IMF’s $650bn SDR holds lifeline for Nigeria’s reserves, debt troubles 

Finance and economic analysts have said there is no reason to sound the alarm bells over Nigeria’s low level of reserves accumulation and huge debt stockpile as there appears to be a lifeline in the pipeline that could be opened by the International Monetary Fund (IMF) through its proposed creation of additional reserve assets to the tune of $650 billion in what is known as special drawing rights (SDR) to help Africa and other developing economies cope with the pandemic.

Analysts think this could well help boost developing economies’, including Nigeria’s, reserves, lift their debt burden in the face of the downturn. For Nigeria, analysts also say there is also hope from the mooted but highly possible revival of the $1.5 billion multilateral loan from the World Bank to the Nigerian government, which could serve as another source of reserve accumulation for the country.

There has been a push for the injection of funds by the IMF after Janet Yellen, United States Treasury Secretary leaned toward supporting the action, reversing US opposition last year under President Donald Trump.

However, analysts at FBNQuest Capital Research have urged caution as the release of the credit facility to Nigeria’s federal government could see conditionality rear its head in the scheme of things.

The economic fallout from the coronavirus pandemic has exacerbated existing strains on a number of African sovereigns including Zambia, Chad and Ethiopia, all seeking overhauls on their debt burdens. However, Nigeria’s case is seen as being not too bad as there are a number of other sources of funding that could be opened to it to cushion its rising debt burden and low reserves accumulation situation, unlike many other countries.

The announcement over the weekend by Kristalina Georgieva, managing director of the International Monetary Fund (IMF), after its executive board decided to support the decision for the general allocation of Special Drawing Rights (SDRs) equivalent to $650 billion to address the long term global needs for reserves during the worst crisis, could serve as just the lifeline Nigeria needs in her quest for sources for reserves accumulation.

“The IMF Executive Board concurred in my proposal for a new general SDR allocation equivalent to $650 billion – the largest allocation in the IMF’s history – to address the long-term global needs for reserves during the worst crisis since the Great Depression. I will now present the new SDR allocation proposal to the IMF’s Board of Governors for their consideration and approval. If approved, we expect the SDR allocation to be completed by the end of August,” she said.

SDRs are issued to members by the Fund and are a reserve asset that can be exchanged for a convertible currency with a central bank.

Nigeria’s gross official reserves declined by $910 million to $33.32 billion in June, according to official data obtained from the Central Bank. By that number, it shows that the total reserves as at the end of June can cover 7.6 months’ imports on the basis of the balance of payments for 2020, and 5.5 months when services are added.

Foreign exchange has been in short supply under life with Covid-19, and Nigerians have made limited use of their education, health and business travel allowances due to restrictions on movement both at home and in their favoured destination countries.

In the view of the IMF managing director, “This is a shot in the arm for the world. The SDR allocation will boost the liquidity and reserves of all our member countries, build confidence, and foster the resilience and stability of the global economy. In 2009, an SDR allocation contributed significantly to recovery from the global financial crisis and I am confident that this new allocation will have a similar benefit now.”

The process for the SDR allocation looks like developing very quickly with the IMF chief noting that it would actively engage with its membership in the months ahead to identify viable options for voluntary channelling of SDRs from wealthier members to support poorer and more vulnerable countries to help their pandemic recovery and achieve resilient and sustainable growth, which will also help boost global economic recovery.

President Emmanuel Macron of France, at a summit in Paris on Africa financing, in May 2021, had agreed to work towards convincing rich nations to reallocate $100 billion in their IMF special drawing rights (SDR) to African states by October, stating in agreement with other African and European leaders at the summit, that impoverished African states must not be left behind in the post-pandemic economic recovery. Moreso, the IMF and World Bank chiefs had come to an agreement, in April, on boosting SDRs by $650 billion with the extension of a debt-servicing freeze to developing countries to help them deal with the pandemic. The decision saw a total of $34 billion earmarked for Africa.

In a related development, Ghana’s Ken Ofori-Atta, Nigeria’s Zainab Ahmed, DRC’s Nicolas Kazadi and Ivory Coast’s Adama Coulibaly, in an open letter to the leaders of the Group of 20 leading economies, urged them to on-lend at $30 billion of that money to a new Liquidity and Sustainability Facility (LSF) and the African Stability Mechanism.

FBNQuest analysts said that Nigeria is not classified as a low-income economy, hence, may find it difficult to qualify.

“At this stage, we do not know the size of the new country allocations. If hypothetically, Nigeria was to be on its current quota, the accumulation would be about $3.50 billion.  Georgieva also hoped that richer nations would agree to “voluntary channelling” of their allocations to the “poorest and most vulnerable states”, which could, in conjunction with other steps, amount to an additional transfer of up to $100 billion,” that analysts wrote in their note.

Speaking on the sources to aid Nigeria’s reserves accumulation, they said, “Eurobond issuance is another call. We recall that the Debt Management Office is mandated to raise N2.34 trillion from the market by way of external financing in 2021. Also, the Nigerian Senate has now reportedly approved the N6.1 trillion external lendings. Another source would be soaring revenue from oil exports.

“The crude price for UK Brent is comfortably above $70 per barrel and yet reserves have continued to decline. The abandonment of OPEC +’s latest meeting is open to many interpretations, the most negative being that it marks the loss of the discipline of the alliance that has underpinned the price over the past 12 months. Alternatively, Saudi could rebuild its relations with the UAE” they opined.