Ngozi Okonjo-Iweala - Minister of Finance
Ngozi Okonjo-Iweala – Minister of Finance

THIS is a major aspect of financial management. It could be defined as a mechanism whereby the nature and structure of existing debt can be adjusted in such a way as to replace the short-term with long-term securities, refund maturing issues, or transfer securities from one type of investor (like the bank) to another (like the firm).
The treasury department can normally change the relative size of all classes of debt by altering their short-term and long-term elements so that short-term and long-term issue which constantly mature in large volume can be replaced with long-term bonds while long-term bonds can be replaced with short-term issues either as they mature or through purchase and call, Obinna (1985). Long-term bonds are callable if they are payable at maturity value with or without a small premium. The callable features enable the government to retire (i.e redeem) the debt sooner than otherwise, without having to pay substantially more than the maturity value. Moreover, they enable the government to issue new bonds with a lower rate of interest if the market rate was falling.
The replacement of short-term with long-term issue offers Some advantages to government:
(i)    During the period of inflation, it helps to reduce the overall liquidity of the debt structure by making it more difficult for investors to use funds in government securities to expand consumption spending.
(ii)    An increase use of long securities the cost of constant refunding short-term Such refunding may coincide with austerity or stringency in the money market Central Bank may be compelled to governments borrowing Policy by taking actions that run counter to those required in the interest of economic stability.
(iii)     On cost consideration alone it is Cheap for the government to shift towards long-term issues especial during a depression. The Primary disadvantage of long range lengthening of the maturity structure of government securities is the reduced competitiveness of long- term bonds viz-a-viz short term securities. This comes about through changes in the monetary policy which may make private securities more attractive during a boom. Short-term issues certainly keep lenders’ investments highly liquid and stimulate their spending sums on consumption.
In summary, we shall distinguish public debt management from government fiscal and monetary policies. Government fiscal Policy, as may be recalled refer to government spending, taxing and borrowing and how these economic activities maybe directed toward achieving the goals of fiscal policy. The Monetary policy refers to how the monetary authorities (board of governors) regulate the flow and credit. Public debt management operate within the realities of fiscal and monetary policy, but is no strictly a part of either fiscal or monetary policy.
Public debt manage takes as “given” the size of the debt and the general conditions prevailing in the money market. The function of public debt management is to establish the terms on which new public issues are sold, and maturing public issues are refinanced. Public debt management means, then, making decisions concerning the types of public debt issues offered, the proportionate amounts of different debt forms to be used, the pattern of debt maturities, the pattern of debt ownership and determination of all the other general characteristics of public debt, such as the conditions on which certain issues are redeemable, callable, usable for tax purposes and other special provisions between the Government and lender.
The money borrowed by the Government forms the public, or national debt. Buhari defined public (national) debt as the accumulated total of past deficits less past surpluses. Public debt could be categorized into (i) Internal public debt and (ii) External public debt.
A public debt is internal when it is owed to people and firm within the country. People are free to lend or not to lend money to the Government. However, the government may in war-time compel them to lend, as happened during the Nigerian Civil War of 1967-1970. By lending to the Government, people or firms simply change cash assets into securities. The value of assets remain the same but they have changed their form. Loans are repaid with interest. Thus, the Internal public debt is repaid from tax revenue, hence, the repayments are transfer payment; they are collected from tax payers and paid back to people holding government securities. That means money is simply transferred within the economy, without adding to the Gross National product (GNP). In other word, no increase in the size of internal public debt can make the country as a whole either poorer or richer. The effect is in-built in that system.
External public debt often referred to as External debt public debt, refers to the debt owed by the Central Government of one country to the governments or non-governmental organisation of other countries while the repayments of loans or principals and interest has internal effects in the case of internal public debt in the case of external public debt, the payment of both interest and principals are made abroad. This affects our reserves, financial credit worthiness and in summary, our balance payments. In 1982, Nigerian external debt amounted to about 13 billion. The debt service ratio was nearly 11 per cent and debt export ratio was 100 percent. At the same year, Nigeria was classified in the list of the debt ridden nations of the world. On the list then, were Brazil, Mexico, Chile, Argentina, Venezuela By 1990, the country’s external debt had amounted to about $33 billion, debt service ratio rose to 30 percent while debt export ratio was about 400 percent.
Why Government Borrow:
(a) The Government has to borrow when its revenue is less than its expenditure. At times, revenue is deliberately kept low in order to reduce unemployment.
(b) To finance a major project, it may be impossible to pay for it from recurrent revenue. Borrowing is worthwhile if the project for which money is borrowed will benefit the country. Often these projects, when completed, provide enough revenue to repay the loans and meet running costs.
(c) When there is an emergency, such as war, floods, earth quake etc.
(d) To settle debts that are due for payment, this is called a funding operation; i.e a short-term debt is converted into a tong-term.
Sources of government borrowing:
i. Loans from Overseas could come from the following foreign governments, the world bank, international monetary fund, private – Paris club London Club, Ford Motor and Co., etc.
ii. Internal Borrowing and Ownership:
(a) Individuals
(b) Financial Institutions (Insurance Companies, Pension and Social Security Funds).
(c) Commercial banks, savings and Merchant banks
(d) Central Bank.
The Nigerian public debt may be classified between funded or floating and unfunded debt, Agu CC (1988 PP 124-127). The funded debt usually refers to the public debt incurred through the sale of government paper or financial instruments, such as the issue of Treasury bills, Treasury Certificates or other loans like-Development Stocks issued through the markets, and the “ways and means advance” given by the CBN.
The unfunded debt, are made up of those loans which are redeemable at a definite date with or without an option for repayment at an earlier date. Such debt is made up of liabilities that are incurred Outside the market, such as deposits in the savings banks, the provident fund and similar mobilisation of funds.
Another method of classification of public debt is to group the debt instruments according to maturity structure. The distinction is drawn between short-term, medium term and long-term liabilities. The short-term instruments are generally treasury bills, “ways and mean advances and those not exceeding one year. Those debt instruments exceeding one year but not exceeding five years known as medium, and long-term instrument are those debt instruments exceeding five years. The interest rates attached to each group also show the time dimension. Thus, the public debt are classified below on table.
CBN, Annual Reports and statement of Accounts – Various Years.
Note that (I) = Phased out
Table T2 show that the Nigerian domestic debts consists largely of debts raised through the issue of Treasury bills, treasury Certificates, National reconstruction and development savings Certificates (NRDSC) National Savings Certificates and Premium bonds and development stocks.
Treasury bills are traditionally short-term loans issued for 60 or 90 day, the issue rate of interest has varied from 3.5%. 5% Treasury Certificate which were introduced in December 1978 are two types:
One matures within One year and carries interest rate, while the other has 2 years life span and interest rate slightly higher.
National, savings Certificates and premium bond medium-term instruments with a maturity of five
They were introduced in 1962, as a means encouraging the small savers to invest directly and voluntarily in Government debt. These savings scheme were channelled through the Post office With post office in rural areas, mast People have the opportunities  of Participating in the Scheme. The savings certificates carried 5% simple interest per annum, while the yield on Pre bonds was earned in the form of prize winning With total Prize not being more than 5% on accumulated investment. Note that both the Certificates and premium bonds are no more in use, They have been phased out.
The long-term Public debt instruments comprise the NRDS the Federation of Nigeria Development Stocks and some bilateral loans The NRDSC is a direct mandatory  borrowing scheme by Federal Government introduced in 1968 to help mobilise funds for both successful prosecution of the civil war and the finance of Post war reconstruction Prograrn of 1 970s. The Contribution was based on income of each person and this contribution earned annual interest 013%, The loan was initially meant to be redeemed by 1977, but by 1972, the Government took decision and redeemed them.
The develop stock were One of the earliest group of debt instruments used by the Government to mobilise funds far financing public sector expenditures. They Were first introduced in 1946 and have been in use since then They are currently the most useful long instruments at the disposal of the Federal Government. Development stocks are not redeemable until maturity, but could be sold before maturity subject to market conditions. The maturity ranges from 5-25 years and interest rate structure ranges from 5% to 6% pending on the maturity of the stocks.Bilateral loans were used around 1950s. It was then contractual between the borrower and he lender.
Generally, the external indebtedness of a country comes a problem when the burden of servicing the debt become so heavy and unbearable that t imposes intolerable constraints  the economy and on the development efforts f the authorities. In such circumstances the bulk of the foreign exchange earning is earmarked for servicing of the debt and at times, and worse still, drawings on new loans may be needed to service existing debts in such a situation, only a small proportion of total foreign exchange earning is available for financing of economic and social projects. Nigeria as we have discussed however has already found herself in this unfortunate situation, It will therefore be instructive to look more closely some of the factor that contributed to this problem. Although, Nigeria’s debt problem became pronounced in 1981, its cases may be traced largely to the activities and decisions of the past years. Some of these major factors are discussed below:
Low Savings Propensity: There are very few rules in economics, but in sustaining a high savings propensity are also those which have achieved the best performance in terms of economic growth. Nigeria had in the past had a great propensity not just to consume but to waste. During the days of oil boom, we developed exotic and expensive tastes, wasted and squandered resources. Remember those day when Champagne almost replaces Nigerian. Even when the resources were dry the expenditures both at public and private adjusted to align with our income flow hence t high accumulation of short-term trade debts.
2. Unrealistic Exchange Rate: Both the monetary and exchange rate Policies of Nigeria did not respond quickly enough to reflect the external value of the Naira at the time when there was a drastic decline in flow of resources from the depressed oil market. The result of this was that the naira become highly overvalued and this created a severe pressure on our external sector. There was large naira base which at the existing rate of exchange made it Possible for individual, corporation and even government to incur foreign exchange obligation which the country resources would not sustain and this led to accumulation especially of short-term trade debts which were unplanned and therefore emerge fortuitously. The over also gave great incentive to leakages and capital flight which substantially dwindled away the already dwindled foreign exchange earnings.
Poor External Debt Management Policies: The acquisition of external loans should normally be for development purposes or for balance of payment support. In deciding on the optimal level of commitments, it is expected that a carefully planned schedule of acquisition deployment and retirement of such loans be prepare Moreover, good estimate
foreign exchange earning as well as projected ratings from investments financed with the loans are 8 All these should help to determine the ability of the country to serve the existing loans and the desirability or otherwise of contracting new loans.
In Nigerian context and particularly between 1980 and 1993, there was a general lack of  for these factors. For instance, the provisions of the Decree No. 30 of 1978 which imposed a ceiling of N5.00 billion on outstanding debt at any point in time were flagrantly disregarded. Of more serious concern, in particular, was the indiscriminate manner in which State Governments acquired External loans to finance all parts of projects without seeking Federal Government guarantee. Such loans, as stated earlier, amounted to :477.4 million in 1985. This has the implication of eroding the country’s credit worthiness in the event of default on the part of the state governments. Where the Federal Government takes up such liabilities, its own debt burden increases correspondingly.
On the part of federal government also at time political considerations rather than economic reasoning prevailed in determining which project to finance with loan. Consequently, some of the projects financed with such loans were either unproductive or lacked adequate cost control which resulted in escalation of fees. A number of such projects were abandoned before completion. These include some project under the Benin Owena River Basin Authority. In the end, the country would still pay for such ill conceived project in terms of debt servicing.
4.  Financing of Long-Term Project With short-Medium Term Loan: The structure of Nigeria’s debt as earlier observed, titled in favour of short-medium term debt which accounts for about 85% of t debt Outstanding debt in 1986. Unfortunately most of these medium term loans was drawn to finance long term projects Examples of such projects Iwopen paper Mi and the steel project at Ajaokuta and Aladja. Like the others from the ICM these loans have relatively short grace periods and a repayment period of between  and 8 years in other words case where the projects are self financing they Were hardly completed when amortization became due Consequent a situation of debt service bunching resulted which compounded the debt problem.
5. Declining Foreign Exchange Earnings and the High Import Bills: Nigeria’s major foreign exchange e since early 1970s has been crude oil, Unfortunately the glut in the international oil market has affected adversely the Country’s foreign exchange earnings from his Source Since 1981. On the other hand the consumption pattern of most Nigerians had changed in favour of foreign goods and services thereby increasing the level of foreign exchange commitments For Instance the level of imports reached its peak of N13 billion in 19 it therefore became a difficult task to reduce the level of imports in line with the development in foreign exchange earnings in subsequent years.
Consequently there was massive build-up of trade arrears which further compounded the external debt problem Such arrears stood at N12,179.7 million ($6.1) billion) in 1986.
6. Diversion of the proceeds of loan into the uses:
Some of the loans contracted in the few years especially during the civilian rule were reported (according to various Tribunals) to have been diverted to other uses of personal or partly interest) instead of being invested in project for which they were contracted. To the extent that such malpractice existed, the external debt of the country must have increased without any corresponding increase in the official assets that would enable the country to service such loans eventually.
A number of measures have been taken by the Federal Government to bring a lasting solution to our debt problems. These measures include:
(i) Embargo on new loan: This implies Government banning further contracts on obtaining new loans. The Federal Government maintained that before granting any type of loan to state governments, an approval has to be obtained.
(ii) Statutory commitments; provisions of maximum levels of
(iii) Issuance of directives by the Federal Government;
(iv) Re-financing of trade arrears
(v) Re-scheduling of debts:
Debt re-scheduling is one of the options available to a debtor country experiencing difficulties in the settlement and in servicing of debt. Under re-scheduling, the d would be negotiated for payment at a future date repayment period stretched out. Therefore debt rescheduling is a process through which debts are re-arranged and re-structure in a manner that the re-payment period is elongated, so that the debtor nations should enjoy some breathing space before the payments would fall dues’ In brief, it is a process of prolonging the “evil days”, if the debtor nation is already paralysed and had no Plans whatsoever to re-pay the debts.
If on the other hand, the debtor nation had been conscious of her indebtedness and planning for re payments, then debt re-scheduling will be a Cooling-off period that will enable her plan. well and meet up the payments with some adjustable styles and Strategies.
Although debt rescheduling enables the debtor nations to enjoy for some time without disturbances, but merits associated with this structure could not be easily over looked.
– For instance, the debtor nations may not take drastic measures towards solving her debt problem.
– Higher interest rate will be built in since increase in maturity period is seen as additional risk on the part of the lender.
– The lender usually insist on certain internal adjustment programmes before re-scheduling is embarked on such as stabilization program This programmes normally affect the domestic economy and this is typically U accordance with Paris Club agreements of 1956.
– The creditors often subject the debtor nations into entering an agreement with International Monetary Fund (IMF) which will impose some conditionalities to the structural set up of the economy already in debts.
(vi) Debt Conversion:
Debt conversion or swapping of debt has become a household issue in most of the debtor nations. It is often referred to as securitization or capitalization of debts.
The Concept of Debt Conversion Emerged: Emerged in the recent years as a potent instrument of debt reduction, which could ii a way substitute for a new money, because it promotes new domestic investment which is a vital aspect of the a process. Debt conversion simply involves the e of a debtor country’s external debt for a domestic debt in local currency or equity participation in a local development project.
Debt conversion or Debt equity swap is the replacement of a foreign debt owned for the equity shares in debtors country but based on a prior agreement of the parties thereto. Debt equity swamp is a payment mechanism recently developed whereby the existing debts of a country is repaid not with the hard earned foreign exchange but with the equity share of companies of the country owing the debt. This implies that if Nigeria for one reason or the other could not meet up with the repayment of undue obligations, then, with the agreement of the creditors, an arrangement could be entered into by which these creditors would have interest in some selected Nigeria organisations/companies up to the tune of the value of loans due as per agreed rate amongst the parties Concerned. Since this technique emerged, several forms of them have been identified as follows:
Forms of Debt Conversion:
Debt for equity: This involves the exchange of a country’ external debt dominated in foreign currency for local currency and which may be utilised to set  up new enterprise or purchase equity Shares existing enterprises which have been design that purpose. In practice, the total accrued debt including the interest is first converted into local currency; while the company of interest Cal share are purchased with funds realised from such conversion This means in essence, that creditor has interest in the Company and is likely partake in the affairs of the company.
But the right Possessed by the creditors/investors will depend on the regulations guiding investment Opportunities in the debtor nation.
(b) Debt for Cash: Here the existing debt is converted into the local currency as per agreed terms, but the realised funds are not capitalise, Rather the creditors use the fund in debtor nation for local working capital, for purchase loan repayment local tax payments etc.
Debt for Exports (Debt for goods): This is the paying of exports of a debtor Country by the exiting debt obligation. Rather than for the country to receive foreign exchange from her exports, the country would liquidated the exiting loan with the export proceed.
Re-Structuring the Economy: The genesis of External debt problem in African Sub-Region among other factor include: the poor performance f th6 economies arising from over dependence on foreign sectors for development programme astute poverty arising from lagging Productivity and vicious circle, diversion of short-term loans to long-term loans, embarking ‘on white elephant projects without reference to available resource, over dependence on petroleum product’s etc. The above factors and others yet unmentioned resulted to the structural disequilibrium within the economies of Africa.
It is because of the above factors that Nigeria embarked on structural Adjustment Programmes in 1986. The effect of the programmes will take some decades to be wiped out from Nigerian soil. Although the programme had some advantages, but the disadvantages are very glaring.
viii  Debt repudiation: Repudiation implies the debtor nations refusing to pay back their debts. This appears unbelievable that a normal person or country can ever adopt such approach a policy for debt management. But in 1987, from the list of the world debtor nations such a Brazil, Mexico, Chile, Philippines, Argentina, Venezuela, Nigeria, Jamaica, Costa-Rica, etc., Mexico Publicly declared her inability to pay back her debt.
Rather than the normal phenomenon of debtors begging for time from their creditors, it is now the creditors who are ready to compromise with these debtors because of the considerable sums of money involved. Of course such policy has economic implication, for sanction could follow a nation that adopts such policy.