Nigeria which intends to significantly expand spending to stimulate economy has been advised by the International Monetary Fund (IMF) to watch its rising debt profile so as not to throw the country into high debt levels that could be more detrimental than the present recession.
While the IMF cautions on rising debt, it says borrowing to fund development is not necessarily bad but must be ‘used wisely’. The Fund is also worried that Nigeria’s present macroeconomic instability presents huge challenges for the African region.
Desperately working out ways to bring the economy out of recession, President Buhari has proposed a record N6.9 trillion spending in 2017 in a Medium Term Expenditure Framework he presented Tuesday to the Parliament for approval. The planned spending is a raise of N800 billion from the N6.1 trillion this year.
As contained in the MTEF, the 2017 fiscal deficit is projected at N2.7trillion, most of which would come through borrowing.
Nigeria plans to borrow as much $4.5 billion from the bond market, in the next two years, including the $1 billion Eurobond issue to be launched mid next month with capital spending planned to reach over N1.8 trillion in 2017, looking at the new MTEF.
Meanwhile, the country’s debt stock rose to N16.3trillion ($61.45billion) as of June 30, 2016.
Though the country still has an accommodative space particularly for external borrowing with debt to GDP ratios at slightly over 13 percent and lowest in Sub-Saharan Africa, the IMF thinks that Nigeria, like most oil exporting economies is still in a bad place and should worry more about the most prudent ways of spending borrowed incomes.
“On Nigeria, the situation is very challenging right now, with the economy being in recession, and the fiscal situation then deteriorating last year on the back of the slump in oil prices, while expenditure levels then were kept steady.
“And for 2016, then, there is a similar expectation with the slump in oil production and slow growth, creating challenges also with the debt profile.
“One statistic that is quite striking to me is in terms of the how the debt profile is weakening, so that now interest payments account for more than 45 percent of federal government revenue. So, there are big challenges and what are the priorities again on the fiscal side,” Catherine Pattillo, Assistant Director, and Head of fiscal policy and Surveillance Division, Fiscal Affairs Department of the IMF stated in Washington on Wednesday at press briefing which launched the Fund’s Fiscal Monitor report.
According to her, “The priorities, then, overall are the need for an internally consistent and comprehensive package of sustained reforms that are going to be important both for addressing the near term, but also the medium term.
“And, on fiscal, then, the important priorities are safeguarding fiscal sustainability, which means importantly increasing nonoil revenues. And, implementing an independent price setting mechanism, then, to minimize fuel subsidies.
“So, these are two priorities, while also of course improving public service delivery so that citizens, then, see the benefits of good government services financed by the government.
“So, these are challenges. And as you mentioned, then, Nigeria is a very important economy in the region, and then, its success, then, has positive spillovers for the region, particularly in West Africa, and its challenges, then, create difficulties for its neighbors,” she added.
In its Fiscal Monitor report, the IMF raised the concerns that global debt at $152 trillion by 2015 representing 225 percent of world GDP is at record highs and rising.
“We find that over the last fifteen years, the debt of non-financial sector has increased significantly reaching $152 trillion by 2015 (225 percent of the world GDP).
“About two thirds (or $100 trillion) is the debt of the private sector, the remainder is public debt, which increased from below 70 percent of GDP at the beginning of the century to almost 85 percent in 2015,” said Victor Gaspar, IMF Director, Fiscal Affairs Department said in an opening remarks at the presentation of the report.
He said excessive private debt is a major headwind against global recovery and a risk to financial stability.
“To conclude, global debt is at record highs and rising. But the global debt landscape is diverse. Fiscal policy can do more to restore nominal growth, facilitate adjustment and build resilience. But it cannot do it alone, and it needs to be anchored in a credible medium-term policy framework,” Gaspar further explained.
The IMF, however, notes in the report that there is considerable heterogeneity, as not all countries are in the same phase of the debt cycle, nor do they face the same risks.
“Nevertheless, there are concerns that the sheer size of debt could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery. Resolving this “private debt overhang” problem is, however, not easy in the current global environment of low nominal output growth,” the Fund stated.
In light of these developments, this issue of the Fiscal Monitor examines the extent and makeup of global debt and asks what role fiscal policy can play in facilitating the adjustment.
“It goes beyond previous studies by drawing on an expanded data set covering emerging markets and low-income countries as well as advanced economies.
“Another novelty is the use of an analytical framework that explicitly models the interlinkages between private and public debt in analyzing the role of fiscal policy in the deleveraging process. Finally, country case studies provide useful insights on what fiscal policy should and should not do to facilitate deleveraging while minimizing the drag on the economy,” the report further explained