IMF cautions Nigeria against borrowing from China

The International Monetary Fund (IMF) has warned Nigeria and other emerging market countries taking loans from China to consider the terms of such facilities, especially their compliance with the Paris Club arrangements.

Speaking yesterday at the ongoing IMF/World Bank Spring Meetings in the United States, Director, IMF Monetary and Capital Markets Department, Tobias Andrian, said there was nothing bad in borrowing from China, except that the terms of such loans are always questionable.

He said: “Loans from China are good, but the countries should consider the terms of the loans. And we urge countries that when they borrow from abroad, that the terms are favourable for the borrower, and should be conforming to the Paris Club arrangements.”

Andrian, who spoke on the Global Financial Stability Report (GFSR), said: “Let me reiterate that in many frontier markets, we see that the share of debt that is not conforming to the Paris Club standards is on the rise. And that means that if there is any debt restructuring down the road one day, that can be very unfavourable to those countries. So, the borrowing terms, the covenants, are extremely important. And we do see a deterioration in that aspect.”

Data from the Debt Management Office (DMO) showed that Nigeria’s total public debt rose to N24.39 trillion or $79.44 billion as at December 31, 2018 representing a year-on-year growth of 12.25 per cent. The 2018 debt stock is higher than that of 2017 by N2.662 billion.

DMO said that as at June 2018, loans obtained by the Federal Government from China represented about 8.5 per cent of Nigeria’s external debt and that they were taken under concessionary terms. But Nigeria was last year seeking  $6 billion from China to fund the construction of the  Ibadan-Kano rail line project.

Andrian said Nigeria had been borrowing from international markets, which gives the IMF some worries. He, however, noted that such loans are good as they allow the country to invest more, but expressed concerns over rollover or repayment risks.

“At the moment, funding conditions in economies such as Nigeria and other Sub-Saharan African countries, are very favourable but that might change at some point. And there is risk of rollovers and whether the need for refinancing can be met in the future,” the IMF director said,  advising that Nigeria should seek higher capital for its banks through recapitalisation and also tackle rising non-performing loans in the sector.

Adrian said that where there are financial stability concerns, authorities are expected to use prudential tools, such as higher capital in the banking system and more conservative underwriting standards to reduce financial stability risks.

He said: “We advise countries that where those downside risks are increasing, to take more steps to ensure that vulnerabilities are not rising too much. Addressing non-performing loans is a first order importance for financial stability. Many countries have tackled that by developing secondary market for non-performing loans. And by being aggressive in writing off non-performing loans and through provisioning and use of improved accounting standards through International Financial Reporting Standards 9 (IFRS 9)”.

According to Adrian, many countries do not have all the tools that are necessary to ensure that the system is financially stable, hence the financial stability concerns can feed into monetary policy decisions. He, therefore, urged monetary policy makers to also look at risks to financial stability both in the short term and in the medium term.

As a way out of the crisis, the IMF director  advised policymakers to develop and deploy macro-prudential tools which can mitigate vulnerabilities and make the financial system more resilient.

“Emerging markets facing volatile capital flows should limit their reliance on short-term overseas debt and ensure they have adequate foreign currency reserves and bank buffers. Besides,  monetary policy should be data dependent and well communicated,” he said.

The Division Chief Monetary and Capital Markets at the IMF, Anna Ilyina, said the institutional mechanisms for resolution and recognition of non-performing loans are, of course, extremely important part of the process of cleaning up the banking system of bad loans and the authorities should continue working along those lines.

She said: “ Credit quality has declined, underwriting standards weaker and debt levels are much higher. The concern is that there are very few macro-prudential tools for the corporate sector. In some countries, supervisors can limit the deterioration of underwriting standards to the extent that is provided by the banks, but one of the big trends post-crisis is that market-based finance has become more important for the corporates.”

She advised that in maturing credit cycle, farsighted policy actions to reduce vulnerabilities can help avoid more painful adjustments in the future.

On capital flow to Nigeria and other emerging markets, the IMF director said that overseas investment run by managers tracking popular indices had increased dramatically over the past decade.

She said: “Widening the range of investors can be positive factor for emerging markets, yet that trend leaves economies vulnerable to a sudden reversal of capital flows in response to global trends. The vulnerabilities intensifying in a maturing credit cycle, this is the time for decisive policy action. The intensification of trade tensions and the threat of a disorderly practices have dented investor confidence. Policy makers should ensure that post crisis regulatory reform is fully implemented and resist calls for rolling back reforms,” she said.

She also said that policymakers should act decisively to renew their commitment to open trade, discourage the buildup of debt and communicate clearly any shifts in monetary policy.

Speaking on tax reforms at the Fiscal Monitor Session of the event, IMF Assistant Director, Fiscal Affairs Department, Cathy Pattillo, described tax reform in Nigeria as a very important issue.

She said IMF’s main recommendations for Nigeria is the need for a comprehensive tax reform that would sustain the increase in non-oil revenue.

“And the reason why that is needed is that Nigeria has one of the lowest ratios of non-oil revenue to Gross Domestic Product (GDP) at around 3.4 per cent  in the world. And the total tax revenue to GDP at around eight per cent is also very low compared to peers.”

She said that the interest to tax ratio is low, adding that the funds realised should be spent on important developmental projects, such as infrastructure and human capital.

She also advised Nigeria to increase excise taxes and begin aggressive streamlining of tax incentives and exemptions