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IMF’s warning -The Nation

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It is within its mandate and it is in the interest of Nigeria to listen

The International Monetary Fund (IMF), the organisation designed to maintain order in the international financial system, has warned African countries, including Nigeria and even South Africa, the continent’s two largest economies, of the dangers of rising debt to the growth prospects of an economy. Incidentally, the warning coincides with steps being taken by the Federal Ministry of Finance and the Debt Management Organisation (DMO) to ensure that Nigeria stays within the safe ratio debt-GDP threshold.

By its own admission, DMO accepts that Nigeria’s domestic debt with higher interest than foreign loans needs to be brought down to 60 per cent to GDP from 73 per cent, while agreeing with the Minister of Justice that the 21 per cent foreign debt-GDP ratio remains one of the lowest in Africa. These two debts rose noticeably since the fall, in 2015, in the price of petroleum, for decades Nigeria’s single earner of foreign exchange. But any country that services its debt with N1.6trillion out of a budget of N7trillion certainly needs to listen to advice, more so if such country is one that is virtually a ‘virgin land’ in terms of development, like Nigeria.

All countries do borrow, but it is the debt of developing countries (with their limited ability to grow out of debt) that is worrisome, given the potential threat they could pose to the international financial system and even to the quality of life of citizens. This explains the frequent concerns shown by the IMF on their debt and its sustainability, i.e. the level of debt which allows a country to meet its current and future obligations, without resorting to debt relief, contracting fresh debts, or accumulating fresh arrears without compromising economic growth.

Nigeria needs not be afraid to borrow towards projects that can add value and improve its chances for growth, which can in turn reduce indebtedness.  It would be beneficial for the country to hearken to the warning of IMF and work more aggressively on the ongoing development projects that could pave way for the attainment of sustainable growth as a step towards the reduction of debt – foreign and local.

It is not enough, as the government is doing, to reduce the level of domestic borrowing and increase the level of foreign borrowing because interests on local loans are much higher than on foreign ones. It is also necessary for the government to address why this is so and what can be done to make local banks give loans at interest rates that do not drive both governments and citizens to seek foreign loans. It is a no brainer that domestic interest rates prevent citizens from assisting in growing the country’s Gross Domestic Product as much as they should.

The unending cycle of debt accumulation and debt relief cannot promote sustainable growth. As such, the systemic factors which make debt accumulation possible in the first instance must be addressed. In the case of Nigeria, the causes are rooted in the reliance on crude oil as the sole earner of foreign exchange; poor utilisation of borrowed money; corruption in the use of resources. These systemic problems need to be addressed in order to prevent the cycle of debt accumulation and debt relief.

In other words, favourable conditions need to be created that could enable the country to grow out of the debt trap. The recent statement by the DMO that “if the country must borrow, it must be for capital projects that the country needs desperately and has the capacity to turn into revenue earner,” should be the official policy guiding the country’s debt accumulation, while paying close attention to the critical indicators of debt sustainability.

The Nation

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