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The International Monetary Fund (IMF) has raised red flags on rising global debt levels, with particular reference to low-income countries, where 40 percent of the economies are currently debt distressed.
The IMF has therefore urged countries, including Nigeria to ensure excessive borrowings translate into high returns for development.
In one of its flagship reports- the ‘Fiscal Monitor report’ released in Washington on Wednesday, the IMF said public debt is currently at historic highs in advanced economies and emerging market economies.
For low income developing countries, average debt-to-GDP ratios –at 44 percent – are however, below historical peaks, but “it is important to recall that these peaks involved debt levels that countries were unable to service, and were eventually tackled through debt relief initiatives by the international community,” the Fund said.
“Our debt sustainability analysis indicates that 40 percent of low-income countries are currently at high risk of or already in debt distress. It doubled in five years,” the Fund added in the report.
The IMF is particularly worried that for low income countries, including Nigeria, governments have embarked on excessive borrowing to fund development, especially as incomes dwindled for commodity prices- as it now strongly advises on an aggressive tax mobilisation.
According to recent data from the Debt Management Office, DMO, by end of 2018, Nigeria would have borrowed some N5.839.27 trillion IN three years, to fund the budget deficits. Authorities have also chosen to rebalance Public Debt Stock in favour of less costly external funds in the ration of 60:40 for external and domestic debt, respectively – currently at about 73:27.
“Borrowing by countries can create benefits if used for investments of high returns. Our evidence suggests that it’s not the case in some countries so rising debt then create the vulnerabilities,” said Cathy Pattillio, Assistant Director, Fiscal Affairs Department at the IMF.
“There will be interest rate risks, market risks and large interest burdens that will squeeze out spending priorities,” she stressed, adding that “with high debt, countries need to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments.
Responding to BusinessDay concerns on government borrowings at press meeting, she observed that for Nigeria and other Sub Saharan African countries, sustained development and increasing per capita income roof which is built on macro stability is the main priority.”
She recalled recent IMF staff report on Nigeria which indicated that a constraining debt servicing, especially with the ratio of federal government interest payment to debt revenue extremely high at 63 percent, there is a need to build revenues to create more space for infrastructure, social safety nets among others.
“The recommendation of the IMF is to broaden the tax base by removing exemptions, to rationalize tax incentives in particular to strengthen tax compliance and our recommendation to raise the VAT rate.
She however, commended Nigeria’s current debt restructuring strategy that is tilted towards more of foreign debt and less of domestic debt.
“There is merit to that strategy. Factors that support that is that Nigeria’s current external debt to GDP ratio is low so the external interest payments are relatively low. The benefits of that switch is a reduction in overall interest payments and a lengthening of maturities.
Vitor Gaspar, Fiscal Affairs Department, IMF who spoke on the fiscal monitor report said at US$164 trillion, or almost 225 percent of GDP, global debt hit a new record high in 2016.
He raised the concerns that debt service has also rising rapidly, especially in countries with high inflation rates.
Interest burden has also doubled, in the past 10 years, to 20 percent of taxes.
“It is imperative that low income developing countries strengthen their tax capacity. This will allow them to meet their debt service obligations. It will also allow them to finance spending priorities- such as health, education, and public infrastructure – to attain the 2023 Sustainable Development Goals,” he stressed.
Gaspar, however, raised the optimism that public debt ratios would be declining in three-fifths of low income developing countries, and in about two-thirds of emerging markets economies.
“When we insist that low income countries should be improving their tax revenue mobilisation, we see that as an instrument of sustainability and development. In that context, higher tax capacity could also help sustain debt service. But that is not an end. The end in itself is the ability to stand on priority areas – health, education, public infrastructure, and others.
“Governments are well advised to build fiscal buffers so that they are ready to tackle challenges that would inevitably come,” he stressed.
A separate report on the ‘Global Financial Stability Report’ also released Wednesday by the IMF, equally indicated that debt sustainability in developing countries has deteriorated and this poses challenges for any future debt restructuring.
Tobias Andrian, Financial Counsellor and Director for the Monetary and Capital Markets Department, IMF said these vulnerabilities could make the road to growth bumpy three years from now.
“Countries that are building up higher debt levels and are exposed more to currency mis-matches and liquidity transformation are going to be exposed more to any adverse developments in global financial conditions.
According to Anna Ilyina, Division Chief, Monetary and Capital Markets Department, IMF, many emerging countries have benefited from very favourable economic climate and that has created some rooms for them to strengthen their positions.
“We indeed see some volatilities,” he stressed adding that though there is an improvement in public debts in the past few years, there are still potential difficulties in some countries in managing and servicing these debts.
“In fact, over 40 per cent of these debts are at high risk of distress.
“From our reports, we do track the debt issuance by the low-income countries and we have seen that there is a strong rebound in international bond issuance in frontier markets.
He said that the IMF is providing some assistance to countries on how to manage their debts, to ensure the track their borrowings.
“That was why the IMF recently rolled out debt sustainability framework to help identify debt-related vulnerabilities.”
Onyinye Nwachukwu, Washington DC
