IMF charges Nigeria, others on fiscal policy restructuring as debt crisis looms

By Onome Amuge.

The International Monetary Fund (IMF) has advised policy makers in sub-Saharan Africa including Nigeria, to re-anchor fiscal policy,undertake fiscal adjustment, mobilise more domestic revenue among other financial sustainability measures to avert a looming debt crisis.

According to the IMF, as of 2022, more than half of the low-income countries in sub-Saharan Africa were assessed to be at high risk or already in debt distress.

This is as the average debt ratio in sub-Saharan Africa has almost doubled in just a decade from 30 per cent of gross domestic product (GDP) at the end of 2013 to almost 60 per cent of GDP by end-2022.

“The region’s ratio of interest payments to revenue, a key metric to assess debt servicing capacity and predict the risk of a fiscal crisis, has more than doubled since the early 2010s and is now close to four times the ratio in advanced economies,” the IMF said.

In a report titled “How to Avoid a Debt Crisis in sub-Saharan Africa”, the major financial agency of the United Nations, noted that the region’s debt fiscal challenges have sparked concerns of a looming debt crisis in the region, noting that repaying the debts has also become much costlier.

To avert a debt crisis, the IMF  identified five policy actions African governments can take to preserve the sustainability of public finances, while also achieving the region’s development goals.

The first major policy action the IMF suggested to African governments is to set a course by  re-anchoring fiscal policy through a credible medium-term strategy.

The IMF observed that in most sub-Saharan African countries, fiscal policy focuses excessively on short-term goals and is not guided by a clear medium-term strategy. This lack of anchoring, it stated, has resulted in frequent breaches of fiscal rules and ever-increasing public debt levels.

The report advised that a more strategic approach to fiscal policy would be preferable by setting explicit debt targets that integrate key policy trade-offs between debt sustainability and development objectives, rather than focusing narrowly on short-term fiscal deficits. It also suggests a novel approach to estimating country-specific medium-term debt anchors, which ensures that debt service costs remain manageable.

Secondly, African policy makers were advised to undertake fiscal adjustment to bring debt back to a safer level.

“IMF staff analysis shows that most countries in the region will need to reduce their fiscal deficits in the coming years. For the average country, the amount of adjustment is about 2 to 3 percent of GDP,” the report stated.

The international financial institution also recommended mobilisation of more domestic revenue through the elimination of tax exemptions or digitalizing filing and payment systems.

According to the IMF, mobilizing domestic revenue is less detrimental to growth in countries where initial tax levels are low, whereas the cost associated with reducing expenditures is particularly high given Africa’s large development needs.

Highlighting other solutions, the IMF urged policymakers to strengthen budget institutions to improve the implementation of fiscal plans, noting that policy changes are more likely to yield tangible results if fiscal institutions are strong and efficient.

“On the expenditure side, well-designed plans too often yield disappointing results due to budgetary slippages or an unforeseen materialization of fiscal risks.

Adopting a medium-term fiscal framework, putting in place tools to better assess and manage fiscal risks, and enhancing controls over government expenditure during the budget implementation phase are key to avoiding such pitfalls,” it stated.

As policymakers take decisive actions to address the worrisome debt challenge, the IMF warned that such decisions might not be fully embraced by the citizens and thus, should public resistance to reforms.

“Public acceptance should be a central consideration in policy design—for instance, by sequencing reforms carefully and introducing compensatory measures,” the IMF advised.

The report stated that the sustainability of a new fiscal strategy also depends on the government’s ability to secure public support by linking the policy measures to longer-term benefits.

It also emphasised that communication campaigns that transparently and credibly outline the long-term benefits of the reform, its distributional consequences, and the costs of inaction are also critical to gaining public acceptance and support.

The report concluded that public acceptance of reforms depends more generally on the ability of governments to convince the population that they will use public funds in an efficient, fair, and transparent manner.