• Chief Abraham Nwankwo, Director general, Debt Management Office

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  • 1. DEBT MANAGEMENT ASPECTS OF CREDIT RATING AND FINANCE RAISING BY SUB-NATIONALS COMMENTS BY DR. ABRAHAM NWANKWO DIRECTOR-GENERAL, DEBT MANAGEMENT OFFICE, NIGERIA AT THE NATIONAL SUMMIT OF MUNICIPAL CREDIT RATING, ORGANIZED BY THE ASSOCIATION OF LOCAL GOVERNMENTS OF NIGERIA (ALGON), MARCH 17-19,2009.
  • 2. SCOPE
    • Connection Between Credit rating and Debt Management
    • Pros, Cons, Challenges
    • Initiatives by DMO to Build Debt Management Capacity at the Sub-national Level
    • Standards of Nigeria’s Debt Issuance financing
    • Existing Legislations and Guidelines Supportive of Good Credit Rating for Sub-nationals
  • 3. Connection Between Credit Rating and Debt Management (1)
    • NEED: Why Sub-nationals need to borrow:
            • Substantial resource deficit relative to infrastructure and social services to be financed
            • Overdependence on a volatile revenue base – statutory allocation of oil revenue
            • A revolution of expectations by citizens for dividends of democracy
    • REQUIREMENT: Creditors need Credit Rating in order to:
            • Evaluate Sub-nationals’ suitability to borrow
            • Determine risk attached to lending to a sub-national
            • Derive appropriate cost to charge the borrower
    • ENABLEMENT: Building a sub-national’s capacity for Debt management is arguably the most portent way to enhance its credit rating and enable it borrow funds on favourable terms and conditions.
  • 4. Connection Between Credit Rating and Debt Management (2) necessitates requires favours
  • 5. Pro, Cons, Challenges of SN Borrowing (1)
    • Pros
    • Additional Source of resources for rapid economic and social development
    • Could encourage sub-nationals to embark on large-scale projects with significant impact on the people’s well-being
    • Could encourage economies of scale in the use of resources
  • 6. Pro, Cons, Challenges of SN Borrowing (2)
    • Cons
    • Could discourage maximum exploitation of internally generated revenue
    • Borrowed funds could be susceptible to waste if there is no sufficient capacity to manage funds and related projects
    • Inadequate negotiation skills at the Sub-national level could lead to unfavourable borrowing terms and conditions
    • Unguarded borrowing could lead to unbearable debt burden (unsustainability)
  • 7. Pro, Cons, Challenges of SN Borrowing(3)
    • Challenges to address
    • Data & Database
    • Accounting Systems
    • Human resource: capacity building
    • Political Commitment to Reform for long-term sustainable development
    • Demand for Accountability and Transparency
    • Role of civil society
    • Note: The major economic and financial issues necessary for
    • Credit Rating are captured in the Fiscal Responsibility Legislation
  • 8. Initiatives by DMO to build Debt Management Capacity for Sub-nationals (1)
        • In 2007, embarked on a programme of helping each of the 36 States of the Federation establish a Debt Management Department (DMD)
            • Substantial Progress made
            • Jointly with States, a Template has been developed and is being implemented
            • Comprehensive in scope – the Template covers: legal backing, institutional development, capacity building , mentoring, etc
            • Inducted and registered 56 appropriate consultants from which the States could choose
        • Relatedly, working with Development Partners, DMO is helping States in developing their Fiscal Responsibility and Public Procurement Laws
  • 9. Initiatives by DMO to build Debt Management Capacity for Sub-nationals (2)
    • DMO is implementing an agenda of Democratization of knowledge in public debt management so as to create Demand for Prudent Public Debt Management
            • Frequent interaction fora
            • Enlightenment seminars in tertiary institutions
            • Continuous media campaigns
    • Note: (i) Owing to the close relationship between States and their respective Local Governments, success of the initiatives at the State Level will positively influence the Local Governments
    • (ii) After sufficient progress at the State level, the logical follow-up will be to extend this initiative to the Local Governments as appropriate
  • 10. Standards of Nigeria’s Debt Issuance Finance
    • Since July ..2005, fundermental process transformation
      • Regular Monthly auctions
      • Issuance Calendar
      • Single price/marginal pricing
      • Tenor extended from 91 days to 20 years
    • Institutional Strengthening:
      • Licensing of Primary Dealer Market Makers (PDMMS) who are always ready to buy or sell FGN Bonds
    • Bond Market Steering Committee in place since 2006
      • Membership: Private Capital Market Operators, SEC, NSE, DMO, CBN, FIRS PENCOM
      • Current focus: to remove constraints to the development of corporate and other
      • bonds – cost, legal administrative.
  • 11. Existing Legislations and Guidelines Supportive of Good Credit Rating For Sub-nationals (1)
    • Ref: Investment and Securities Act (ISA), 2007; The DMO Establishment Act, 2003; The Fiscal Responsibility Act, 2008; The National Debt Management Framework, (2008-2012).
    • National Debt Management Framework contains Guidelines for External Borrowing, Guarantees and On-lending
    • Sample of Control and Prudential Provisions:
        • Federal and State Governments and their parastatals shall obtain Federal Government approval-in-principal, prior to full-scale negotiation for external loans
        • All external loans shall be supported by Federal Government Guarantee
  • 12. Existing Legislations and Guidelines Supportive of Good Credit Rating For Sub-nationals (2)
        • The applicants for Federal Government Guarantee must provide evidence that they have not over-borrowed externally
        • Domestic borrowing by States are to be backed with Irrevocable Standing Payment Order (ISPO) attached to their statutory allocation
        • All banks and financial institutions wishing to lend money to the Federal, State or Local Governments or their agencies, shall obtain the prior approval of the Minister of Finance (DMO Act, Section 24; Fiscal Responsibility Act, Part X, Section 45)
  • 13. Conclusion
    • There exists adequate legislations and guidelines for Sub-nationals in the area of public finance and debt management, which should facilitate favourable credit ratings for them
    • In particular, the DMO’s current initiatives of facilitating the establishment of a Debt Management Department in every State, will further enhance their chances of good credit rating
    • Appreciable progress is being made in developing the market for bonds
    • It is to the benefit of the States and Local Governments to ensure they are guided by the existing regulatory and prudential provisions, so that they can obtain favourable credit rating and less costly access to external and domestic funds.