Nigeria can still borrow, but must be cautious—–IMF

Okey Onyenweaku –Washington D.C , USA

As a departure from the hues and cries over Nigeria’s huge debt, the international Monetary Fund (IMF) yesterday at the World Bank Meeting/ IMF Spring meetings, said the largest African economy by Gross Domestic Product (GDP) maintains good fundamentals to enable it borrow more if she can eschew mismanagement.

Speaking at a briefing on ‘Global Financial Stability Report’ during the ongoing World Bank Meeting/ IMF Spring meetings, Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, IMF, said though the conditions were good for Nigeria and other sub-Saharan African countries to get funding to invest more, especially to improve its infrastructure, but expressed worry that these favourable conditions may not subsist given fluctuating macro-economic conditions which could change ‘at some point’.

‘’ So Nigeria has been borrowing in International markets. But we worry—so on the one hand, that is very good because it allows Nigeria to invest more; but on the other hand, we do worry about rollover risks going forward’’,

‘’ At the moment, funding conditions in economies such as Nigeria and other Sub-Saharan African countries are very favourable but that might change at some point. And there is a risk of rollovers and there is a risk of whether these needs for refinancing can be met in the future.

Adrian also pointed out that policy uncertainties and bad decisions were the root causes for financial distress in countries and advised that sub-saharan African countries should embrace more of long-term borrowings than short-term risk assets.

‘’What we have seen in the past two years is that policy uncertainty has been at historically elevated levels. And that kind of policy uncertainty in many countries around the world is a risk factor for financial stability’’, he stressed adding that recent work at the fund has shown that this kind of elevated policy uncertainty forecasts down side risk growth over an above the information that is in market -based measures.

Adrian called for better and more strategic collaboration between the fiscal authorities and monetary authorities if Nigeria must achieve its long-term goals.

However, Nigeria’s ballooning debt profile just caught the attention of International financial agencies, as the country’s budget deficit continues escalate.

Estimates suggest that every Nigerian citizen from a day old owes an estimated debt of N105, 556 or N289 a day. This becomes clear when consideration is taken of the recent Debt Management Office (DMO) announcement that Nigeria’s total debt stock had reached N24.4 trillion.

Policy makers

He said: “ Amid rising downside risks to global growth, policymakers should aim to avoid a sharper economic slowdown, while keeping financial vulnerabilities in check.

Policymakers should clearly communicate any reassessment of the monetary policy stance that reflects either changes in the economic outlook or risks surrounding the outlook. This will help avoid unnecessary swings in financial markets or unduly compressed market volatility.

“ In countries with high or rising financial vulnerabilities, policymakers should proactively deploy prudential tools or expand their macro prudential toolkits where needed. These countries would benefit from activating or tightening broad-based macro prudential measures, such as countercyclical capital buffers, to increase the financial system’s resilience. Efforts should also focus on developing prudential tools to address rising corporate debt from nonbank financial intermediaries and maturity and liquidity mismatches in the nonbank sector.

Regulators should also ensure that more comprehensive stress tests (that include macro-financial feedback effects) are conducted for banks and nonbank lenders.

Measures to repair public and private balance sheets should be stepped up. A gradual fiscal adjustment is needed to reduce elevated risks, based on policies that will support medium-term growth. Efforts to tackle nonperforming loans on euro area bank balance sheets should continue. Given concerns about the sovereign–financial sector nexus, consideration could be given to mitigating concentration risk in banks’ sovereign exposures.

Emerging market economies should ensure resilience against foreign portfolio outflows by reducing excessive external liabilities, cutting reliance on short-term debt, and maintaining adequate fiscal and foreign exchange reserve buffers. Given the rising importance of benchmark-driven portfolio flows, a close dialogue is needed between index providers, the investment community, and regulators. Building on the progress achieved so far, the Chinese authorities should continue financial sector de-risking and deleveraging policies and put greater emphasis on addressing bank vulnerabilities. Structural reforms such as reducing the emphasis on growth targets and tightening budget constraints for Chinese state- owned enterprises will be critical to reduce credit misallocation.”

Commenting on the global economy he said: “Financial conditions have tightened since the October 2018 Global Financial Stability Report but remain relatively accommodative, notably in the United States. After sharp declines in the fourth quarter of 2018, financial markets rebounded strongly in early 2019 on growing optimism about US-China trade negotiations and as major central banks adopted a more patient and flexible approach to monetary policy normalization. Such a dovish shift in the outlook for monetary policy in advanced economies has helped sustain positive market sentiment despite growing signs of weakening global growth (as discussed in the April 2019 World Economic Outlook).”

Continuing he said:  “With financial conditions still accommodative, vulnerabilities continue to build. The tightening in financial conditions in the fourth quarter of 2018 was too short-lived to meaningfully slow the build-up of vulnerabilities, leaving medium-term risks to global financial stability broadly unchanged. Financial vulnerabilities are currently elevated in the sovereign, corporate, and nonbank financial sectors in several systemic countries. As the credit cycle matures, corporate sector vulnerabilities—which appear elevated in about 70 percent of systemically important countries (by GDP)—could amplify an economic downturn

However, overall debt and financial risk taking have increased, and the creditworthiness of some borrowers has deteriorated.

Therefore, a significant economic downturn or sharp tightening of financial conditions could lead to a notable repricing of credit risk and could strain the debt-service capacity of indebted firms.”

“ If monetary and financial conditions remain easy, debt will likely rise further in the absence of policy action, raising the spectre of a deeper downturn in the future” he added.