As Nigeria’s debt profile continues to rise, the International Monetary Fund (IMF) has raised the alarm that the debt level was “creating some form of vulnerabilities.”
The Fund’s Assistant Director, Fiscal Affairs Department, Catherine Pattillo, said this yesterday in Washington D.C. at the ongoing IMF/World Bank Spring meetings.
Nigeria’s total debt – domestic and foreign – according to the Debt Management Office (DMO) was N21.725 trillion, as at last December.
Of the total debt stock, Federal Government’s domestic debt was N12.589 trillion, while states and the Federal Capital Territory (FCT) owed domestic debt, amounting N3.348 trillion.
The total external debt of both the Federal Government and states was an equivalent of N5.787 trillion.
Responding to a question from a Nigerian journalist, Pattillo specifically highlighted the dangers of interest rate risk and market risk.
She advised the Nigerian government and other low-income countries to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments.
“I think we can all agree that for Sub Saharan African countries that sustained development and increasing per capita income roof, which is built on macro stability is the main priority and the Fund has been working with African countries to help build tax capacity so that countries can sustain levels of public debt and also so that they can mobilise spending for health, education, infrastructure,” she said.
“Borrowing by countries can create benefits if used for investments of high returns. Our evidence suggests that, that is not the case in some countries. So, rising debt creates vulnerabilities. There will be interest rate risks, market risks and large interest burdens that will squeeze out spending priorities.
“With high debt, countries need to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments.
“You have seen the most recent IMF staff report on Nigeria, which was emphasizing that with a constraining debt servicing as you know the ratio of Federal Government interest payment to debt revenue is extremely high, 63 per cent. So, there is a need to build revenue so that you have more space to spend for infrastructure, social safety nets etc. otherwise, interest is eating up most of your revenue. So, building revenue is key and how do you do that? The recommendation in the IMF staff report is to broaden the tax base by removing exemptions, to rationalise tax incentives in particular to strengthen tax compliance and our recommendation to raise the VAT rate. So, those were the recommendations for Nigeria on tax.”
On Nigeria’s current debt restructuring strategy that is focused on foreign debt and less of domestic debt, she said: “There is merit to that strategy. Factors that support that is that Nigeria’s current external debt to GDP ratio is low, so the external interest payments are relatively low. The benefits of that switch are a reduction in overall interest payments and a lengthening of maturities.
“The emphasis is that countries have these risks of very high interest payments to revenue because of large borrowing and exhibiting change in borrowing. There’s more non-concessionary borrowing, there’s more domestic borrowing. So, if you have problems repaying your debts, then yes, it’s a risk for future borrowing.”
But the IMF Director, Fiscal Affairs Department, Vitor Gaspar, said the Fund was ready to assist Nigeria and other low-income countries in managing their debts.
“When we insist that low income countries should be improving their tax revenue mobilisation, we see that as an instrument of sustainability and development. In that context, higher tax capacity could also help sustain debt service.
“But that is not an end. The end in itself is the ability to stand on priority areas – health, education, public infrastructure, and others. Governments are well advised to build fiscal buffers so that they are ready to tackle challenges that would inevitably come,” Gaspar said.
In a related development, IMF’s Financial Counsellor and Director for the Monetary and Capital Markets Department, Mr. Tobias Andrian, had earlier, said vulnerability may make the road to global growth vulnerable.
He said this while unveiling the Fund’s Global Financial Stability Report (FSR).
He said: “Debt sustainability in developing countries has deteriorated and this poses challenges for any future debt restructuring. Countries that are building up higher debt levels and are exposed more to currency mis-matches and liquidity transformation are going to be exposed more to any adverse developments in global financial conditions.
“The IMF is working with authorities in countries on evaluating and improving fiscal policies.”
Also, the Division Chief, Monetary and Capital Markets Department, IMF, Anna Ilyina, pointed out that a lot of emerging countries had benefited from very favourable economic climate.
This, she said, had created some rooms for them to strengthen their positions.
“But of course, policy uncertainty does create uncertainty and volatility. We indeed see some volatility,” she said.
“There is an improvement in public debts in the past few years. In fact, the median debt-GDP ratio in the past few years in low income countries rose by over 13 per cent to about 47 per cent of GDP, which is quite dramatic over a short period of time.
“Also, this leads to difficulties in some countries in managing and servicing these debts. In fact, over 40 per cent of these debts are at high risk of distress.
“From our reports, we do track the debt issuance by the low-income countries and we have seen that there is a strong rebound in international bond issuance in frontier markets.”
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