Nigeria’s $70.99bn debt poses financial stability risks-IMF

The International Monetary Fund (IMF) Wednesday expressed concern over Nigeria’s N21.72 trillion ($70.99 billion) public debt position, saying it constitutes a direct risk to the country’s financial stability.

Tobias Adrian, the IMF’s Financial Counselor and Director of the Monetary and Capital Markets Department disclosed this during the Global Financial Stability report presentation at ongoing IMF/World Bank Spring Meetings in Washington D.C, United States

The referenced Nigeria’s external debt and domestic debt figures above are as at December 2017 data from Debt Management Office (DMO) showed.

Adrian said the Fund is ready to provide sound debt management assistance to Nigeria and other emerging market countries, in line with its debt sustainability framework for low income countries and emerging market economies.

According to him, short-term risks to financial stability have increased, and medium term risks remain high while vulnerabilities in global markets may make the roads ahead bumpy, and put growth at risk.

“Rising foreign debts remains a big risk to financial stability. The debts that are accumulated quickly are deteriorating and could pose financial stability crisis in the future in emerging markets,” he disclosed.

Adrian said the Fund has continued to track debt issuance programmes in emerging markets which Nigeria belongs, adding that bank-dollar liquidity mismatches also remain a concern.

The IMF director said the international US-dollar balance sheets of non-US banks rely on short-term or wholesale sources for about 70 per cent of their funding, a practice that could leave banks exposed to dollar funding problems in the event of strains in markets. He, therefore, advised policy makers to ensure that the post-crisis regulatory reform agenda is implemented, and should resist calls for rolling back reforms.

“Our growth risk analysis which links financial conditions to the distribution of future global growth indicates that, under a severely adverse scenario, growth could be negative three years from now. Stretched valuations across many asset classes, borrowing by emerging markets and low income countries and bank-dollar liquidity mismatches remain vulnerabilities,” he said.

He said that issuance of riskier bonds has surged, adding that debt sustainability in emerging markets and low income countries has deteriorated, and a more complex creditor composition poses challenges for any future debt restructurings.

According to Adrian, pick-up in inflation might lead to a more rapid withdrawal of monetary accommodation by central banks leading to sudden tightening in financial conditions and a sharp fall in asset prices.

Adrian advised central banks to continue to normalize monetary policy, and communicate their decisions clearly while addressing financial vulnerabilities by strengthening fundamentals and building buffers.

Also speaking, Victor Gasper, IMF’s Director at the IMF’s Fiscal Affairs Department, said public debts are at the historic high in emerging markets and have been associated with fiscal crises.

He added that debt servicing is also rising in countries with high inflation rates. He said there was no room for complacency, and that countries should strengthen their tax capabilities and deploy the resources in funding health, education and public infrastructure.

Gasper, who spoke at the Fiscal Monitor session, said that counties will be better placed to tackle looming risks if they build strong public finances in good times.

He said that in emerging market economies, debt at almost 50 percent of Gross Domestic Product (GDP) on average is at levels that in the past have been associated with fiscal crises adding that average debt was only higher during the 1980s.

He said that in the last 10 years, emerging market economies have been responsible for most of the increase in the $164 trillion global debt. “We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up. Instead, most countries should deliver on their fiscal plans and put deficits and debt firmly on a downward path,” he stated.

Similarly, IMF, concerned with the world’s rising debt profile, urged governments to use the current strong economic growth to strengthen their finances, warning that high debt makes governments’ financing vulnerable to sudden changes in market sentiments.