The Africa Development Bank (AfDB) has advocated for the establishment of an African Financial Stability Mechanism (AFSM) to help Nigeria access low-cost external financing amid rising costs in global financial markets.
In its latest country focus report, the bank noted that Nigeria faces rising financing costs in global financial markets with its 30-year bond trading at a double-digit yield of 11.11 percent in January 2023 and 10.58 percent in April 2024 compared to 8.25 percent at issue in 2021. This, it stated, hinders Africa’s most populous nation from mobilising finance from the Eurobond market in 2023.
According to the report, Nigeria’s capacity to mobilise financing to fast-track structural transformation has motivated the need for a global financial architecture reform, to support increasing external flows to finance its economic transformation as well as other African countries, adding that Nigeria requires $47.6 billion annually until 2030 to accelerate its structural transformation process.
“This investment will have to be financed by external flows and domestic private and public resources. Financial flows including official development assistance (ODA), foreign direct investment (FDI), portfolio flows and remittances to Nigeria have been erratic
“As part of the reform of the global financial architecture, establishing an AFSM could help Nigeria access liquidity at a lower cost. Furthermore, multilateral development banks can reform their risk capital models to allow additional lending capacity to regional member countries, including through risk transfer and balance sheet optimisation instruments,” the report said.
Commenting on the report, Lamin Barrow, director-general of the Nigeria country department, AfDB, said that limited access to affordable financing was a major constraint to fast-tracking structural transformation in Nigeria.
He noted that at 2.9 percent in 2023, GDP growth in Nigeria has decelerated compared to 3.3 percent achieved in 2022. This, according to him, is largely attributed to high inflation, continued low oil production and a weakening global economy.
“There is a need for the Nigerian government to prioritise measures to accelerate structural transformation, including developing infrastructure and accelerating domestic revenue mobilisation in the context of the ongoing fiscal consultation programme as well as proper valuation of Nigeria’s critical and rare earth minerals.
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“The report estimates that Nigeria needs significant financing to accelerate its structural transformation. The annual financing gap to fast-track this structural transformation is estimated at $31.5 billion to achieve the SDGs and $5.5 billion to achieve the Agenda 2063 targets.
“Closing this financing gap will require innovative policy responses including accelerated domestic revenue mobilisation in the context of the ongoing fiscal consultation program as well as proper valuation of Nigeria’s critical and rare earth minerals. These, if well-valued, managed and managed, will have the potential to generate additional resources and for that matter substantial additional resources to underpin structural transformation.”
The report showed that tax architecture reforms were critical to improving domestic resource mobilisation by containing illicit financial flows and tax avoidance.
“Mobilising resources at scale and on affordable terms for the financing of structuring transformation will require a review of the debt sustainability framework (DSF). The World Bank has recently responded to calls for reforms of the DSF framework, but more needs to be done.
“In particular, the IMF/World Bank DSF needs to be updated to reflect the changing structure of economies such as natural resources, and the impact of shocks such as pandemics and climate change, on economies, especially those in Africa.
“Indeed, the current DSF focuses only on the liabilities side of the government balance sheet, that is, what the government owes and ignores government assets, that is, what the government owns and from which resources can be generated to liquidate the debt. The FGN can be part of the discussions,” the report noted.
