IMF confirms Nigeria digging deeper into financial crisis

Nigeria is digging itself deeper into a financial crisis that only a fundamental policy reset can salvage, the International Monetary Fund (IMF) said Monday.

Nigeria spent N92 of every N100 earned in 2020 servicing its fast-growing debt stock, according to IMF estimates. That is the highest in five years, and is up from 52.6 percent in 2019 and 60 percent in 2018.

Although the IMF expects the government to spend less of its revenue on debt servicing in 2021 at N60 for each N100 earned, Nigeria will remain in a precarious situation if a needless petrol subsidy bill joins an over bloated workers’ wage bill and critical capital expenditure to jostle for the N40 that is left.

High interest-to-revenue ratio, according to the IMF, means financing the country’s current and capital spending needs will highly depend on debt.

“Significant revenue mobilisation will be needed in the medium term to reduce fiscal sustainability risks arising from low debt servicing capacity,” the IMF said in its report.

“With high poverty rates, revenue mobilisation will need to rely on progressive and efficiency-enhancing measures,” the Fund said, more importantly, “the current crisis provides a unique opportunity to break away from the past.”

Breaking away from the past would entail ditching consumption subsidies that have long held back the economy, like the petrol subsidy.

It also means a break away from the raft of protectionist policies that have done the economy more harm than good.

Long-running inward-looking policies have been stepped up in recent years through increased import restrictions, a partial border closure, administrative control of foreign exchange (FX) allocation and capital flow measures.

But these protectionist measures are yet to deliver a job-rich growth as the economy remains heavily dependent on the oil sector, through direct and indirect exposures, and vulnerable to periodic commodity shocks.

Nigeria slipped into its worst recession in over three decades last year and now faces a record sixth straight year of declining average incomes with most forecasts pointing at less than 2 percent growth in 2021. Unemployment hit a record 27 percent as at the second quarter of 2020, with economists forecasting the rate to rise further to 30 percent on the back of pandemic-induced job losses.

A large number of countries around the world have been battered by the global pandemic, experiencing output contractions and job losses.

However, what set Nigeria apart are its weak pre-crisis fundamentals that threaten to turn a temporary crisis into a slump with more lasting consequences for employment and living standards.

Past IMF advice to pursue broad market reforms, including recommendations for unification and greater flexibility of the exchange rate that the authorities committed to under the RFI, have seen limited traction.

Even as the economy is stuck in a low growth cycle, Nigeria’s level of public debt has continued to increase, an indication that the government has not spent the debt on economic stimulating activities.

Public debt, which includes general government debt, CBN overdrafts, CBN financing of the power sector, Asset Management Company (AMCON) debt, and non-interest-bearing promissory notes issued to clear payment arrears (about N2.6trn from 2018 through 2022), increased to about 29 percent of GDP in 2019 from 9 percent in 2009. This was driven by large fiscal deficits arising from weak non-oil revenue mobilisation and falling oil revenues.

Nigeria’s total debt profile increased to N31.009 trillion ($85.897bn) as of June 30, 2020, according to the Debt Management Office (DMO).

Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, said the debt service to revenue ratio was the true measure of a country’s debt burden. Therefore, the significantly high debt service ratio points to the fact that Nigeria’s public debt level is becoming unsustainable.

This development, he said, tends to crowd out expenditure on capital projects thereby stunting economic development. It also attracts low ratings by global agencies as it increases the country’s vulnerability to domestic and external shocks.

“Now that crude oil price is well above the 2021 budget reference price of $40 per barrel, this is the time to apply the excess oil revenue to reduce the budget deficit and level of borrowing,” Uwaleke said.