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Nigeria’s debt service worries IMF/World Bank

by Business News Report

At the conclusion of the 2018 IMF/World Bank Annual Meetings, The Nigeria delegation led by the Minister of Finance Ms Zainab Ahmed had an interactive session with the Nigerian media in attendance below is excerpts.

Introductory remarks

Indeed, because of the monetary policy normalisation, some concerns were raised that the adverse consequences of the policy will eventually spread to Europe and could create more problems for emerging market economies. For emerging market economies, it was observed that the adverse consequences of the US policy normalisation has resulted in capital flow reversals, particularly for emerging markets, resulting in some cases, currency depreciation in those economies. We also found that it has also resulted in interest rate hikes and monetary policy tightening measures in these economies as well. Because the emerging market economies are price takers, it is expected that public debt service would rise for the emerging market economies, possible resulting in weakening of assets in various banking system and weakening in financial conditions in the emerging and frontier economies.

Concerns were raised about debt vulnerabilities as it affects emerging and frontier markets. Although Nigeria’s debt to GDP remains fairly okay, debt service concerns were raised and we also told them we are doing everything possible to broaden the revenue base so as to improve the tax to GDP ratio. In general, advise was given that countries must continue to build buffers and that different countries should implement country-specific policies to protect against this shocks that is expected to take some time and its consequences might be adverse on different economies.  We were also advised to build fiscal and structural reforms to ensure growth in our economy. For Nigeria, issues bordering on diversification of the economy remains priority and we also made our views that these are issues that have been in the front burner of the Nigerian economy. Like I said earlier, we used the opportunity of the meeting to hold meeting with our international financial institutions, some of our correspondent banks were also available and we also discussed how to build and improve our relationship going forward.


As I stated earlier on and I think it has been collaborated by the three of us that Nigeria’s problem in respect of debt, we don’t have a debt problem because at the ratio of 3 percent of GDP we have one of the lowest debt, in fact the lowest debt among our comparative countries. What we have is a revenue problem and we need to work to increase our revenue to ease our debt service obligations. So we have to enhance our domestic revenue mobilisation so that we can ease the debt service burden that we now carry. We have a lot of headroom to borrow but we are not rushing to borrow more because have to consider the foreign debt service that we carry. We have so far in the 2018 budget release N460 billion naira and this is for capital projects. For us to have to  give you the lists of the capital projects we have to review our monitoring report, that is where the schedule of the projects that  have been implemented will be seen. But subsequently we are looking at also the possibility of, going forward that when we release capital projects, we would clearly determine what projects the funds are released for. Going forward we want to do that to support us in monitoring from the beginning  not after the funds have been utilised as it  currently obtains.


We really are in a situation where we have to consider increasing building fiscal buffers because even though the global economy is going positively upward there are still a lot of fragilities, a lot of countries, including our own, and the next wave of recession that might hit the global economy might not be the one that any country can quickly come out from unless the country has sufficient buffers. So as a country, both the federal and the state, we have to look at how to save more and we have to look at how to invest more in critical infrastructure that we yield revenue. And that is what came across throughout the meeting from the world bank, from the IMF, that all countries, not just Africa but globally need to build more fiscal buffers. There are only a few countries in the world that have saved so much in the world that any shock will not affect them. So we have to do this to protect ourselves from external shocks now we are seeing coming from increase in rates in the US and so of the shocks we can get also nationally. And some of those shocks are shocks caused by natural occurrences. So we all need to be really really ready.


The upcoming bonds that we are trying to raise should be within 2018 and it is within the approved budget, so we are not going beyond what was approved in the budget. The budget has approval for us to borrow both locally and domestically and we have a bond issuance within the range of $2.8 billion that we need to raise before this year closes out. That will be used to finance the capital projects in the 2018 budget.


The meeting on climate change was not specific to any country. It was just trying to wake up everyone to realise that just as we prepare for meeting economic challenges we also have to prepare for meeting natural disasters that may occur, and we have seen floods occurring in our country time and time again. So the objective of that meeting is that you don’t need to wait until a disaster occur before we prepare, you need to prepare for it ahead of time because you know what you are predisposed to and in our country we are predisposed to flood. Other countries are predisposed to earthquake and disasters. We are fortunate that we in our region in Africa that we have very limited natural disaster, but we still need to be more ready to mitigate whatever losses of lives, properties from such floods.


I just want to add something and that is the issue of Human Capital Development. What I want to say is that where we have today is not where we want to be. But it is the result of cumulative neglect over a period of time and one of the things in the ERGP that we clearly identified is that we need to clearly invest in our people. And we are doing so but it takes time. Just by the way of illustration, the capital allocation to education which in 2015 was N22.52 billion, by 2018 we are taking up to N102.9 billion. In health the capital allocation was N22.68 billion in 2015, in 2018 we are taking the capital allocation up to N86.49 billion.

Udo Udoma Minister of National Planning

We have taken capital allocation to N86.49 billion. In addition, in this year’s budget, we are setting aside N55.15 billion under the provisions of the National Health Act, as well as N3.5 billion counterpart funding for GAVI immunisation, which is in the Service Wide Vote. So, what I want to say, basically, is that it has been the focus in the ERGP. We have increased funding to those areas that bother on human capital development because we are conscious of investing in our people. But it takes time for these things to manifest.


You will recall that about 2009 through 2011 was a period of quantitative easing and those periods were marked by the flow of capital from the United States and Europe, even Japan. Capital from these countries ended up in the emerging market and developing countries. At this time that we have started to see reversals in monetary policy, where interest rates are rising and naturally those flows are beginning to return back to where they came from. Practically all emerging markets have suffered, not just by depreciation, but also lost reserves. India, for example, has depreciated almost 14 per cent, Ghana by almost 12 per cent, New Zealand by about 12 per cent, Indonesia by another 12 per cent, Australia by 8, South Korea, 8; Japan, 6; Thailand, 6; Philippines and Vietnam have also lost, but Nigeria have lost nothing.

While we are at this meeting, our host country has reported a loss of about $20 billion in foreign exchange reserves and at the same time suffered currency depreciation, which is the same for the rest of the emerging market economies. For Nigeria, we have lost only reserves by a margin, in my view and at the same time, we have managed to sustain stability in our foreign exchange market. I think we have done a very good job, not only trying to maintain a stable exchange rate, but trying to avoid depreciating our currency so far in this early days of normalisation. We have lost reserve yes, somewhat marginally in my view, and at the same time, we have managed to sustain stability in our foreign exchange market. It is not about trying to say that others have not done a good job, but am saying in Nigeria, we have done a very good job.

We are trying to see to it that we maintain a stable exchange rate and avoid the pitfall of depreciating our currency so soon in the early days of the normalisation. We are going to need to build buffers but unfortunately I must say that we are I  a period where it is difficult to talk about building reserve. You can only build reserve buffers if you want to hold on the reserve, while allowing your currency to go and wherever it goes is something else. It is a choice we have to make and at this time  , the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan and we don’t create problem in the banking system assets. Naturally, when this happens, it result in weakening of assets, raising Non performing Loans, and other wide implications. This is why we will maintain the posture we have and we believe that it is sustainable in the short run.


We have had questions as it concerns the outflow of investors from the country. Foreign would normally want to leave a frontier market once interest rate begins to go up in advance economies, especially in the United states, as we currently have. Having foreign investors is good as they bring in liquidity and efficiency, and transparency in the market. We are also encouraging our local investors by giving them confidence in the market. We have put in place, incentives like risk base supervision, to enable us properly monitor the works of the CMO’s. We are also encouraging new product to deepen the market, like thee non-interest finance related products We are looking to increase and encourage the commodity ecosystem. We are also looking to introduce derivatives in the market. As we speak, our rules on derivatives are ready and we are building internal capacity to supervise all of these.

Minister of finance 
You asked whether we are partnering with NNPC. We work with NNPC. Let me tell you what we are doing in terms of more transparency with NNPC reporting . There was a committee that was set up by the president on revenue mobilisation. One of the intention is to ensure that all revenues are reported in a transparent manner that committee is working to support FAAC and they have agreed on new reporting template for NNPC which is still being negotiated. NNPC has reviewed the template and made its input and FAAC has also reviewed the template. It has to be agreed and then NNPC will start reporting in that template. The essence is for NNPC to make its reporting more granular so that more information will be provided. On the revenue that is generated and the cost they have incurred. So that is ongoing. We hope that in the next few weeks it will be concluded and the new reporting will take effect. Reporting has been a concern for the whole of FAAC both state and federal government.  In respect of your question relating to power by the world bank, we have guarantee that the world bank will pay in terms of financing specifically for one of the power projects and it has already taken effect, it is has been in news now.
On instrument we will use in taxing

We are already taxing companies with the rates approved in the tax laws. For to change the taxes it means we will review the tax laws that may be a process we will address in the future, right now we don’t have any plan to review upward taxes in Nigeria. We don’t have such plans. Instead what we are trying to do is to identify people who are suppose to pay tax but they are not paying. A lot of efforts is being put to expand the tax base as well as improving the tax collecting processes and it is already yielding results. We have seen our tax base grow from 13 million to 19 million. That number is not enough for a country of 185 million but we are doing a lot of works in this regard. You also recall Vaids was implemented and phased out in June, even though Vaids is closed, the rigour contained in the Vaids programme is still ongoing.

The discussion we had with IMF managing director included the concerns around what is going to happen to the economy because of the elections. So what we did was that we assured them that we have directive by the president to focus on the economy. There are a few key function within the government that has been directed to focus on working to sustain the growth that we have in the economy and not to be distracted by election processes. Some of us are actually focusing on the economy and IMF was comfortable with that and they said that was a good strategy.
We are trying to raise a new Eurobond which will be used to fund capital projects and I said earlier that this is $2.8 billion mainly to finance capital projects.

CBN Governor 
On the issue of the mints, like you all know, CBN is the majority shareholder in mint and it was thought fit that being the majority shareholder and given that mint is an important national asset, that Bureau of Public enterprises should divest from mint and that is why that happened but on this issue of whether more and more of this will be coming! I am aware as a member of national council on privatisation that more are coming and I believe in due course the BPE will make this available for us. I also aware of the situations like ASCON that has been burned by takeovers and that is also on the cart for a total review of the process of privatisation and making payment so that our alluminum sector can eventually come to live.

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