In a bid to secure debt relief that will free up funds to meet their financial obligations to workers, contractors and other debtors, Osun, and other states have topped the list of 11 states, which have issued federal government bonds (FGN Bonds) to 14 commercial banks under a debt-restructuring programme facilitated by the federal government. The 36 states of the federation had approached President Muhammadu Buhari in June to ask for a bailout that would enable them pay salary arrears to their employees and meet other pressing obligations. Seizing on the opening, 22 states of the federation have applied to the Debt Management Office (DMO) for their debts to be restructured into FGN Bonds. The Director-General of the DMO told the Nigeria economic council that based on the approval of the president on the plan to restructure bank loans of the states into FGN Bonds in order to address their fiscal imbalance, 22 states submitted reports and applied for restructuring as at August 19.
Governor Aregbesola has studied Osun low multilateral debt which is the total amount of money that Osun State owes to international financial institutions, such as the World Bank and the International Monetary Fund (IMF). Governor Aregbesola only took sukuk bond to build 11 High Schools and no other loan. For details of Osun State Sukuk projects go to to see eleven wonders of Governor Rauf Aregbesola. These financial entities insist that the repayment of multilateral debt become a priority and hold precedence over any other outstanding loans.
Governor Aregbesola equally studied Osun State bilateral debt which is a simple loan arrangement between Osun State and a single lender. Such loans are called “bilateral” because there are only two parties to the loan, each with an obligation to the other: One will provide a specific amount of money under the terms of the loan agreement, and the other will repay the money as provided for in that same agreement. Osun sukuk is under multilateral debt. According to DMO the country’s public debt-to-Gross Domestic Product remained sustainable as a result of the insightful management of the debt portfolio, even in the midst of crude oil price slump. Osun debt continues to be sustainable in line with IMF debt sustainability threshold, despite all these volatilities in the international capital market and the collapse of oil prices. The people of Osun State have nothing to fear over the level of Osun debt and its management, but should see this period as the time to work harder to grow the economy. Osun Sustainable debt has allowed the state to meet its current and future debt services obligations in full, without recourse to further debt relief or rescheduling, avoiding accumulation of arrears, while allowing an acceptable level of economic growth or without compromising growth. Osun has met IMF debt sustainability threshold which is a measure of Osun solvency, that is, to ensure that accumulated debts are serviced without defaulting and she is able to sustain her debt servicing overtime Generally, Osun state has a borrowing space under the International Monetary Fund (IMF) debt sustainability threshold of 45 per cent for which Nigeria and other low-middle income countries are.
Since he was sworn as Governor of Osun State in 2010, Governor Aregbesola had publicly announced the need to reduce the recurrent expenditure so that more money would be made available to capital spending which is critical to growing and diversifying the state’s economy. How far has the Osun State government succeeded in making these necessary cuts; and where exactly have these cuts been made in this effort to reduce recurrent expenditure? In other words, based on real amount spent on capital expenditure, how much reduction was made from 2011- 2016? Governor Aregbesola introduced sukuk as a debt management strategy that the percentage of external debt service drastically reduced while the percentage of domestic debt servicing grew, drastically increasing the cost of the total debt service since the cost of domestic borrowing is atrociously higher than the cost of external borrowing. Governor Aregbesola observed that sukuk attracts zero percent interest. Governor Aregbesola has identified factors such as increasing government spending, reforms initiatives, a low interest rate environment and high liquidity are conducive for a vibrant Islamic debt capital market in the country. Also, with investors shunning equity during the past few years due to volatility, equity capital raising activity has slowed down drastically over the last three years. Hence, governments and corporate organisations are increasingly tapping the debt market, especially Sukuk, to fund expansion plans. In addition, a low interest rate regime has reduced the attractiveness of conventional deposits, but is making Sukuk an alluring investment alternative.

The federal government has unveiled a new debt management strategy partly in line with sukuk as introduced by Governor Aregbesola to run from 2016 – 2019 aimed at a marginal increase in external borrowing and increased commitment to capital projects execution. The DMO boss explained that the focus of the new initiative is to develop a debt management strategy that would ensure that in the face of macroeconomic and other financial constraints, the cost and risk profile of the public debt portfolio remains within acceptable limit over time.
DMO boss reiterated that that the strategy is in line with President Muhammadu Buhari’s vision to generate maximum employment, reduce poverty and increase the living standard of Nigerians. He said, for this to be effectively achieved, the government is making positive efforts in diversifying the economy as against the backdrop of structural collapse in oil prices and oil revenue. Nwankwo said: “The Debt Management Strategy we are going to pursue over the next four years, takes into account the fact that for now Nigeria’s public debt portfolio is dominated by domestic debt. After the Paris and London Club exits between 2004 and 2006, the country took a deliberate decision to develop its domestic bond market and to do most of the public borrowing from domestic sources so as to develop the domestic bond market, that objective has been sufficiently achieved.
“And therefore taking into account that external financing sources are on the average cheaper than domestic sources, it becomes more necessary to slant more of the borrowing in favour of external sources. “Therefore one of the major elements of this strategy is that over the medium, term we will strive to remix the public debt portfolio from 84 per cent domestic and 16 per cent external to 60 per cent domestic and 40 per cent external.
Justifying the decision to remix in favour of external debt like what Governor Aregbesola did by introducing sukuk, he said the country would be able to achieve cheaper cost of funds, lower debt servicing and avoid the risk of crowding out the private sector from accessing the domestic market, adding that the private sector is still expected to play the lead role to compliment government’s effort. While dismissing concerns on government’s decision to focus on external borrowing in a country currently facing foreign exchange constraints and harsh macroeconomic environment, he stressed that the new strategy is the best for the Nigerian economy as the government is presently making sustained efforts on diversifying the economy, noting that in the next 5-7 years export proceeds accrued to the economy will be more and our exchange rate will be favourable.
Inwalomhe Donald, public affairs analyst writes from Benin City, Edo State(