Again, World Bank Raises the Alarm, Says Nigeria’s Economy at Critical Juncture

•Declares debt-service payments put biggest squeeze on poor countries

Obinna Chima in Lagos and Ndubuisi Francis in Abuja

The World Bank yesterday reiterated its call for urgent reforms to reset the Nigerian economy and address its myriad of economic challenges, saying the country is presently at a critical juncture.

The World Bank Country Director for Nigeria, Mr. Shubham Chaudhuri, said this yesterday, in a presentation titled: “Nigeria’s Choices and How the World Bank is Trying to Help,” which he delivered at a roundtable with media leaders in Lagos, organised by the bank in collaboration with Agora Policy.

He reiterated the need for the removal of fuel subsidy, exchange rate convergence, even as he expressed concern that the country’s debt service cost has outstripped its revenue.

Chaudhuri, also urged state governors in the country to be more accountable in order to deliver the dividends of democracy and ensure inclusive economic growth.

“Nigeria is at a critical juncture. The basic message here is that Nigeria has huge potential and often you can see it from the impact of Nigerians in diaspora and the rest of the world as well as the potential you see within Nigeria right now.

“But Nigeria has huge challenges. in basic things as little as investing in its people, Nigeria has not done a lot and in terms of enabling private firms to grow and create jobs, that hasn’t happened and without these two things, Nigeria would never get out of the situation it finds itself presently,” he said.

He pointed out that from the 1980s down to 2020, average income in the country hasn’t really grown. “Take a look Indonesia which is very similar to Nigeria, you will see the difference. Both countries had similar average income in the eighties, but Indonesia was able to manage its resources better.

“Good times come with oil prices being high. Nigeria is at a critical juncture and there are three different paths that Nigeria can take. But why are we sounding the alarm? For the first time in Nigeria’s history, what should be good times has actually become negative for the country.

“Oil prices have headed up, while oil and gas revenue has headed down. Petrol subsidy is not really helping the poor and should be taken away immediately. Another reason why things are different this time for Nigeria is that for the first time, the cost of debt service has exceeded its revenue.

“Another thing is that when oil prices go up, Nigeria’s current account balance goes up and usually forex reserves go up. But for the first time, just as we saw with revenue, forex reserves have continued to decline. So, the question is, where are all those borrowings going to?” he added.

According to Chaudhuri, as a development organisation the World Banj believes that, “there is need for consensus that you cannot have business as usual, especially among the elites and other stakeholders. Without that, we are facing the risk of having a not so nice scenario.”

In his presentation, the World Bank Lead Country Economist for Nigeria, Alex Sienart, noted that Nigeria’s debt stock relative to the size of its economy was not an issue, compared to a country like Kenya.

“But what you have to look at is what it is costing the country to finance the amount of debts the country has accumulated. For every naira the country earns, immediately the money comes into the purse, more than half of that goes back as interest payment for its debts.

“So, even though Nigeria doesn’t have a debt problem, it has a revenue problem. No matter how you look at it, the point is that this is not sustainable. As your debt obligation begins to outpace your revenue base, you now have to be borrowing increasingly to do anything else, and even to service the interest on your loans. The parallel forex market premium is a reflection of the scarcity of forex.

“The financial markets have noticed these challenges and that has consequences on Nigeria’s risk premium and increases Nigeria’s financing cost,” Sienart added.

 He, however, pointed out that the global economy has really changed and has become more challenging due to rising inflation and geo-political tensions.

Sienart, however advised the federal government to among other recommendations, adopt single and market reflective exchange rate, increase non-oil revenue by raising the Value Added Tax (VAT), eliminate petrol subsidy, contain inflation by reducing the federal government’s borrowing from the Central Bank of Nigeria as well as establish a strong implementation mechanism that promotes performance and accountability.

There were also presentations from World Bank Infrastructure Programme Leader for Nigeria, Ms. Yadviga Semikolenova and the World Bank Nigeria Human Development Programme Leader, Mr. Tekabe Belay. The meeting was moderated by Mr. Waziri Adio of Agora Policy.

Meanwhile, the bank has stated that the poorest countries eligible to borrow from its International Development Association (IDA) now spend over a tenth of their export revenues to service their long-term public and publicly guaranteed external debt—the highest proportion since 2000, shortly after the Heavily Indebted Poor Countries (HIPC) initiative was established.

It stated this in its new International Debt Report released yesterday.

The report highlighted rising debt-related risks for all developing economies—low- as well as middle-income economies.

It noted that at the end of 2021, the external debt of the economies totaled $9 trillion, more than double the amount a decade ago. During the same period, the total external debt of IDA countries, meanwhile, nearly tripled to $1 trillion.

According to the report, rising interest rates and slowing global growth risk tipping a large number of countries into debt crises.

About 60 per cent of the poorest countries are already at high risk of debt distress or already in distress.

At the end of 2021, IDA-eligible countries’ debt-service payments on long-term public and publicly guaranteed external debt totaled $46.2 billion—equivalent to 10.3 per cent of their exports of goods and services and 1.8 per cent of their gross national income (GNI), according to the report.

Those percentages were up significantly from 2010, when they stood at 3.2 per cent and 0.7 per cent respectively.

“In 2022, IDA countries’ debt-service payments on their public and publicly guaranteed debt are projected to rise by 35 percent to more than $62 billion, one of the highest annual increases of the past two decades. China is expected to account for 66 per cent of the debt-service payments to be made by IDA countries on their official bilateral debt.

“The debt crisis facing developing countries has intensified,” said World Bank Group President David Malpass. “A comprehensive approach is needed to reduce debt, increase transparency, and facilitate swifter restructuring—so countries can focus on spending that supports growth and reduces poverty. Without it, many countries and their governments face a fiscal crisis and political instability, with millions of people falling into poverty.”

On the surface, debt indicators seem to have improved in 2021, the report showed.

“As economic growth resumed following the global recession in 2020, public and publicly guaranteed external debt as a share of GNI returned to pre-pandemic proportions. However, this was not the case for IDA countries, where the debt- to-GNI ratio remained above the pre-pandemic level at 25 per cent. Moreover, the economic outlook has deteriorated considerably.

“In 2022, global growth is slowing sharply. Amid one of the most internationally synchronous episodes of monetary and fiscal policy tightening the world has seen in 50 years, the risk of a global recession next year has been rising. Currency depreciations have made matters worse for many developing countries whose debt is denominated in U.S. dollars. The 2021 debt-to-GNI improvement, as a result, is likely temporary.

“Over the past decade, the composition of debt owed by IDA countries has changed significantly. The share of external debt owed to private creditors has increased sharply. At the end of 2021, low- and middle-income economies owed 61 per cent of their public and publicly guaranteed debt to private creditors—an increase of 15 percentage points from 2010.

“IDA-eligible countries owed 21 per cent of their external debt to private creditors by the end of last year, a 16-point increase from 2010. Also, the share of debt owed to government creditors that don’t belong to the Paris Club (such as China, India, Saudi Arabia, United Arab Emirates, and others) has soared.

“At the end of 2021, China was the largest bilateral lender to IDA countries, accounting for 49 per cent of their bilateral debt stock—up from 18% in 2010. These developments have made it much harder for countries facing debt distress to quickly restructure their debt.

“The rising debt vulnerabilities underscore the urgent need to improve debt transparency and provide more complete debt information to strengthen countries’ ability to manage debt risks and use resources efficiently for sustainable development.”