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

Tobias Andrian

Kunle Aderinokun, Chika Amanze-Nwachuku, Obinna Chima and Nume Ekeghe in Washington D.C.

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.

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  • Jon West

    The Herdsman President from Daura will not listen . He is busy borrowing to build railways to nowhere , including his blighted hamlet of Daura, while the areas that need railways and intermodal transportation , in order to improve the dying Nigerian economy, are denied service. This is what you get from hypocrisy, doublespeak an Afonjite genetics.

    Olusegun Obasanjo, who tirelessly worked with Ngozi Okonjo-Iweala, in order to make Nigeria debt-free and therefore,economically viable , in the early 2000s, has regressed to campaigning for this man that he acknowledged in a BBC Hardtalk Interview, was totally bereft of economic and international relations substance; yet he asked us to vote for the Herdsman. The genes of Afonja will totally destroy his descendants . They have no chance in hell of survival in an honest political environment. To hell with Nigeria!!!

    • Garba sani

      Well, you had your time during Jonathan’s tenure but instead of you to help your ogogoro people you stole all the money and milked dry the nation. Do you expect us to repeat the same mistake? God forbid. Railway must reach all the homlets in Daura! Jonathan and you will regret your failure to provide ordinary tarred road to Otoke town. Hahahah

  • Daniel Obior

    The dumb government of Buhari does not heed warnings. Its mind is set on putting future generations of Nigerians in debt, due to its bad policies and incompetence. In its recklessness, it was even planning to borrow $30 billion, without any clear plan what to do with the money. The journey to doom of this country becomes more assured, with every passing day of this useless government. It may well be that is what a hopeless country like Nigeria deserves.

    • Enyi

      Easy with the insults! It does you no good nor does it help your silly arguments.

      Let me repeat, there’s no harm in borrowing , the harm comes in when projects for which such money is borrowed aren’t sustainable.

      A close look at the projects the government intends to borrow are projects that will grow the economy, create jobs and attract investments, kindly do not allow your sentiments becloud your senses!

      • Henry

        You are here calling Daniel argument silly have you asked yourself what the said 1.6 trillion naira spent on capital projects by this government where are the project located. This government has been challenged to name the projects region by region. All we hear is silence from the VP who made this claim. I come from the South South and the most significant and noticeable project of the Federal government is the East West road. I can tell you that nothing significant has been done on that road since 2015 when this government took over.
        After this government borrows this trench of foreign loans it will be using close to to 70% of its entire revenue on debt servicing. They claim that the total debt stock is bellow 18% of GDP therefore it is sustainable but the issue is after using such a large sum and percentage of your revenue to service debts how do you fund essential services.Tell me one major project that this government has executed completely in the last 24 months. Monies are been borrowed to fund 2019 elections and you are saying we should not talk. The 2.3 Trillion deficit funding in this budget that he claims he is seeking loans for what is he using the money for besides the Mambela power station that the Chinese are doing the major funding an 2nd runway of Abuja airport. There is systematic looting taking place in the country in the name of non existent capital projects.

        • John Akasike

          What about all the money this government claimed that they have recovered from looters? Please ask that so called Enyi.

          • Garba sani

            Ok, the monies recovered from the looters especially your sister Allison Dizeanni and your step mother Mama Peace jonathan will be put to work only when the monies stolen by your step father Jonathan is recovered . The loot by these 3 thieves will pay for 2018 budget.

          • John Akasike

            I don’t have time for your scurrility. I asked legitimate question as a Nigerian which I also asked during Jonathan’s administration but because you are a sectiionist, you can never be rational in any debate.

      • Jon West

        Yes, you are quite right. Like the railway to Daura, Kaduna and Kano where economic activity is zero. You peole will see the end of this Zoo sooner than those of us who wish it dead even anticipated. How did Nigerians get this low in reasoning and basic intellects, even if driven by abject poverty and the néed to even have one meal a day? Surely you don’t have to write nonsense in order to collect your stipend from Lauretta Onochie? Please!! Please!! Please!!

      • Daniel Obior

        I will not glorify Buhari’s incompetent government with insults. I have simply stated facts which have become clear to all that the government is incompetent and dumb. If you have a problem with that, please feel free to jump into the lagoon. Your reply shows you are one of the gullible and deluded fools trying ever so hard to defend the indefensible. Fortunately, others have adequately responded to your dumb comment and I need not add more than this. Have a nice day with your dumb hero.