IMF Warns of Heightened Risks as Nigeria Seeks to Increase Foreign Debt

Tobias Andrian

As the federal government continues to fine-tune plans to raise additional foreign debt from the international capital market (ICM) and multilateral donor agencies, the International Monetary Fund (IMF) has warned Nigeria and other low income countries that greater reliance on foreign borrowing may at some point expose their economies to vulnerability, if the funds are not put to good use.

The Financial Counsellor and Director, Monetary and Capital Markets Department of the fund, Mr. Tobias Andrian, gave the warning Wednesday while briefing journalists on IMF’s Global Financial Stability Report titled, “Is Growth at Risk?” released at the IMF/World Bank Annual Meetings taking place in Washington D.C.

The IMF, however, welcomed the effort by the federal government to reduce the country’s infrastructure gap, particularly in the power sector.

President Muhammadu Buhari on Wednesday had sought the approval of the National Assembly for additional foreign borrowing of $3 billion for re-financing domestic maturing debts and the issuance of a $2.5 billion Eurobond/Diaspora Bond to fund the 2017 capital budget.

However, Andrian pointed out that the good news was that portfolio inflows to emerging economies, which Nigeria has also enjoyed recently, was estimated to reach $300 billion in 2017.

This is expected to further support growth prospects in these countries, he explained.
“Borrowing by governments, households and companies (not including banks) in the so-called Group of 20 exceeds $135 trillion, equivalent to about 235 per cent of their combined gross domestic product (GDP).
“Despite low interest rates, debt servicing burdens have risen in several economies. And while borrowing has helped the recovery, it has also created new financial risks,” he explained.
According to Andrian, Nigeria and other low income countries have benefitted from easy financial conditions by expanding their access to ICMs.

He noted that while borrowing has generally been used to fund infrastructure projects, refinance debt, and repay arrears in some countries, it has also been accompanied by an underlying deterioration of debt burdens as measured by the debt service ratio.
Furthermore, he said investors were growing complacent about potential shocks that could cause turmoil in the markets.

These include geopolitical risks, a surge in inflation, and a sudden jump in long-term interest rates.
He urged central bankers to maintain easy policies to support growth.

“But this is breeding complacency and allowing a further build-up of financial excesses. Non-financial borrowers are taking advantage of cheap credit to load up on debt.
“Investors are buying riskier and less liquid assets. If left unattended, these growing vulnerabilities will continue to mount, threatening to derail the economic recovery when shocks occur.

“Overseas investment into emerging market and low income economies has increased. The global economic upswing is laying hopes for a sustained recovery and allowing central banks to eventually return their monetary policies to normal settings.

“Major central banks can avoid creating market turbulence by thoroughly explaining their plans to gradually unwind crisis-era policies. To discourage riskier lending, financial regulators should deploy so-called ‘macro-prudential’ policies, such as limits on loan-to-value ratios for mortgages, for macro critical objectives,” he added.

The Assistant Director, Fiscal Affairs Department, IMF, Mrs. Catherine Pattillo, also in an interview on the sidelines of the launch of the fund’s Fiscal Monitor, called on the Nigerian government to increase its pace of reform in order to stimulate growth.

“There is a need for urgent actions to front-load fiscal consolidation through mobilising more non-oil revenue. So right now, non -oil revenue collection in the first part of the year was only half of what was budgeted and there is an expectation that the trend might continue for the second part of the year.
“And if so, that would continue to widen the deficit and make interest payments to revenue stay very high at around 60 percent which is quiet striking.

“So the message is to front-load fiscal consolidation, emphasise non-oil revenue mobilisation and there are certain measures both on the tax and spending that the IMF team has been emphasising on,” Pattillo said.
She stressed that for a number of oil exporters such as Nigeria, unless action is taken, “debt which has been rising in many countries is a concern particularly because of the interest payments”.

“So, if you have continuing rise in debt, the interest payments would rise, then it would consume a large part of any revenue that you collect and you won’t be able to use that revenue for the objectives of the Economic Recovery and Growth Programme (ERGP) and increasing growth and employment.

“So to ensure that you have the ability to use those revenues for enhancing expenditure, there is a need to make sure that debt is sustained and interest to revenue is kept at a reasonable level,” she advised.
Meanwhile, the World Bank has noted the modest economic recovery in Africa, adding that growth was projected to pick up to 2.4 per cent in 2017, from 1.3 per cent in 2016.

According to the Bank’s Africa’s Pulse, a bi-annual analysis of the state of African economies conducted by the World Bank released Wednesday, the current projection was below the April forecast of 2.6 per cent.
This rebound, said the World Bank, is expected to be led by the region’s largest economies.

In the second quarter of this year, Nigeria exited five consecutive quarters of contraction growing by 0.55 per cent, while South Africa emerged from two consecutive quarters of negative growth.

Looking ahead, the continent, according to the World Bank, is projected to see a moderate increase in economic activity, with growth rising to 3.2 per cent in 2018 and 3.5 per cent in 2019 as commodity prices firm up and domestic demand gradually gains ground, helped by slowing inflation and monetary policy easing.

“Improving global conditions, including rising energy and metals prices and increased capital inflows, have helped support the recovery in regional growth,” it added.

However, the report warned that the pace of the recovery remained sluggish and will be insufficient to lift per capita income in 2017.

“Growth continues to be multispeed across the region. In non-resource intensive countries such as Ethiopia and Senegal, growth remains broadly stable supported by infrastructure investments and increased crop production.

“In metal exporting countries, an increase in output and investment in the mining sector amid rising metals prices has enabled a rebound in activity,” it stated.

Headline inflation slowed across the region in 2017 amid stable exchange rates and slowing food price inflation due to higher food production, the World Bank said.

It added that fiscal deficits had narrowed, but continued to be high, as fiscal adjustment measures remain partial.