With rates rising globally and investors moving funds out of emerging economies, Nigeria, which plans to fund a large part of its 2023 budget through borrowings, may find it hard to get foreign loans.
This was stated by the deputy divisional chief, International Monetary Fund (IMF), Wenjie Chen, during a keynote presentation at the IMF Regional Economic Outlook in Lagos.
Nigeria is currently grappling with huge debt overhang of over N77 trillion and the need to increase revenue generation to meet expenditure requirements.
Nigeria’s total public debt stock hit N46.25 trillion at the end of December 2022, data by the Debt Management Office (DMO) indicates.
With N23.77 trillion ways and means, and other planned borrowings to find the 2023 budget, the debt overhang continues to rise.
This is even as the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele affirmed that emerging markets are finding it difficult to access foreign loans.
Chen had noted that borrowing costs, high-interest rates and the increasing value of the dollar have continued to put a strain on Nigeria’s economy and that of its sub-Saharan African counterparts, adding that, due to the uncertainties surrounding the global economic environment, loans from China as well as other advanced economies to Africa have been on the decline.
The IMF deputy divisional chief stated that, “in terms of the funding squeeze, the three main manifestations that many countries are facing are: the rise in borrowing costs. You can see that virtually all the frontier markets have been shut out of the Eurobond markets since the spring of 2022. What that means is that they cannot raise financing on these international markets.
“Eurobond market has been a large component of financing for these countries. What this has meant in terms of the global economy’s reaction to the Russia-Ukraine war in terms of rises in price and the cost- of-living crisis has placed very high interest rates.
“Not only were interest rates rising, the value of the dollar rose to a 20-year high last year. For many African countries, the cost of servicing these debts has also gone up. Inflation is still a major concern for many African economies. Many countries are still going through recovery after the pandemic.”
To address the many issues confronting the Nigerian economy, Chen said the IMF’s policy advice to Nigeria is based on four key policy priorities, fiscal policy, monetary policy, exchange rate policy and structural reforms.
She said the new emphasis on addressing the current liquidity squeeze should focus on reducing off-budget commitments (extra-budgetary spending, arrears, guarantees, etc), enhancing debt management and domestic revenue mobilisation.
On forex-related challenges, Chen said significant exchange rate pressures in the past year largely reflect global factors; terms of trade changes and monetary policy normalisation. Noting that the scope of forex interventions is limited in many cases by low foreign reserves, she said, Nigeria and its counterparts would have to adjust to new fundamentals.
Also, IMF representative for Nigeria, Ari Aisen, said with the funding squeeze, it would be critical for Nigeria to rely on internally-generated funds, adding that for Nigeria’s economy to react positively to this funding squeeze, the private sector needs good macroeconomic policies to thrive.
The IMF, he said, remains confident of its earlier projection that Nigeria’s economy will grow by 3.2 per cent this year. “In Nigeria, we always believe that growth has the potential to be much higher, but because of the shocks since the pandemic and the food price shock because of the Russia-Ukraine war, the economy managed to grow by three per cent. We are forecasting 3.2 (this year).
“It could be higher. It’s helped by services which is the main driver of growth on the supply side of the economy. The oil sector has not also contributed as much as it should have contributed, partly because of investments in the sector and partly because of leakages, particularly oil theft. These issues are gradually being addressed and we are hopeful that it will continue, so we are now projecting 3.2 per cent growth,” he said.
Economic analyst Stephen Kanabe said the warning from the IMF is a caution call on the federal government to adjust to a shrinking global economy.
Kanabe said at a time of such economic meltdown as is currently being experienced, Nigeria needs to look inward, get more innovative and expand revenue generation sources to brace for the shortfalls.
“Nigeria has borrowed enough from local and foreign markets. The IMF warning should come to us as a call to look inward and find a way around revenue generation without necessarily causing much stress on Nigerians. We are already overstretched.
“Government can take the issue of expansion of the tax net seriously, deal with the issue of oil theft and even sell some of the properties that were forfeited to the Economic and Financial Crimes Commission (EFCC),” Kanabe said.
Earlier at the third edition of the RT200 Export Summit on Tuesday, the CBN governor Godwin Emefiele had said there had not been any significantly successful Eurobond in the past year as investors pulled out over $100 billion from emerging markets.
“Due to the global financial conditions in which we find ourselves today, where rates at the global market rose, we saw almost about $100 billion move from emerging markets back to the United States (US). Rates had gone high and there had been tremendous difficulty by emerging martes in their ability to source foreign exchange.
“I am not sure in the whole of 2022, we saw any significantly successful Eurobond because of the tight financial market, and that is the reason we continue to appeal that a lot of work still needs to be done here in Nigeria,” Emefiele said.
Looking at the implication of accumulating foreign loans, the director of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, stated that, the implication of Nigeria’s debt profile is the burden of servicing the debt, which has been on an increase, adding that “this means that less resource is available for development of the economy; investment in infrastructure; and investment in the social services.”
He also said it had a crowding out effect in the financial market for the private sector, saying, “the implication of high debt service is that the level of borrowing will be increasing and most of the borrowing is done domestically.
“Also, it creates a visual circle of indebtedness or debt trap because as the debt profile is increasing, the burden of debt service is increasing also. Already close to 80 per cent of our revenue is used to service debt. If the debt continues to increase, that means more of our resources will be used to service debt.”
According to Yusuf, “this is a challenging situation and the way out of this is for us to see how we can pursue more rigorously fiscal consolidation. Looking at how we can boost our revenue and the level of revenue coming to the government is extremely low for the size of our economy.
“We need to do a lot more and one of things we can do is to unlock more revenue by addressing the issue of subsidy. With this, we should be able to unlock about N7 trillion or more.
“Also putting an end to foreign exchange subsidy, we should be able to unlock some revenue of about N4 trillion; increase oil output and address the issue of corruption.”
He explained that, “this will enable us to use our money in a transparent and productive manner. We need to check the quality of our spending. This is not only a revenue issue but also an expenditure issue. We need to cut down on the cost of governance.”
Similarly, the national president/chairman of Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Ide Udeagbala said, “it is now obvious that the current levels of debt servicing payments are considerably too high and unsustainable given the dwindling government revenues. We call for urgent structural reforms of our economy towards a transformational production economy and effective and efficient management of our debt profile to enhance the productivity level of the country.”
Udeagbala added that “as the leading member of the Organised Private Sector, NACCIMA strongly advocates once again for less dependence on debt financing and ensures effective implementation of the budget to address the productivity challenges of the economy.”
He stressed the need for fiscal policies and public expenditure controls at various government levels to keep the nation’s debt profile in check and make available resources to fund other government priority projects.
