Public Debt Instruments in Nigeria (Edited by Amara Onuh)
Meaning of National or Public Debt
National or public debt refers to the total amount of money the government owes individuals, financial institutions, other organisations, foreign governments and international financial institutions as a result of borrowing. The government incurs public debt when its revenue is not sufficient to meet its expenditure, and it obtains loans to finance the shortfall or other public needs. Public debt may be domestic when the government borrows from sources within the country, or external when it borrows from sources outside the country. Borrowed money must usually be repaid over an agreed period, with interest where applicable.
Types of Public Debt
Public debt can be classified according to where the borrowing comes from.
1. Domestic Debt
Domestic debt is money the government borrows from individuals, organisations and financial institutions within the country. In Nigeria, the government can borrow domestically from commercial banks, pension funds, insurance companies, investment institutions and members of the public. Common instruments used for domestic borrowing include Treasury Bills and Federal Government Bonds. Domestic borrowing provides the government with funds to finance budget deficits and development projects without borrowing from foreign creditors. However, excessive domestic borrowing can increase government debt-servicing costs, raise interest rates and reduce the funds available for private businesses to borrow and invest.
2. External Debt
External debt is money that the government borrows from sources outside the country. These sources may include foreign governments, international financial institutions such as the World Bank and African Development Bank, foreign commercial banks and international investors. External borrowing can provide the government with large amounts of foreign currency needed to finance major infrastructure and development projects. However, external debt must usually be repaid in foreign currency, together with interest. If the country's currency loses value against the currency in which the debt is denominated, the cost of servicing the debt can increase. Excessive external borrowing can therefore place pressure on government finances and foreign-exchange resources.
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Instruments or Sources of Government Borrowing in Nigeria
Government uses different financial instruments to borrow money.
1. Treasury Bills
Treasury Bills are short-term government securities issued by the government to raise money from the public and financial institutions. They typically have a short maturity period, generally less than one year. When individuals, banks or other investors buy treasury bills, they are effectively lending money to the government, which repays the amount according to the terms of the instrument. Treasury bills are mainly used to meet the government's short-term financing and cash-flow needs. They are considered relatively low-risk investments because the government backs them.
2. Federal Government Bonds
Federal Government Bonds are long-term debt instruments issued by the Federal Government to borrow money from investors. Unlike treasury bills, government bonds normally have longer maturity periods and may provide periodic interest payments to investors. The government uses the funds raised through bonds to finance budget deficits, infrastructure and other public expenditure. At maturity, the government repays the principal amount to the investors. Excessive reliance on bonds, however, increases public debt and the amount of money the government must spend on debt servicing.
3. Sukuk
Sukuk are government securities structured according to the principles of Islamic finance. The Federal Government can issue Sukuk to raise funds for specific infrastructure projects, such as roads and other public facilities. Instead of being structured simply as an interest-bearing loan, Sukuk generally represents an investment linked to an underlying asset or project and provides returns according to the terms of the issue. It allows the government to obtain funds from investors who prefer Sharia-compliant financial instruments. The government is still required to meet its obligations under the Sukuk arrangement.
4. Ways and Means Advances
Ways and Means Advances are short-term financing facilities provided by the Central Bank of Nigeria to the Federal Government to help meet temporary government cash-flow shortages. They are intended to bridge the gap that may occur when government expenditure becomes due before sufficient revenue is received. In simple terms, the government may obtain temporary financing from the Central Bank and repay it when revenue becomes available. Excessive use of Ways and Means financing can increase government liabilities and, where it results in excessive monetary expansion, may contribute to inflationary pressure.
5. Loans from Commercial Banks
The government can obtain loans from commercial banks operating in Nigeria. Such borrowing may be used to meet government financial obligations or finance specific activities, depending on the terms and legal framework governing the borrowing. Commercial banks provide funds that the government is expected to repay, usually with interest, over an agreed period. This form of borrowing increases domestic public debt and creates future debt-servicing obligations. Heavy government borrowing from domestic financial institutions can also reduce the funds available for private businesses to borrow, a situation economists refer to as crowding out.
6. Foreign or External Loans
Foreign loans are funds borrowed by the Nigerian government from sources outside Nigeria. These sources may include foreign governments, international financial institutions such as the World Bank and African Development Bank, and other external lenders. External loans can provide substantial funds for infrastructure, development programmes and other government expenditure. However, many external loans are denominated in foreign currencies, so changes in the exchange rate can affect the amount that Nigeria has to repay in naira. External borrowing therefore increases the country's external debt and creates future repayment and interest obligations.
7. Sovereign or Eurobonds
A sovereign bond is a debt security issued by the Federal Government to domestic investors, while eurobonds are issued to investors in international financial markets. When Nigeria issues a Eurobond, for example, it raises money from investors in the international capital market and agrees to repay the principal and interest according to the conditions of the bond. Such borrowing can provide access to large amounts of foreign currency for government financing. However, it can expose the government to foreign-exchange risk and international interest-rate conditions, particularly when the country's currency depreciates against the currency in which the debt is denominated.
Summary
Public debt is the total amount of money the government owes from borrowing.
The government borrows when its available revenue is insufficient for its planned expenditure.
Public debt can be domestic or external.
Domestic debt is borrowed within Nigeria.
External debt is borrowed from outside Nigeria.
Instruments or Sources of Government Borrowing in Nigeria include Treasury Bills, Federal Government Bonds, Sukuk, Ways and Means Advances, Commercial Bank Loans and Foreign Loans.
