The International Monetary Fund (IMF) has warned emerging and developing economies on the need to be careful in the way they go about rescheduling domestic debt.
In a newspaper on its blog titled Sovereign Domestic Debt Restructuring: Handle with Care, the international lender said countries needed to be careful on how they go about restructuring the rising debt vulnerabilities and growing stocks of sovereign domestic debt.
The document further said questions of when and how to restructure such debts were now more acute than ever.
Over the past two decades, emerging market developing economies have seen their share of domestic debt increased from 31 to 46 percent of their total sovereign debt.
“Thus, restructuring of domestic debt is likely to play a role in the resolution of future debt crises,” the paper said.
While noting that domestic debt is easier to restructure, the Bretton Wood Institute said “authorities can simply elect to alter the terms of debt contracts through changing domestic law, which in the medium to long term may avoid some costly consequences associated with external debt restructurings, such as the loss of access to external debt markets.”
“On the other hand, domestic debt is often held predominantly by domestic creditors who will suffer losses. Through this channel, sovereign debt distress can easily spread to domestic banks, pension funds, households and other parts of the domestic economy. This can add to the economic malaise that made the debt restructuring necessary in the first place,” the IMF said.
In restructuring, the international lender explained that the net benefit of a domestic debt restructuring is considered.
The paper also queried: “Do the benefits of a lower debt burden outweigh the fiscal and broader economic costs of achieving that debt relief?”
“The decision to restructure domestic debt or not is always the sovereign’s prerogative and entails the responsibility to limit the damage and help mitigate the effects of a restructuring on the domestic economy. For example, to avoid compromising the viability of the domestic financial system, the government may be required to recapitalize some banks or replenish pension savings. Similarly, ensuring the continued effective functioning of the central bank may require fiscal support.
“The net benefit calculation will determine whether or not the domestic debt should be part of a restructuring, together with external debt, or on a standalone basis,” the paper said.
World Bank warns
In a related development, the journey ahead for fiscal and monetary authorities appears challenging with the World Bank warning that the country runs the risk of rising cost of funds which are susceptible to throwing the macro-economy and fiscal arrangements into shock.
“While currently the debt stock of 27 per cent of the Gross Domestic Product (GDP) is considered sustainable, any macro-fiscal shock can push debt to unsustainable levels.
“However, the debt to the GDP in Nigeria is rising quickly, and the total stock of debt in absolute value has almost doubled between 2016 and 2020, and without a policy change is expected to reach 40 per cent of the GDP by 2025,” World Bank said.
The global apex ban also expressed concerns over Nigeria’s rising cost of debt servicing, which according to the institution, has disrupted public investments in key sectors.
“The cost of debt servicing is also a concern as it is potentially crowding out public investment and critical service delivery spending. Interest costs have been above two percent of the GDP since 2018, reaching 2.4 percent of the GDP in 2019 and then falling to 2.2 percent of the GDP in 2020.
“Cost of debt is high as Federal Government also resorts to overdraft (Ways and Means financing) from the CBN to meet in-year cash shortfalls. At end of 2020, the stock of the CBN Ways and Means financing was estimated at N13.1tn or 8.5 percent of the GDP,” it stated.
FG on rising debt
Meanwhile, the federal government has estimated that Nigeria’s total public debt would rise from the present N38 trillion to N50.22 trillion by the end of 2023, with domestic debt projected at N28.75 trillion and foreign debt at N21.47 trillion.
There are suggestions that President Muhammadu Buhari-led administration is planning to borrow an estimated N12 trillion in two years.
Economists have condemned President Buhari’s incessant borrowing habit and warned that it could hurt the country’s development and productivity down the line.
In the second quarter of 2021, the administration spent N445 billion on debt servicing, according to Debt Management Office.
That is the amount that could have been used to improve factors of production and grow the economy.
The Washington-based global financial institution disclosed this in its November edition of Nigeria Development Update.
According to World Bank, the country’s debt is at risk of becoming unsustainable in the event of macro-fiscal shocks.
It said: “Nigeria’s debt remains sustainable, albeit vulnerable and costly, especially due to large and growing financing from the Central Bank of Nigeria.