Debt, Debt Everywhere…

Rising debt waves across the world remains a major risk for global financial stability and undermines efforts to engender sustainable development, writes Obinna Chima

One of the dominant issues discussed at the just concluded Spring Meetings of the International Monetary Fund (IMF) and the World Bank was the elevated global debts. This remains a concern to countries, especially as interest continues to climb with weaker fundamentals to support debt repayment.

After soaring in the aftermath of the 2008 global financial crisis and the COVID-19 pandemic, global debt climbed to an unprecedented level as it hit $300 trillion or 349 per cent of world Gross Domestic Product (GDP) as of June last year.

With sustained negative supply shocks and the central banks across the world battling to cage inflation, debt risks are becoming increasingly alarming. Low income countries are worst hit as their debts have risen to astonishing heights, plunging most of them into even worse austerity than before.

This challenge prompted the IMF and the World Bank to initiate the Global Sovereign Debt Roundtable (GSDR).

The objective of the Global Sovereign Debt Roundtable is to build greater common understanding among key stakeholders involved in debt restructurings, and work together on the current shortcomings in debt restructuring processes, both within and outside the Common Framework, and ways to address them.

The roundtable is co-chaired by the IMF, World Bank and India (G20 Presidency) and comprises official bilateral creditors (both traditional creditors members of the Paris Club and new creditors), private creditors and borrowing countries.

Nevertheless, it is worthy to note that debt in itself is not bad as it is vital to the functioning of any economy.

During the Spring Meetings, members of the GSDR met and discussed debt sustainability and debt restructuring challenges and ways to address them.

The discussion focused on actions that can be taken to accelerate debt restructuring processes and make them more efficient, including under the G20 Common Framework. The importance to urgently improve information sharing including on macroeconomic projections and debt sustainability assessments at an early stage of the process was also agreed and the IMF and World Bank were asked to  rapidly issue staff guidance on information sharing at each stage of the restructuring process.

The meeting discussed the role of Multilateral Development Banks (MDBs) in the processes through the provision of net positive flows of concessional finance. The International Development Association (IDA) was also requested to provide positive net flows and the ex-ante implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress was welcomed.

The President, World Bank Group, David Malpass, stressed the need for a path towards meaningful debt restructuring.

He pointed out that the World Bank is contributing fully to debt resolutions by providing highly concessional financing, including grants and net positive resources during the delays in the restructurings and will support debt restructurings with concessional and net positive resources as restructurings return countries to debt sustainability.

“There should be a more predictable process that moves faster toward sustainability of the debt. In meeting the financing needs, it will be important to apply rules for transparency and for comparability of treatment, including a common discount rate.

“The roundtable has enabled a better understanding of the many issues that need to be resolved for the successful debt treatment for issues facing countries like Ethiopia, Ghana, and Zambia.  However, there is urgency to act quickly, and the World Bank will do whatever it can to contribute toward a solution for these countries,” the World Bank boss explained.

On her part, the Managing Director, IMF, Kristalina Georgieva, said the debt roundtable brought together public and private creditors as well as borrowers, “the first time all of them are sitting around the table, to accelerate restructuring cases, including those under the G20 Common Framework, but also those that are not covered by the framework and are pressing.”

For Nigeria, whose public debt rose from N10.04 trillion to N46.25 trillion between 2013 and 2022, the IMF Director, African Department, Abebe Aemro Selassie, noted that the future trajectory of the Nigerian economy as well as the country’s debt sustainability would depend on the reforms and choice of policies of the incoming administration of the President-elect, Bola Tinubu.

Selassie explained: “For a country like Nigeria, the future trajectory of its economy is going to depend on a whole host of variables; the reforms that the government decides to pursue, how effectively it uses the resources it has, and the oil price trajectory. It is a combination of those factors that will determine the sustainability of Nigeria’s debt.

“Right now, Nigeria’s debt looks manageable, but it is really also important, of course, and contingent on what policies will be pursued in the coming months and years.”

Commenting on the sustainability of Nigeria’s debt, Selassie said: “Whether debt is sustainable or not, is not dependent on just one number, one threshold, rather, you have to look at a lot of indicators to assess the trajectory, whether debt will be sustainable in the coming years or not.

“When we make an assessment and we classify countries as being a moderate risk or a high risk, or we talk about vulnerabilities being elevated, it takes into account what we think of the kind of policies that the government is going to pursue and, of course, certain assumptions about the global environment.

“The last several years have been full of shocks, so it has made countries’ ability to bring debt under a sustainable trajectory more difficult but, they have been compensating for that also with stronger economic policies.”

 At the International Monetary and Financial Committee (IMFC), where Nigeria’s Finance Minister, Zainab Ahmed, represented 22 countries, she called for the speedy implementation of the G20 Common framework on debts.

“While raising concerns on delays in debt restructuring for some countries., I encouraged cooperation between creditors and the affected countries to ensue completion of the programs. I also used the opportunity to highlight macro-economic development in Nigeria including ongoing engagements with all critical stakeholders on the need to mobilise additional resources for remove the fuel subsidies and free up resources for investment in the social sector,” Ahmed explained.

According to Colombia’s Finance Minister José Antonio Ocampo, it is poor countries that face the most immediate risks.

“Hammered by tightening financial conditions and steep currency depreciations, dozens of developing countries are either teetering on the edge of a debt crisis or have already defaulted,” he said.

And the international community’s efforts to deliver relief have been far from inadequate, he argued, saying more ambitious action – such as an independent panel for sovereign-debt negotiations and another large issuance of special drawing rights by the IMF was needed.

Anne O. Krueger of Johns Hopkins University echoed supported Ocampo, saying, the “most promising route” would be to grant the IMF – which plays a crucial role in supporting macroeconomic policy reforms – greater authority to deem debt unsustainable. But, for any effort to have an impact, the international community must bring China and major private creditors on board.

For Nigeria to navigate the challenge its rising debt profile creates for the country, the Director General, Lagos Chamber of Commerce and Industry, Dr. Chinyere Almona, recommended that government should shift its focus to equity financing either by divestment or shedding of its equity holdings in state-owned enterprises, real estate, and infrastructure to reduce its debt commitments and improve its fiscal situation.

According to her, “both capital and interest payments on borrowed sums expose the country’s fiscal vulnerabilities. Also, the government should, as a matter of urgency, emphasise strategies on revenue growth while blocking leakages.

“Importantly, the government may want to consider the need to deregulate the downstream subsector of the oil industry to block a major drain on revenue.

“Finally and most importantly, following the commendable launching of the restructured Ministry of Finance Incorporated (MOFI) as the arrow head of Nigeria’s efforts to optimise national assets by President Muhammadu Buhari on February 1, 2023, the LCCI wishes to urge that copious references should henceforth be made to the growth in the stock of financial assets that Nigeria owns in corporate equities, real estate and infrastructure spaces and the returns Nigeria is generating on them, each time Government of Nigeria is providing updates on the growth in the stock of the financial liabilities that Nigeria owes and the costs it is incurring on them, to provide local and global observers a balanced picture of our financial evolution.”

The foregoing clearly shows that there is need for concerted efforts towards addressing the rising debt issues so as to give countries fiscal space to address socio-economic issues and engender sustainable development.