The recent report by the International Monetary Fund, that more trouble looms for low-income countries in 2022, has further raised concern on Nigeria’s debt restructuring, writes EHIME ALEX
A more challenging debt outlook is impending for low-income countries in the coming year, as the Coronavirus Disease-related initiatives, such as the G20 Debt Service Suspension, end this year, the International Monetary Fund warned in a recent report.
The risk, IMF added, would force countries to resume debt servicing. In its last reported public debt profile, Nigeria’s internal and external debts swelled by N2.358tn to N35.465tn from the end of the first quarter of the year to the end of the second quarter.
G20 framework for debt treatment
Following the outbreak of COVID-19, the G20 emplaced the Debt Service Suspension Initiative to temporarily pause official debt payments by the poorest countries. The international community also put in place the Common Framework to help these countries restructure their debt and deal with insolvency and protracted liquidity problems.
With the IMF emergency lending and a $650bn allocation of Special Drawing Rights, of which $21bn was allocated directly to low-income countries, there is also a commitment by the G20 leaders to support low-income countries with onlending $100bn of their SDRs.
But with the debt service suspension initiative expiring and interest rates poised to rise, low-income countries will find it increasingly difficult to service their debts, IMF said, stressing that countries would need to transition to strong programmes, especially low-income countries that need comprehensive debt treatment.
It also stated that despite “significant” relief measures brought on by the COVID-19 crisis, about 60 per cent of low-income countries are at high risk or already in debt distress, a number below 30 per cent in 2015.
According to the Fund, many of the low-income countries are faced with mounting challenges, as the new variants of the pandemic are causing further disruptions to economic activity.
“We may see economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated,” it stated, adding that it is also critical for private sector creditors to implement debt relief on comparable terms.
Nigeria’s debt stock
Nigeria’s public debt profile stands at N35.465tn or 21.92 per cent of Gross Domestic Product at the end of June 2021, with China accounting for 78.7 per cent of the 38.66 per cent external debt, made up of multilateral, bilateral and commercial loans.
According to the Debt Management Office, the Federal Government owed N29.46tn (83.07 per cent) of the total debt stock, while states and Federal Capital Territory share the remaining 16.93 per cent.
Nigeria’s debt costs are projected to reach N3.6tn in 2022, N4.9tn in 2023, and N6.16tn in 2024 as against projected revenue of N8.36tn in 2022, N10.18tn in 2023, and N10.9tn in 2024 respectively, an economist and the Chief Executive Officer of Economic Associates, Ayo Teriba, in an article published by Vanguard (online), cited the 2022-24 Medium Term Expenditure Framework and Fiscal Strategy Paper.
He added that these imply debt cost revenue ratios of 43 per cent in 2022, 48 per cent in 2023, and 56.52 per cent in 2024.
The debt service to revenue ratio of Nigeria is high at 73 per cent, President of the African Development Bank, Akinwumi Adesina, pointed out recently. “Things will improve as oil prices recover, but the situation has revealed the vulnerability of Nigeria’s economy.”
Stakeholders’ react
Stakeholders are divided over what will work best in debt restructuring for Nigeria. From international standpoint, high debt service to revenue ratios crowd out spending on economic and social priorities, IMF corroborated World Bank, urging government to cut subsidies and/or increase taxes.
Meanwhile, there is a plan by Nigeria to end fuel subsidy in mid-2022 and cushion the effect with a monthly transport grant of N5,000 to between 30 million to 40 million deserving Nigerians, a move already generating controversy.
However, the government sees low revenue as the problem to debt service, and argues that if this can be increased, then the high debt service to revenue ratios will become much lower.
Among national thought leaders, the high debt service to revenue ratios reveal a debt sustainability or solvency problem, which means the government must stop borrowing and/or cut costs of governance.
The only sensible way to solve the problems presented by debt costs is to reduce or eliminate the debt cost itself, Teriba, said.
He argued that the way out of the problem lay not in increasing revenue or tax, removing subsidies, stopping borrowing, or reducing cost of governance, but that the DMO has much to do.
“Issuance of interest-paying bonds is an unnecessary and avoidable drain on our hard-earned revenue, even if we have the revenue in abundance.
“Reducing interest payable on any given debt stock is the only enduring way of resolving the issue at hand. Other seeming solutions are red herrings,” he said.
According to Teriba, Nigeria should aggressively restructure its debt portfolio by replacing interest-paying commercial bonds with interest-free commercial bonds on a wholesale basis to drastically reduce or eliminate the N4.9tn yearly average interest payments that is projected in the 2022-2024 MTEF.
“Rather than issue interest-paying bonds to fund infrastructure, we should create special purpose vehicles for packaging infrastructure assets for interest-free financing through asset-linked non-convertible or convertible bonds. Ideally, this should happen in a rule-based fiscal regime with an independent advisory fiscal commission as a watchdog,” he added.
