DMO’s Strategies to Reduce Interest Expense Working—FSDH

By Dipo Olowookere

The strategies put in place by the Debt Management Office (DMO) to reduce the interest expense on the debt of the Federal Government have been commended.

Analysts at FSDH Research disclosed in a report yesterday that the strategies were achieving the necessary results.

Recall that the debt office plans to put the debt mix at 60 percent and 40 percent for domestic and external debt respectively.

It also plans to increase the long-term portion of the domestic debt to 75 percent.

The latest debt figures show that the interest expense on the local debt have dropped in the last few months.

FSDH Research, in its report, said it observed a relative increase in the revenue accrued to the FGN from the Federation Account Allocation Committee (FAAC).

It said these two factors have led to a drop in the ratio of the interest expense to the FAAC revenue which stood at 20 percent in December 2017.

The DMO has leveraged on the low interest rate in the international market to reduce the interest expense. The external component of the FGN debt as at December 2017 increased to 23 percent from 14 percent in 2013.

The proportion of the long-term debt in the domestic debt portfolio increased to 71% in December 2017 from 63.74 percent in 2013.

According to FSDH Research, the debt to Gross Domestic Product (GDP) in Nigeria at 20 percent is one of the lowest figures among selected countries. This is lower than the limit of 40 percent and indicates that Nigeria had huge fiscal sustainability space if revenue can grow faster than the current level.

The FGN has announced that it may raise less debt in Q2 2018 than initially indicated. This development may reduce further the yields on the FGN securities.

Although FSDH Research said it believes the yields on the NTBs will drop further, it is of the view that the yields on the FGN Bond may move up gradually from the current level before it drops around mid-year.

“We note that funding the 2018 budget, when approved, will require more borrowing in addition to the funding gap created by the subsidy on Premium Motor Sprit (PMS). The potential impact of the increase in rates in the advanced countries is an important external factor that may also lead to relative increase in the yields on FGN Bonds,” it said.

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan. Mr Olowookere can be reached via dipo.olowookere@businesspost.ng

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