How poor communication could lead Nigeria to a debt crisis

Last Wednesday, Mrs Zainab Ahmed, Nigeria’s Finance Minister, conducted a Bloomberg interview where she spoke at length about the Nigerian economy and its fiscal health. It was the longest interview I had seen of her—outside of her budget presentations and panel discussions—speaking about the Nigerian economy on international media, and maybe for a good reason.
 

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During the interview, she spoke about everything from Nigeria’s growth expectations to crude oil theft, the 2023 budget and most importantly, the federal government’s debt.

A few minutes into the interview, the Bloomberg interviewer, Oliver Crook, asked if Nigeria would be exploring any debt restructuring and our finance Minister replied in the affirmative. She later spoke on the government’s plans to securitise the CBN’s ways and means of financing.

This led to a frenzy on social media. Analysts were alarmed that the Minister had mentioned that the country would restructure its debt when the plan was only to securitise loans.

This article will explain the Finance Minister’s response and why it caused a frenzy.

Let’s start by explaining what Minister Ahmed said.
 

An overdue overdraft 

In response to the question of if Nigeria will be exploring debt restructuring options, the Minister responded that “it is an option [the government] is looking at right now”. We’ll explain what a debt restructuring is shortly, but the Minister went on to speak a bit about the securitising of CBN loans. Essentially, securitisation is when a debt (or asset) is repackaged and sold to investors. So, in the case of a short-term sovereign debt like the Ways and Means financing, the government could repackage it as a bond with a longer tenure and sell it to the public. This gives them immediate liquidity to pay back the CBN and reduces the debt interest burden on the FG. 

Now, the CBN has been funding the federal government's fiscal deficit for the past ten years. However, the loans have surged significantly in the last six years. This is because whenever the government's revenue fails to meet the budgeted amount and the government doesn’t want to present a supplementary budget, the CBN steps in and gives the government an overdraft. However, going by the CBN Act of 2007, this overdraft should only be about 5% of the previous year’s revenue and should be paid within the year it’s collected, and the CBN should close its purse to the government until the debt is repaid. 

Neither of these has happened. Rather, the CBN has continuously given the government more than the total of its previous year’s revenue in ways and means financing and has not demanded repayment of its existing loans in full before giving out more loans. This is why the federal government currently owes the CBN over ₦20 trillion (more than the sum of the revenue earned in the last five years.

So, the move to securitise these loans to pay the CBN back was not the issue that riled people up—the DMO has explored that as an option since 2018. The reason for securitisation is for the federal government to stop owing the CBN and replace the short-term debt it owes the CBN with more longer-term bonds that it can offer to local investors like me and you, which it would pay back over time.

The Minister also mentioned the FG’s plans to roll over existing short-term loans, which is not new. Rolling over existing treasury bills has always been financed by the DMO, is not debt restructuring. So, although the Minister claimed that the government was looking to restructure its debt, the only new development from the response is the securitisation of the Ways and Means. 

The one who cried wolf

However, it is not so much about the explanation she gave about the restructuring but more about admitting to the restructuring itself, which is what I’ll explain now.

What got everyone agitated is that Nigeria’s Finance Minister admitted to a restructuring, when in fact, there was no plan to restructure. That statement alone was so weighty that it could disqualify the Nigerian government from borrowing from foreign capital markets. What happens is that when creditors (and rating agencies) worry about a country’s ability to pay back its loans, the country's bonds become junk bonds—the lowest credit rating for a bond.

Debt restructuring is when the debtor reaches an agreement with its creditor to renegotiate the terms of its debt. This could either be by extending the tenure of the debt, renegotiating the interest rates and, in extreme cases, the creditor taking a haircut—that is, agreeing to receive less money than it loaned to the debtor. 

You don’t throw the word “restructuring” around because it’s a cry that admits you can’t pay back your loans and need to change the terms. Imagine you loaned someone money, and the loan was due today, but the borrower came to you to ask if you wouldn’t mind receiving your money next month instead. The only reason you would be willing to give the person till the next month is if you’re certain that the person won’t be able to pay back your loans anytime soon.

It’s the same for countries. Countries would only approach their creditors or lenders for a debt restructuring when they (the debtors) believe they won’t be able to meet their debt obligations anymore. For example, sometime in July, the government of Ghana had already sounded the alarm on its need for a debt restructuring because the country could not repay its loans anymore. At the time, Ghana was already in a debt crisis; its debt to GDP was around 84%. Its total debt was around $59 billion, with its external debt being a little less than $25 billion while its foreign reserves were less than $10 billion—a liquidity problem.

Worse, Ghana’s debt-to-revenue ratio is around 85%, much less than Nigeria’s 100%. But with its debt inching closer to its GDP and its foreign exchange reserves being only a fraction of its external debt obligations, it was clear that the Ghanaian government had exhausted all its options for raising money internally (through taxes). Hence, the struggle to meet its future debt obligations—a solvency problem. If all of Ghana’s external creditors requested their money, Ghana would not be able to pay back. So, the country was right to cry for help.

In Zambia’s case, the country requested a debt restructuring in 2021 after defaulting on some of its Eurobond debt servicing of about $42.5 million in 2020. And the country still had a total outstanding external debt of about $17 billion. Hence, Zambia only requested the debt restructuring when it was certain it needed it—after it had already failed to pay back in 2021.

An equally extreme case was that of Sri Lanka, whose government told the world it was bankrupt. Essentially, debt restructuring is a last-resort solution. It’s what countries say when they’re sure, beyond a reasonable doubt, that they cannot pay back their loans in the near future. Restructuring typically takes time because of the negotiations that typically go into it, so sometimes, countries attempt to fix their debt situation by exploring all other options before going out to declare their inability to pay back their loans. 

Nigeria has yet to get to the point where it needs a debt restructuring.  Yes, like we’ve been clamouring since, Nigeria has a debt, revenue and expenditure problem. The country’s debt servicing to revenue ratio crossed the 100% mark in 2021, even though debt to GDP is still low. Basically, Nigeria has a liquidity problem, not so much a solvency problem. This simply means that the country has a problem with servicing its debt today but doesn’t have an issue with meeting its debt obligations in the future. Although the country might have a solvency problem soon—considering how quickly it has racked up its debt, it’ll still be balling with a liquidity problem. This is further made worse by the government’s increasing appetite for debt and spending.

For instance, the government’s debt obligations (interest payments and principal for some mature loans) for the next five years are a little over $6 billion, while its foreign exchange reserves are about $37 billion. If the government were to continue on the trajectory of earning around ₦3.5 trillion (~$8.3 billion) - ₦4 trillion (~$9.5 billion), which has been the trend in the last five years, then the government would still be able to meet its interest payment obligations. This means that if creditors came for their loans today, the country would still be able to pay back to a large extent.

However, the country also struggles to earn revenue—the liquidity problem I mentioned earlier. If we continue on our present trajectory, there will be no money to meet other obligations after paying loans. So, to fund the government’s budgets, it needs to borrow locally or from foreign markets.

This is not a good look. As I explained in this article, most foreign markets respond to signals from the borrowers because sovereign debt—debt by governments—is typically backed by the credit of said government. The foreign investment banks and investors abroad loan the Nigerian government money because they are certain that the FG will always be able to earn revenue through taxes and resources to pay back the loans.

Many of these sovereign loans—particularly commercial loans like Eurobonds and treasury bills—don’t require collateral from the government, so creditors bank on the words and credibility of the country. When the Minister of Finance, who is the spokesperson for the government, appears to be saying that we’re looking to explore debt restructuring options, she’s invariably saying that the government is approaching a time it won’t be able to pay back its loans and need to restructure them.

So going on international television—particularly at a time and place when most world leaders are gathered to discuss the next step for global growth—declaring a “cry for help” on your loans is not the best of ideas.

Dumped 

What makes the announcement even worse is that the Nigerian federal government is currently in the process of passing its largest budget and needs to borrow over ₦11 trillion to fund this budget. Already, the country has a terrible fiscal outlook—as the Minister said in the same interview—and is shying away from borrowing from the foreign capital markets because their rates are not very favourable. In her words, “the market doesn’t look good for [the government] to approach it”. This is largely due to the perception of the market of Nigeria’s fiscal health and its ability to pay back these loans. She reiterated this during a panel discussion on the sidelines of the World Bank and International Monetary Fund (IMF) Spring meetings. 

The country which is highly dependent on oil revenue is barely earning any revenue (after subtracting how much it pays on subsidies) from said crude, even when the prices are record-high. This is largely because of oil theft and production shut-ins. This is one of the reasons why the government’s revenue has been insufficient to meet its debt. What’s more serious is that despite this stark debt outlook, the government continues to borrow at an alarming rate. As of June 2022, the government’s debt interest payments were about 108% of its total revenue. Even worse, the recurrent expenditure (excluding debt) and capital expenditure were both 101% of revenue individually. So, even without paying debt, the Nigerian government could not meet any of its expenditure categories.
 

This explains why the market is already hostile to Nigeria. With the Minister’s apparent cry for help, the situation is bound to worsen. And we’re already seeing that happen. A day after the announcement, Nigeria’s Eurobond yields already rose, showing investors were already reacting to the news. Analysts monitoring the markets confirmed to Stears that many investors are already looking to sell off their Eurobonds because of the announcement. 

The reaction was the same when Ghana made its debt restructuring during the week. Investors began to sell off their bonds because they didn’t want to be left with a junk bond—one with a low rating.  Following Ghana’s actual debt restructuring, which was announced last week, there was already some scepticism in the investor market about which other countries in West Africa would need a bailout, and it’s almost as if Mrs Ahmed gave them a response.

This shows just how important communication is in steering the market.

In Nigeria’s case, the poor communication by the Minister could lead to what we can call a self-fulfilling crisis. The government (through the ministry of finance) says we need a debt restructuring. Investors panic and drop Nigerian bonds or increase the rates of subsequent bonds so high that the government cannot borrow from the capital market again. The government then reaches out to concessionary lenders like the World Bank or IMF. They refuse to fund the government's budget unless it takes necessary austerity measures like removing subsidies, hiking taxes and cutting its excess spending. If the government agrees with the terms, it can sustain its debt, but the economy suffers through a tough macroeconomic patch with high inflation. If the government decides not to borrow from these concessional routes and borrows internally, its debt will rise until it cannot pay it back. Either way, the picture looks grim.

Understanding how bad the situation is, less than 24 hours after the Bloomberg interview, the Debt Management Office issued a statement clearly stating that observers took the Minister’s opinion out of context. The statement's purpose was to assuage investors’ fears, informing them that the government was not on the verge of a restructuring but could still meet all its debt requirements. Likewise, the Minister had an investor relations call days after the interview to further reiterate the fiscal strength of the nation. 

While this damage control is good, the damage has already been done and might take some time to repair.