Prepared by Jeanne Gobat.
Most of the external debt was accrued in the 1980s. The government borrowed heavily to finance large investment projects. It encountered external debt servicing difficulties as oil prices deteriorated sharply starting in the mid-1980s. These payment difficulties were further exacerbated through subsequent exchange rate devaluations. See Lane (2003) for a detailed discussion on the origins of Nigeria’s external debt crisis.
Several states have tapped into the domestic capital market, with bond issuance totaling about N 28-30 billion since 2000.
The government issued treasury bonds in 1989 mainly to avoid paying market interest rates. Interest rates on those bonds were set at 5 percent, well below market clearing rates. Given the price, investors did not take up the bonds and the CBN was left with absorbing almost the entire issue and continues to face difficulty offloading these bonds. In subsequent years, the treasury bonds were issued to the CBN whenever the government wanted to raise money at artificially low rates. The development stocks, which are listed on the Nigerian Stock Exchange, were issued to finance various capital projects. Both will be retired as they mature (Debt Management Office, 2002).
One convergence criterion for the West African Monetary Zone, which Nigeria has endorsed, calls for a ceiling on central bank lending to the government of 10 percent of the previous year’s revenue base.
Examples of countries with specialized debt agencies include Australia, Finland, Hungary, Poland, Sweden and the U.K., while in African countries they include Malawi, Namibia, Zambia and Zimbabwe.
The DMO Act went into effect in early 2003, while at the same time, the CBN Act 39, which deals with CBN’s role as debt manager, was repealed.
A USAID-sponsored resident advisor has been working with the DMO on a full-time basis since late 2001, to provide technical assistance in developing the government securities’ primary and secondary market.
The expected cash surpluses in 2004 and over the medium term are virtuous as they lower domestic debt which in turn reduces net interest payments.