IMF warns Nigeria on debt service

The International Monetary Fund (IMF) has cautioned the Federal Government  to be mindful of the country’s rising debt service to revenue ratio and take steps to mitigate the situation.

IMF Senior Resident Representative in Nigeria Mr. Amine Mati yesterday issued the warning in Abuja at the public presentation of the “Regional Economic outlook: Sub-Saharan Africa, Capital Flows and the Future of Work.”

He predicted that Nigeria’s economy will grow by 1.9 per cent this year, up from 0.8 per cent in 2017.

This, according to him, is due to fewer disruptions in oil production

Mati attributed the expected growth to some pick-up in the non-oil. According to him, “the recovery is expected to contribute about 0.7 percentage points to the region’s average growth in 2018 and lift activity in Nigeria’s trading partners through stronger remittances, financial spillovers and import demand.”

Mati lamented that public debt was diverting more resources towards interests payments, and cautioned that though Nigeria’s debt to GDP was quite low, over 50 per cent of the country’s revenue went into interest payments.

He suggested that increase in revenue was very important to bridge the gap in order to ensure that revenue to GDP was sufficient enough to pay up and service the debt profitably.

According to Mati, “Nigeria’s Debt /GDP ratio at between 20-25 per cent is quite low but debt servicing which takes about 50 per cent of revenue is certainly high”.

With regards to Sub-Sahara Africa, Mati said that the regional average was worse than the Nigerian scenario with Debt/GDP across Sub-Saharan Africa ranging between 35-57 in the past five years. He noted that “a lot more of the resources are going into paying interests and there is less to spend on capital expenditure.”

Going forward, the solution the IMF chief said was for massive revenue to be mobilized to address the challenge but African nations especially Nigeria were not doing enough in that regard. Sub-Sahara’s strategy he queried has been to cut expenditure, rather than mobilizing more revenue.

According to him though Nigeria has immense revenue potentials many of which have remained untapped, “adjustment has relied on spending compression rather than revenue mobilization.”

The IMF Senior Resident Representative noted that as the magnitude of capital flows to the region increased, so also the volatility increased. According to him, “portfolio inflows could be very volatile and more associated with consumption than investment in the real sectors of the economy.”

Mr Nnanna Okwu, Deputy Governor, Economic Policy of the Central Bank of Nigeria (CBN) who was represented by Mr Friday Ogwuche said capital inflows into Nigeria responds to both domestic and external shocks. He said Foreign Direct Investments (FDIs), inflows were becoming more diversified in response to the changing structure of the Nigerian economy.

He also said that there were certain factors shaping capital inflow behaviour in recent times, adding that, high oil prices and growth in external reserves provides confidence for capital inflows into the country.

He also said that tepid recovery from recession and relatively stable macroeconomic environment provided impetus for capital inflows back to Nigeria between 2017 and 2018.

”Also, uncertain political environment as a result of the 2019 general elections is a source of concern for foreign investors and may have influenced capital reversal in recent months” he said.

Director-General of the Debt Management Office (DMO), Ms. Patience Oniha, said the organisation was working towards focusing more on foreign exchange risks strategy, especially with the rising interest rates in the United States and other advanced economies.

Commenting on the fears raised in some quarters regarding exchange rate risks on the nation’s external borrowings if the value of the Naira falls in relation to the dollar, “before, the share of the external debt was small, oil prices were good, production was good so, really, there is no need to be worried.”

However, she called for focus stressing that “In the new Strategy Plan we have, there is huge focus on risks. Portfolio risks, contingent liability risks, interests risks. Before we were not focused on risk management.  We have even asked for assistance from the IMF, from the US Treasury.”