Rising debt: Capital market instruments as viable alternatives to foreign loans

By Chukwuma Umeorah

Nigeria’s debt ratio has been a concern over the years spanning several presidential administrations. The country’s escalating debt profile results from factors such as declining oil revenues, high borrowing rates and extensive infrastructure projects. Experts have urged the implementation of fiscal reforms, enhanced revenue generation, and the promotion of economic diversification to mitigate the debt crisis.

The recent move by the federal government to secure a $500 million loan from the World Bank for revamping rural roads has sparked a debate among financial experts and market operators about the optimal sources for funding such infrastructure projects. While some are in support of foreign loans, others advocate a more intentional approach by the government in tapping into the Nigerian Capital Market, leveraging instruments like the Nigeria Infrastructure Debt Fund (NIDF), Sukuk, and green bonds.

Current debt scenario

Nigeria’s external debt has been on the rise with significant payments made to service these debts. In January 2024 alone, the country paid $560 million to service its external debt, a significant increase from previous years. By the end of May 2024, the country’s debt services and payments had reached $2.19 billion, a surge from $1.12 billion recorded in the same period in 2023.

The country’s total public debt stood at N87.91 trillion as of September 2023. This mounting debt burden has raised concerns about the sustainability of continuous borrowing, making the decision to secure another $500 million loan a contentious issue.

The proposed $500 million World Bank loan

The federal government on Thursday revealed that it is seeking a fresh $500 million loan from the World Bank to enhance rural road infrastructure and agricultural marketing across the federation.

Contained in the final draft of the Resettlement Policy Framework, this request is part of the Nigeria Rural Access and Agricultural Marketing Project Scale-Up (RAAMP-SU), executed by the Federal Ministry of Agriculture and Rural Development. The project, which is estimated to cost $550 million, with the World Bank committing $500 million, seeks to address the significant infrastructure deficits that hinder Nigeria’s rural development. Scheduled for appraisal in July 2024, with an anticipated board approval in November 2024, the RAAMP-SU project will focus on developing, maintaining, and managing Nigeria’s rural road network.

This will involve not only the physical construction of roads but also the establishment of operational Rural Access Road Agencies (RARA) and State Road Funds (SRF), the implementation of road asset management systems, and the enhancement of road safety management protocols.

Historically, Nigeria has faced challenges in funding large-scale infrastructure projects due to fiscal constraints, inflation, and currency fluctuations. The RAAMP-SU project is a continuation and expansion of previous efforts supported by the World Bank, the African Development Bank (AfDB), and the Agence Française de Développement (AFD).

Background of Nigeria’s Infrastructure funding

Nigeria’s infrastructure funding has traditionally relied heavily on external loans from multilateral organisations such as the World Bank and the AfDB. These loans often come with concessional terms, including low or zero interest rates and extended repayment periods, making them attractive for financing large-scale projects. However, this reliance on external debt has also led to a substantial increase in the country’s debt servicing obligations. According to the Debt Management Office, Nigeria’s total external debt stock stood at $41.69 billion as of September 2023, with the World Bank being the largest creditor at $14.58 billion.

In recent years, there has been a growing discourse around diversifying funding sources for infrastructure projects to include domestic financial markets, particularly the Nigerian Exchange (NGX), leveraging instruments such as Sukuk bonds and the Nigeria Infrastructure Debt Fund (NIDF), which have shown promise in raising significant capital for infrastructure development. The successful issuance of multiple tranches of Sukuk bonds, which were oversubscribed, indicates a robust investor appetite for infrastructure projects in Nigeria.

Alternate Financing Using Capital Market: The Role of Sukuk and Infrastructure Funds and Green Bonds

Sukuk bonds have been a key component of Nigeria’s strategy to fund infrastructure projects. Since the first issuance, these Islamic bonds have provided a viable alternative to traditional debt instruments, allowing the government to tap into a pool of investors seeking Sharia-compliant investment opportunities.

The federal government has been commended for utilising this instrument effectively as over the last six series of Sukuk issuances, it has raised over N862.55 billion to fund capital projects.

The success of Sukuk bonds in Nigeria can be attributed to their structure, which aligns with long-term infrastructure projects and offers attractive returns to investors. For instance, the sixth issuance of Sukuk bonds raised over N300 billion, significantly exceeding the initial target.

Similarly, the Nigeria Infrastructure Debt Fund (NIDF), managed by Chapel Hill Denham and other similar infrastructure funds listed on the NGX, also offer potential for raising capital domestically. These funds are designed to pool resources from institutional and retail investors to finance critical infrastructure projects. By leveraging these funds, the government can reduce its reliance on external debt and mitigate the risks associated with foreign currency fluctuations.

Green bonds also are not left out as an instrument for the government to raise money. Although they are specifically earmarked for climate and environmental projects, these bonds provide the government and private sector with a mechanism to raise funds for renewable energy projects, sustainable agriculture, waste management, and other eco-friendly initiatives. The issuance of green bonds not only helps in addressing environmental challenges but also attracts a new class of socially responsible investors. The Nigerian government issued its first sovereign green bond in 2017, raising N10.69 billion, paving the way for subsequent issuances and highlighting the growing investor appetite for green investments.

Market operators’ perspectives

Market operators have expressed confidence in the capacity of the Nigerian capital market to deliver on large-scale infrastructure funding. The CEO of Arthur Stevens Asset Management Limited, Olatunde Amolegbe, emphasises the need for a balanced approach to financing. He argues that while concessional loans from multilateral organisations are beneficial for short-term projects, long-term infrastructure projects should ideally be funded through the capital market to ensure sustainability and avoid undue financial pressure.

According to him, “Some of these foreign loans come with zero interest rates while others have very low interest rates. They also give them a moratorium on repayment. You really cannot say the government should not take it simply because you want them to raise money from the capital market. But having said that, we want a realignment of priorities. What we are seeking is for them to have a mix. If the projects or the infrastructure they intend to invest in have a long gestation period, it is expected that financing for such should come from the capital market because the capital market is the market where you can raise long-term money.”

However, if you want to do a project that is within a two- three-year period and you are able to get concessionary loans or debt from these multilateral organizations, there is really nothing wrong in tapping that source too. Moreover, some of these loans are only targeted/tied to that specific project; it is not money that you can use to do any other thing.”

Speaking on the capacity of the capital market to deliver in raising huge amounts of money as may be required by the government, Amolegbe added, “It is already evident that the market has such capacity. If you look at the kind of monies that the government has raised in terms of Sukuk and in terms of even some of the Eurobonds that are issued. Five, six years ago, before they did those issuances, people speculated that our market did not have capacity, but by the time they issued the Sukuk, it was clear. For instance, the first Sukuk, I believe, they were targeting N100 billion, but they raised close to N300 billion; it was oversubscribed.

“It is really a matter of what kind of products we are offering on the stock market, and how it is structured. If it is well packaged and appealing to investors, then it will sell. We have also seen the introduction of more infrastructure funds on the NGX.

Amolegbe commend president Bola Tinubu’s administration for the steps taken in promotion of the capital market.

“The Securities and Exchange Commission (SEC) has been included as a member of the MPC, that didn’t use to be the case, it started this year. So, that itself demonstrates that the government has started to make the capital market a priority in the policy plans of the government. The fact that the Minister of Finance and the CBN Governor are also Stockbrokers has given us an edge at promoting the interest of the Capital market.”

On his part, the MD/CEO of Apt Securities, Kurfi Garba, noting that the government has successfully raised substantial funds through Sukuk bonds and other capital market instruments, highlights the importance of continued engagement and advocacy to deepen the market and align government policies with market priorities. Garba also points out that leveraging foreign loans helps augment Nigeria’s foreign exchange reserves, which is crucial for stabilizing the naira in the face of currency shortages.

“Don’t forget that we are in a shortage of foreign exchange, so you need to augment the foreign exchange to support the naira. I think that is why they go for such loans. Because if you do not supply the foreign exchange market, it would make useless of the naira. At least for some time now, the naira has been stable at around N1,400/$, if that can continue, it is good so you will not be hit by fluctuation. But if the dollar is not stable, that means your naira today may be worth nothing tomorrow.”

Addressing concerns that Nigeria’s debt will keep rising if the borrowings continue, Garba said, “We cannot essentially do without that because we need so many things on the ground. Look at our infrastructure and that is part of what these monies are used for. If we have adequate power, many of our moribund industries will be revived, but we don’t have it. If we had railways, food prices would not be high. For instance, a basket of tomatoes in the north may not cost N5,000, but here in Lagos, it costs N25,000 to N30,000. Why? Because of transport. If you have good railways, you will take it from Kano, the next day they arrive in Lagos, and it will not cost you up to N500. So, if it is sold at N5,000 in the North or wherever it is planted, it would not sell for more than N6,000 in Lagos after factoring transportation.

“Most of our roads are not okay, plus so many police checkpoints. If you are on the railway, will there be any checkpoints? So, our reality is that we have a lot of infrastructural decay, and we need money whichever way the government deems fit to address these issues.”

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