As debt burden continues to rise in countries of the world, the International Monetary Fund (IMF) has projected that debt servicing would gulp as much as 14 percent of government revenue in Nigeria and other low income countries.
Kristalina Georgieva, the managing director of the IMF stated this while providing an overview of the global economy outlook on Thursday.
According to Georgieva, the trend of rising debts which began more than a decade ago, during a prolonged period of very low interest rates was exacerbated by the Covid 19 pandemic which necessitated an unprecedented fiscal response to protect lives and livelihoods.
She noted that globally, countries are in an era of far higher interest rates which is pushing up the cost of servicing debt.
This is as Nigeria’s total debt profile stood at N97 trillion as at end of 2023. This figure included local and external debts owed by all 36 states and the Federal Capital Territory.
“In advanced economies, excluding the US, interest payments on public debt will average about 5 percent of government revenues this year. But the cost of servicing debt is most painful in low-income countries. Their interest payments are set to average about 14 percent of government revenue—roughly double the level from 15 years ago.
“For most countries, prospects of a soft landing and strong labor markets mean there is no better time to act to reach sustainable debt levels and build stronger buffers to cope with future shocks, for some, delay is simply not an option: consolidation must start now to avoid tipping into debt distress.
“And for the handful of countries already in debt distress, restructuring may be necessary. The G20 Common Framework can help. Zambia recently finalized its agreement with bondholders, complementing the restructuring with official bilateral creditors. We must build on lessons learned to improve the debt restructuring process,” she said.
According to her, the IMF forecasts shows that deficits will still be too high to stabilize debt in over one third of advanced and emerging economies, and in more than one quarter of low-income countries, stressing on the need for countries to adopt credible medium-term fiscal frameworks as the ultimate ‘good policy’ choice .
She also recommended more focus on closing tax loopholes, strengthening tax collection, and improving the quality of public spending adding that fiscal strength allows countries to support the most vulnerable parts of society and to invest in a better future.
According to her, foundational reforms such as strengthening governance, cutting red tape, increasing female labor market participation, improving access to capital all have a role to play. “Even more can be achieved with policies to encourage economic transformation to speed up the green and digital transition. How well we handle them will define the legacy of this decade.
“This is particularly important for the green transition. How quickly we advance it will have tremendous significance for whether we succeed to tame climate risks. But the shift to a climate friendly economy goes beyond managing risks. It also offers tremendous opportunities for investment, jobs, and growth.
“We are already witnessing the economic, health and environmental benefits of transformative investments, including in renewable energy, electric mobility, and ecosystems restoration. For every $1 spent on fossil fuels, $1.7 is now spent on clean energy. Five years ago, this ratio was 1:1. But robust policies and institutions are needed for a stable and encouraging investment climate and to tackle a broad range of market failures,” she said.
Georgieva speaking further noted the impact of technological advancements in many sectors of the economy, from manufacturing to healthcare and financial services, adding that artificial intelligence is likely to accelerate the fourth industrial revolution.
For her, this brings huge potential benefits but also risks, as study shows that AI could affect up to 40 percent of jobs across the world and 60 percent in advanced economies. It could enhance workers’ productivity but also threaten some jobs. “Investing in digital infrastructure and skills, as well as in strong social safety nets, will determine the pace of AI adoption and its impact on productivity.
“Both the climate and the digital transformation require coordinated global efforts to manage risks and capture the benefits they create.”
Speaking further, the IMF boss tasked of central bankers on the need for price stability in countries, stating that it has become imperative for central banks to uphold their independence, as policy credibility is vital in the fight to restore price stability.
Noting the decline in inflation rates in most countries, Georgieva said that the decline is expected to continue in 2024, creating the conditions for major advanced economy central banks to begin cutting rates in the second half of the year.
“This is the task of central bankers, many of whom are carefully calibrating this important policy choice—when to cut interest rates and by how much. We have seen what good policy can achieve since inflation peaked in mid-2022. In the final quarter of 2023, headline inflation for advanced economies was 2.3 percent, down from 9.5 percent just 18 months earlier. For the median emerging market and developing economy, inflation declined to 4.1 percent.
“But the pace and timing of the monetary pivot will vary. Some central banks have already begun to loosen, mostly in emerging markets where inflation was tackled early. But elsewhere—primarily in advanced economies—they are still holding off for now. They must carefully calibrate their decisions to incoming data.
“Where necessary, policymakers must resist calls for early interest rate cuts. Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening. On the other side, delaying too long could pour cold water on economic activity,” she said.
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