The International Monetary Fund and the World Bank has repeatedly warned that the rate at which African countries were taking loans they would eventually run into debt crises. In this report, BENJAMIN UMUTEME examines the implication of the warning.
In the last couple of years, the World Bank and the International Monetary Fund have repeatedly cautioned developing economies, especially those in Sub-saharan Africa, on their level of borrowing.
According to them, the region was likely to enter into a debt crisis as there will come a time that the debt will no longer be sustainable.
Speaking on the development, the Director of Africa Department at the IMF, Abebe Selassie, said there was need for even greater consideration by African countries when considering their borrowing terms as it is according to the Fund, borrowing terms are expected to become less favourable in the medium term as the growth spurt in advanced economies tapers off. Refinancing, then, may shortly become more costly.
“And that is the challenge of most African countries whose economy is mostly driven by commodities. And in the last couple of years, the price of commodities globally has been on the decline this affecting their revenue inflow.
“The IMF has repeatedly stressed the need for African countries to raise their domestic revenue in order to stay on top of debt.
“Our recommendation is to minimise the impact on spending cuts to engage in a lot more revenue mobilisation. There’s quite a lot of scope for increased tax collection as well as promoting greater investment.”
Nigeria’s tax-to-GDP ratio, for example, stands at just 6 per cent, the lowest in Africa. Compared to most OECD countries, which push tax rates at anywhere up to 50 per cent, Africa’s earnings from its citizens are remarkably low.
With a debt overhang of $25.3 billion, it is obvious that Nigeria’s debt is gradually becoming unsustainable. With revenue falling due to shocks in the global oil market coupled with oil theft and vandalism which has significantly reduced in the last couple of years.
Particularly, the Minister of Finance, Zainab Ahmed, had told the National Assembly last week that the country was borrowing from China and other commercial sources because it found it difficult to access loans from concessionary sources.
According to her, when in its bid to shore up revenue to boost infrastructure, federal government approached the World Bank for loans the institution advanced Nigeria $400 loan after a long period of waiting.
However, speaking at the World Bank-International Monetary Fund Debt Forum in Washington recently, World Bank President, David Malpass, accused African Development Bank (AfDB), Asian Development Bank, and the European Bank for Reconstruction and Development, of contributing to debt problems bedevilling emerging economies.
Malpass said the institution was no longer extending concessional loans to Nigeria because the country was already heavily indebted.
Specifically, the Debt Management Office (DMO) and National Bureau of Statistics (NBS) had put Nigeria’s total public debt at N26.14 trillion as at September 2019, even as the DMO has concluded arrangements to float another $3 billion Eurobond to support the budget.
As contained in the budget, the federal government budgeted N2.45 trillion to service debt in 2020. This is just slightly below N2.78 trillion budgeted for the total capital expenditure.
This conclusion by the World Bank contradicts the position of Federal Government officials who insist that the nation’s foreign debt was still within the threshold of 25 per cent of GDP “far lower than the 55 per cent threshold of debt to GDP set by the World Bank.”
He said those institutions were lending too quickly to heavily indebted countries, which was worsening already-challenging debt situations.
“We have a situation where other international financial institutions and to some extent development finance institutions as a whole, certainly the official export credit agencies, have a tendency to lend too quickly and to add to the debt problem of the countries.”
The World Bank chief explained that while Asian Development Bank was pushing billions of dollars into a fiscally challenging situation in Pakistan, AfDB was doing the same in Nigeria and South Africa.
He called for better collaboration among international financial institutions to coordinate lending and maintain high standards of transparency.
“And so we have a very real problem of the IFIs themselves adding to the debt burden and, and there’s pressure then I think on the IMF to sort through it and look at the best interest for the country,” he said.
Malpass later cited liens against Angola’s oil revenues associated with Chinese debt that were hidden by non-disclosure agreements, convenient for politicians and contractors in an interview with reporters.
“Let the people of the country see what the terms of the debt are as their government makes commitments,” Malpass said.
The International Development Association, an arm of the World Bank will on July 1, begin implementing a new set of lending rules when it unlocks a new round of funding expected to make some $85 billion in loans and grants available.
These rules will expectedly set new standards for transparency and require coordination with other multilateral lenders working with the same country.
Nigeria not in debt crisis
Speaking at a public forum, the minister of finance said Nigeria was not in any debt crisis as being speculated in ‘some quarters’.
She said contrary to speculations that Nigeria was gradually slipping into a debt crisis; the country’s debt profile is still within very reasonable limit.
The minister argued that Nigeria’s debt profile was still within a reasonable limit at less than 20 per cent of the country’s Gross Domestic Product (GDP).
We have heard repeatedly that Nigeria is inching into a debt crisis, and we have consistently said that Nigeria does not have a debt crisis.
Our total borrowing today is just under 20 per cent of our GDP while multilateral institutions project for an economy our size to borrow up to 50 to 55 per cent of our GDP.
“What we have is a revenue problem. Our revenue performance by half-year is 28 per cent so we have designed a strategic revenue growth initiative early this year which has three thematic areas: One is to achieve sustainability in revenue generation.
“Two is to identify new and enhanced enforcement of existing revenue streams and three is to achieve cohesion of our people and tools,” she explained.
… IMF cuts Nigeria’s 2020 growth forecast
And just on Monday the International Monetary Fund (IMF) review downward Nigeria’s 2020 growth forecast to two per cent from the 2.5 per cent it predicted earlier.
According to the Washington-based institution Nigeria’s pace of economic recovery remains slow, as declining real incomes and weak investment continue to weigh on economic activity.
Inflation, which it said is driven by higher food prices, has risen, marking the end of the disinflationary trend seen in 2019.
The IMF said external vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals even though the exchange rate has remained stable, helped by steady sales of foreign exchange in various windows.
“Weak non-oil revenue mobilisation led to further deterioration of the fiscal deficit, which was mostly financed by Central Bank of Nigeria (CBN) overdrafts. The interest payments to revenue ratio remain high at about 60 per cent.”
Govt should be mindful of the danger
In a chat with Blueprint weekend, economist and public affairs analyst Friday Efih said the statement by the World Bank and IMF was a wakeup call that should remind the government officials of the dangers of continuing on the debt path.
He said: “If the fiscal authorities fail to heed the advice of the two world bodies, then they will have nobody to blame. If they are sincere, they will have to look for new means of funding projects rather than continue to take loans with its attendant exchange rate challenges.
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