IMF Advises Nigeria to Deploy Borrowed Funds in High-return Investments, Infrastructure

• Sub-Saharan Africa on course for 3.1% growth in 2018, says World Bank

Kunle Aderinokun and Obinna Chima in Washington DC

The International Monetary Fund (IMF) has stressed the need for fiscal adjustment in Nigeria as it urged the federal government to ensure it expends borrowed funds on high return investments and infrastructure.

The Assistant Director, Fiscal Affairs Department, IMF, Catherine Pattillo, gave this advice while responding to a question during the launch of the Fiscal Monitor report, at the ongoing IMF/World Bank meetings in Washington DC.

The fund also pointed out that rising debt levels in Nigeria and other low income countries (LICs) were creating vulnerabilities, saying it exposes the countries to interest rate and market risks. It, therefore, reiterated the need to create fiscal buffers in Nigeria.
Nigeria’s external debt stood $18.91 billion (N5.787 trillion) at the end of December 2017, while domestic debt rose to N15.937 trillion, bringing the total debt stock of the country to N21.725 trillion ($70.92 billion), according to the latest data released by the Debt Management Office (DMO).

However, in line with the federal government’s debt restructuring strategy, it had designed a plan to substitute expensive domestic short-term debt with cheaper long-term foreign debt.

But Pattillo noted: “Borrowing by countries can create benefits if used for investments of high returns. Our evidence suggests that’s not the case in some countries. So, rising debt then create vulnerabilities -there will be interest rate risks, market risks and large interest burdens that will squeeze out spending priorities.

“With high debt, countries need to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments”
Responding to a question on the federal government’s debt restructuring strategy which favours more of foreign borrowings, Pattillo said: “There is merit to that strategy. Factors that support that is that Nigeria’s current external debt to GDP ratio is low. So, the external interest payments are relatively low.

“The benefits of that switch is a reduction in overall interest payments and a lengthening of maturity.
“The emphasis is that countries have these risks of very high interest payments to revenue because of large borrowing. But if you have problems repaying your debts, then it is a risk for future borrowings.”

On his part, the Director, Fiscal Affairs Department, IMF, Vitor Gaspar, pointed out that the fund’s insistence that low income countries should be improving their tax revenue mobilisation, was because it is an instrument of sustainability and development.

“In that context, higher tax capacity could also help sustain debt service. But that is not an end in itself. The end in itself is the ability to stand on priority areas – health, education, public infrastructure, and others. Governments are well advised to build fiscal buffers so that they are ready to tackle challenges that would inevitably come,” Gaspar added.

The Fiscal Monitor report stated how strong and broad-based growth provided an opportunity to rebuild fiscal buffers now, improve government balances, and anchor public debt.

One concern in the report was the surge in global debt, which reached the record peak of US$164 trillion in 2016.
“Rapidly rising debt among low income developing countries means that interest payments are taking up an increasingly large share of taxes and expenditure.

“Countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardise economic activities. Importantly, large debt and deficits hinder governments’ ability to implement a strong fiscal policy response to support the economy in the event of a downturn,” it added.
Therefore, it urged countries to implement policies to support medium-term growth by promoting human and physical capital, and by increasing productivity.

Earlier, during the unveiling of the Global Financial Stability Report (FSR), the Financial Counsellor and Director for the Monetary and Capital Markets Department, IMF, Mr. Tobias Andrian, noted that vulnerability may make the road to global growth vulnerable.
Andrian predicted that global growth could be bumpy three years from now.

“Debt sustainability in developing countries has deteriorated and this poses challenges for any future debt restructuring.
“Countries that are building up higher debt levels and are exposed more to currency mis-matches and liquidity transformation are going to be exposed more to any adverse developments in global financial conditions.

“The IMF is working with authorities in countries on evaluating and improving fiscal policies,” he explained.
Also, the Division Chief, Monetary and Capital Markets Department, IMF, Anna Ilyina, pointed out that a lot of emerging countries had benefited from very favourable economic climate.

This, he said had created some rooms for them to strengthen their positions.
Meanwhile, the World Bank has predicted that sub-Saharan Africa was on course for economic growth of 3.1 percent this year, slightly lower than it had previously forecast.

According to the bank, by 2020, growth in the region should pick up to 3.7 per cent.
“While Nigeria, South Africa, and Angola are expected to see a gradual pick-up in growth, economic expansion will continue at a solid pace in the West African Economic and Monetary Union (WAEMU), and strengthen in most of East Africa,” the bank said in its Africa’s Pulse report for April.

“These forecasts are predicated on the expectations that oil and metals prices will remain stable, expansion in global trade will stay robust, and external financial market conditions will continue to be supportive.”

In January, the World Bank’s Global Economic Prospects report projected that growth in sub-Saharan Africa would rise to 3.2 per cent in 2018.