N2.56tn Domestic Debt Repayment Poses High Risk To Nigeria Economy – DMO

Refinancing 30 per cent (N2.56tn) of Nigeria’s total domestic debt of N8.4tn in the next one year poses a high risk to the economy, the Debt Management Office has said.

The DMO in a document entitled: ‘Nigeria’s Debt Management Strategy, 2016-2019’, obtained by our correspondent in Abuja on Monday, stated that at least 30 per cent of the nation’s domestic debt would fall due within the one-year period.

According to the DMO, the country’s domestic debt as of December 2015 stood at N8.54tn, adding that refinancing the 30 per cent component posed high risk to the economy because of high interest rate.

The DMO said, “This debt stock is slightly lower than the published FGN’s total debt stock of $55,576.28m (N10,948,526.57m), because the Debt Management Strategy tool treats the NTBs stock based on the discount values and not on the face values; while for the external debt, the tool aggregates the debt by tranche and currency, and applies a common end-period exchange rate. These gave rise to the observed difference.

“The implied interest rate was high at 10.77 per cent, due mainly to the higher interest cost on domestic debt. The portfolio is further characterised by a relatively high share of domestic debt falling due within the next one year.

“Interest rate risk is high, since maturing debts will have to be refinanced at market rates, which could be higher than interest rates on existing debt. The foreign exchange risk is relatively low given the predominance of domestic debt in the portfolio.”

 It added, “The main risks to the existing public debt portfolio are (i) the high refinancing risk, given that more than 30 per cent of the domestic debt matures within one year; and (ii) the high interest rate risk arising from the high proportion of domestic debt due for re-fixing within the coming year, and therefore, exposed to changes in interest rates.

“The direct exposure to exchange rate risk is limited due to the low share of debt denominated in foreign currencies and low interest rate at concessional terms that apply to most of external debts. Regarding domestic debt, the large amount of short-term securities in the portfolio implies a relatively higher exposure to an interest rate increase and additional high refinancing risk.”

The DMO said after a decade of strong economic performance, real Gross Domestic Product growth weakened considerably to as low as 2.97 per cent in 2015 compared to 6.22 per cent in 2014, due to the structural collapse in the price of crude oil, which contributes about 90 per cent of foreign exchange earnings and about 70 per cent of government’s revenue.