Debt Management is the establishment of the conditions of issue and redemption of foreign loans. It involves a conscious and a carefully planned schedule of the acquisition, deployment and retirement of loans contracted either for development purposes or to support the balance of payments.
In Nigeria the ultimate responsibility for debt management rests on the Treasury Division of the Ministry of Finance. The Central Bank of Nigeria (CBN) is the principal agent implementing the day to day debt management policy.
In the case of internal borrowing the two institutions together determine the terms and conditions of using government debt instruments and in case of external borrowing, they do the negotiation on behalf of the federal and state government.
They ensure periodic payment of interest and the final retirement of debt at maturity. This high centralized debt management structure is an important strategy for eliminating the chances of the federal and state governments competing against themselves in a bid to raise funds from external sources.
For a state government to be eligible for external loan for instance, it projects must rank high in order of national priority. It must be economically viable and its debt service ratio must not exceed 10% of the state government revenue for the particular year.
The terms and conditions of the loan must be seen as fair and reasonable. The state government projected revenue at any point in time must be considered adequate for meeting all its debt obligations.
In the event of default, the federal government must service the debt and then deduct the equivalent of the debt service charge from the annual statutory allocation accruing to the particular state government.
Principally, Nigeria has adopted the following debt management methods to reduce the burden of her debt.
Embargo on New Loans:
This is the total stoppage of borrowing by all levels of government.
This is a method by which the federal government pegs the amount of external borrowing a level of government is legally allowed to borrow; it has been N0.5 Billion for federal government and N200 Million for state government.
Limit on Debt Service Payments:
This involves setting a limit on the amount or proportion that can be spent on debt service payments. For the state governments, not more than 10% of their total revenue and for the federal government not more than 30% of export earnings can be used on debt service payment. This is to make room for the government to meet their internal development obligations.
- Refinancing of Trade arrears: this involves the procurement of a new loan by a debtor to pay off an existing debt, particularly short term trade debt. The new loan may be taken from existing creditors or a new set of creditors.
- Debt rescheduling: this consists of changing the maturity structure of debt, spreading it over a longer period of time until it is finally liquidated.
- Debts buy back: the offer of a substantial discount to pay off an existing debt through collateralization.
This is the exchange of monetary instruments for tangible assets or other financial instruments. It is a mechanism for reducing a country external debt burden by changing the character of the debt, e.g. debt for equity, debt for cash.
Under certain exceptional circumstances, a country may negotiate for her debt cancellation with the creditor nations or organization. Nigeria recently benefitted from this arrangement from the Paris Club.
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