Nigeria’s $53bn central bank debt restructuring


Remember the $53bn Nigerian debt imbroglio that Alphaville wrote about earlier this year? It’s finally been resolved, and — surprise surprise! — the government has managed to ram through a simple but powerful bit of financial engineering.

On Wednesday, Nigeria’s upper house of parliament rubber-stamped president Muhammadu Buhari’s request to convert a giant pile of loans his government had taken from the central bank through a facility called the Ways and Means Advance.

Now, the N23.7tn ($53bn) of debt owed to Nigeria’s central bank (ed note: Alphaville loves that they call it the “apex bank” there) will become a 40-year bond that pays a 9 per cent interest rate.

With the Senate’s assent now granted, the lower House of Representatives followed suit not long after, setting it up for Buhari to sign the bill into law, perhaps after returning from some big party in London this weekend.

Back in December, when Buhari first went to parliament for legislative blessing for the debt restructuring some lawmakers rejected the request — not unfairly arguing it was unconstitutional to have borrowed so much money from the central bank in the first place.

The central bank lending is in itself not illegal, but it comes with clear limits. Nigeria’s Central Bank Act of 2007 allows it to extend credit to the government, but only to the tune of 5 per cent of the previous year’s revenue, and it must be repaid at the end of each fiscal year. Moreover:

. . . “no repayment shall take the form of a promissory note or such other promise to pay at a future date or securitization by way of issuance of treasury bills, bonds, certificates or other forms of security which is required to be underwritten by the Bank.”

The problem was that the money had been spent to support the country’s often cash-strapped states and to plug federal government revenue shortfalls. The Senate president briefly grumbled about lawmakers not being informed, but it was pretty obvious who was plugging the budget deficit.

Moreover, the rolling central bank advances cost 21 per cent a year, which will now be reduced to 9 per cent. That’s understandably pretty tempting for lawmakers in a country that spent over 90 per cent of last year’s revenues on servicing debt, leaving little for a chronically underfunded education system and other important priorities.

However, converting the supposedly short-term (but constantly rolled) Ways and Means credit facility into a long term bond will balloon the country’s official debt burden to about $170bn. That will push the country’s debt-to-GDP ratio at almost 40 per cent — not bad, all things considered, but close to the limit the government set for itself.

In any case, what’s done is done. Buhari has gotten his massive billions of dollars in credit from the central bank and now found himself (or the nation) a sweet deal on his way out. A senior banker in Nigeria says the restructuring made sense.

“If another administration does not follow the footsteps of the outgoing one and run up a huge pile of debt from the central bank, this need not be a bad thing in the long run.”
That’s a big if though!

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