Financially distressed countries hoping for debt relief may have to wait a little longer as the world, already facing a deep economic crisis, does not have a technique in that regard yet, David Malpass, president of the World Bank Group, said on Thursday.
“On the debt crisis that overhangs Africa, the interest rates are up, the burden of the debt is higher, and the currencies are weakening for quite a few of the countries and the world doesn’t have a technique now to provide a debt relief, even when that is unsustainable,” Malpass said during a press briefing in Washington at the ongoing 2022 Annual Meetings of the International Monetary Fund (IMF) and the World Bank.
“We’ve seen multiple countries asking the world community for debt relief, and not finding a mechanism to do that. So that’s particularly relevant to Africa,” he added.
Malpass also disclosed that the World Bank would be working with the IMF to assess Nigeria’s debt sustainability, even though the country has not approached it for any restructuring plans.
Quite a number of poor income and developing economies, including Nigeria, have been making subtle appeals for an outright cancellation of their mounting debt, or at least restructuring as the world battles high inflation, high debt, rising interest rates, and elevated uncertainty.
At the United Nations General Assembly last month in New York, Nigeria’s President Muhammadu Buhari highlighted the need “to address the burden of unsustainable external debt by a global commitment to the expansion and extension of the Debt Service Suspension Initiative to countries facing fiscal and liquidity challenges as well as outright cancellation for countries facing the most severe challenges”.
Taking questions at the press meeting, Malpass acknowledged that the present global economic crisis driven by COVID-19 pandemic and the latest disruptions from the Russia-Ukraine war has hit fragile countries the most and particularly Africa.
He said nearly half of the World Bank commitments have been made to Africa so far, a gradual shift in its commitments towards fragile countries and in particular towards the distress-prone continent, which must look at ways to begin to fix its fiscal and structural impediments.
The World Bank chief said: “One of the things we are advocating now is that countries in the developing world, and in particular in Africa, should look to use this challenging crisis going on to improve their structural policies so that they can produce more in their countries.
“I think to get there, there would have to be more gross fixed capital formation. That means the actual physical investments and educational investments within the countries in order to have future growth.”
On Nigeria’s debt restructuring plans as announced by Zainab Ahmed, minister of finance, budget and national planning on Wednesday, Malpass said Nigeria was yet to make any formal request, and that for countries that had already made the move, the process had been slow.
He said: “With regard to the debt restructuring, the World Bank works very closely with the IMF on debt situations. Nigeria has not asked for the common framework under the G 20 process.
“That process has been slow acting in, in terms of Chad and Ethiopia and Zambia. There are some signs of movement on Zambia, but it’s still challenging. So Nigeria and Ghana, both did not ask for common framework treatment.
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“Kristalina (IMF MD) and I were talking yesterday with the group about if countries could have a situation where a common framework caused or allowed the country to have a standstill on their debt, that would help the countries choose their path forward on debt restructuring.”
Malpass added: “That would mean they would get a break on debt payments while they are working out a restructuring agreement with the world. Nigeria hasn’t gone that route.
“Some of the challenges on Nigeria, and I’ve talked about, have been with them for sometime, is the multiple exchange rates that are used that make it very hard to have capital flowing in an efficient way within the country. Also, the trade policies tend to be protective on the import side, and restrictive on the export side.
“So we would work with the IMF on the assessment of the debt sustainability of Nigeria but then it would also be up to Nigeria itself to interact with the various creditors, which include bond holders, official creditors that are engaged in Nigeria.”
He blamed huge fuel subsidies, which have substantially shrunk revenues and exacerbated the fiscal crisis, as a critical challenge, and warned that the government needs to address this aggressively.
“The challenge for Nigeria is that the subsidies are so large that they undermine the revenues coming to the government from the state-owned oil company, and Nigeria is actually in a concerning situation because the increase in the oil prices that occurred earlier this year actually ended up hurting the finances of the country because of a large subsidy that it provided,” he said.
He said to the extent that governments can have subsidies, they should be small enough. “If you’re putting a cap on gasoline prices, don’t make it a nominal cap in the local currency terms, but allow it to be reduced over time.”
