Recent reports have suggested that Nigeria may not have planned for the repayment of domestic debts maturing in 2025, raising concerns about a potential default.
These claims stem from the exclusion of principal repayments, particularly for local debt borrowings, in the proposed 2025 budget.
However, in a discussion with Nairametrics, sources at the Debt Management Office (DMO) clarified that this is standard debt management practice and not an indication of financial distress.
How domestic borrowing is repaid
The DMO explained that Nigeria’s domestic debt servicing strategy focuses on budgeting for interest payments—the cost of borrowing—rather than the repayment of principal.
This approach, commonly referred to as “rollover,” has been the norm since the agency’s establishment in 2000 and is a globally accepted practice for managing public debt.
- According to a senior official at the DMO, who requested anonymity as they were not authorized to speak when domestic debt instruments like treasury bills or bonds mature, the government issues new debt to refinance the principal.
- For instance, if ₦100 billion worth of treasury bills mature, the government, via the DMO, raises ₦100 billion in new treasury bills to repay the lenders.
- This ensures that the principal is repaid without directly impacting the budget, while lenders receive their funds and have the option to reinvest.
The DMO emphasized that the budgetary provision for domestic debt servicing includes only interest payments—such as the discount on treasury bills or the semi-annual coupon payments on bonds like Sukuk or Green Bonds.
- Principal repayments are handled outside the budget through refinancing.
- This explains why the government often borrows amounts exceeding the budgeted figure for new domestic borrowing.
- For example, while the budget may allocate ₦5 trillion for new borrowing, actual borrowing might total ₦6 trillion, with the additional ₦1 trillion used to repay maturing debt.
- One notable exception to this rollover strategy is promissory notes, which are not refinanced.
- Instead, the government sets aside funds in the budget under a line item called the “sinking fund” to fully redeem these obligations when they mature.
This deliberate separation ensures that promissory notes are settled without issuing new debt.
External debt servicing is a similar principle
The DMO further explained that external debt servicing operates on a similar principle but with added complexities.
External debt includes interest, commitment fees (for unused portions of loans), and service charges, as well as amortizations, which are gradual repayments of the principal.
- Unlike domestic debt, external loans are often long-term, with a grace period before principal repayments begin.
- For example, a 20-year loan might have a three-year grace period where only interest and fees are paid.
- After the grace period, the principal is repaid in installments, ensuring that the entire amount is cleared by the end of the loan term.
- However, Eurobonds—foreign currency bonds issued by Nigeria—are treated differently. They require the entire principal to be repaid at maturity (a “bullet payment”).
- To manage this, the DMO often plans to refinance Eurobonds by issuing new ones, which is a common strategy in international debt markets.
For the 2025 budget, Nigeria has included full principal repayments for a $1 billion Eurobond maturing in November 2025 and another $1.25 billion Eurobond due the same year.
The DMO noted that while these amounts are reflected in the budget, the government could also refinance them.
Addressing concerns about the size of Nigeria’s debt servicing costs, the DMO noted that this is a natural consequence of growing debt stock.
As the government borrows more—whether through concessional loans or commercial debt—servicing costs inevitably increase.
This is not unique to Nigeria but is standard for any country managing significant debt obligations.
What you should know
The DMO clarified that the exclusion of principal repayments from the 2025 budget for domestic debt is a deliberate and efficient debt management strategy.
- By refinancing maturing debt, the government maintains liquidity and avoids large disruptions to its budget.
- In the case of external debt, while Eurobond repayments are included in the budget, these are often refinanced to ease cash flow pressures.
- The overall strategy allows the government to meet its debt obligations while prioritizing critical budgetary expenditures.
Despite the concerns, Nigeria’s approach to managing its debt obligations reflects a structured and sustainable plan that aligns with global standards.