mask and costume it wears, be it dollar denominated bond or concessionary loans from international financial institutions like IMF, World Bank, AfDB and the Paris club leads to outflow of resources from our country during debt repayments. Therefore, it is deleterious to the economy in terms of missed economic opportunities , especially when misapplied, hence must be discouraged. FGN of Nigeria should engineer more prudent means of financing economic programmes and projects that have immediate and direct impact on our economy and has the potential to enhance economic growth and revenues of government.
