Debt Rising Cost May Increase Cost Of Borrowing – PwC

Cost of funding increase in debt concerns which has led to lowering of credit ratings may lead to increase in the cost of international funds, PricewaterhouseCooper (PwC) has said. In its Nigeria bi-monthly Economic Outlook released on its website titled “Impact of global economic trends on Nigeria’s foreign exchange and the way forward”, the professional services firm said it may increase the demand pressure on forex to meet future FX debt service obligations. According to the firm, it is evident in the decline in capital importation from $24 billion in 2018 to $5.3 billion in 2022.   “The increase in the global Central Bank’s policy rate may lead to capital reallocation away from Nigeria’s financial market to other markets with more attractive yields on investment. This may reduce FX flows to the economy “The Nigeria MSCI index recorded a significant decline of 113%, from 23.5% in 2020 to -3.02% in 2022, reflecting capital reallocation to other economies A marginal trade surplus may lead to an increased pressure on FX threatening liquidity in the forex market. In Q2 2023, Nigeria recorded a positive balance of trade of $2.3 billion. The positive trade balance could be attributed to the growth of total export by 9% (y/y) to $12.5 billion “The decline in remittance flows may reduce FX flows to the economy. Though remittances to Nigeria accounted for 38% of the total flows to the region, it increased by only 3.3% to $20.1 billion “Lower credit ratings due to Nigeria’s widening fiscal deficit, debt service to revenue ratio may reduce confidence in the Nigeria economy. This may lead to reallocation of funds from the Nigerian economy and reduction in FX flows,” it said. Over time, the company observed that there has been a rise in the inflows of FX from autonomous or non-CBN sources, which has led to the widening divergence between the official and parallel market rates. “Since 2007, the FX inflows from autonomous sources exceeded inflows from the CBN “The implication of official interventions may not accurately reflect the market demand and supply dynamics as annual inflows are skewed towards unofficial sources,” it said. To address this imbalance, there is a need for authorities to boost investors’ confidence by deepening the financial markets, ensure longer term sectorial policy to maximise exports or deepen domestic consumption, and roll out short-term fixes to enhance foreign exchange liquidity.

ActionAid Tasks African Leaders On Collaboration To Tackle Debt Crisis 

ActionAid has called on African governments to coordinate collectively for a resolution to debt crises, based on radical renegotiation or debt cancellation, including through advancing this case in climate negotiations; and to pursue alternative economic paths that place quality public services, social and economic justice at the heart of building sustainable and truly sovereign states. The resolution was made by AA Country Directors at the just concluded IMF/ World Bank Annual Meetings in Marrakech, Morocco. They further called on the two Institutions to move away from the failed neoliberal economic model, to stop imposing austerity policies and constraints to public sector wage bills, and instead to support debt cancellation and ambitious and progressive tax reforms nationally and internationally. “The IMF and World Bank have imposed a neo-colonial model of economic development based on exploitation and extraction from the Global South which has given rise to regular debt and economic crises.  “These crises have then been used to justify the imposition of harsh loan conditions and coercive policy advice on African governments, perpetuating dependency and stripping away the capacity of States through cuts to public spending.  “Although some of the rhetoric has changed in recent years, in practice the IMF and World Bank are still attached to this cult of austerity, undermining progress on health, education and other public services and blocking Africa’s ability to respond and adapt to the climate crisis. “ActionAid’s research has shown in particular that IMF enforced cuts and freezes to public sector wage bills have consistently blocked the recruitment of urgently needed teachers, nurses, midwives and other public sector workers.  “We have documented the gendered impact of these cuts, with women being the first to lose access to services, the first to lose opportunities for decent work and the first to absorb the rising tide of unpaid care and domestic work. “Without access to low-cost financing, many African governments now find themselves facing a deeper debt crisis than ever before – with UNCTAD recently finding that the amount spent on interest payments is often higher than spending on either education or health,” they said.  

IMF Advocates Fiscal Adjustments As Solution African Countries’ Debts 

The International Monetary Fund (IMF) has urged African governments to re-anchor fiscal policy through a credible medium-term strategy to avoid a debt crisis. According to the Fund in its report ‘How to Avoid a Debt Crisis in Sub-Saharan Africa’, it stated that to avoid a debt crisis, African countries seek to achieve key debt targets. The Bretton Woods Institute said the average debt ratio in the region has almost doubled in 10 years adding that the average debt ratio to gross domestic product (GDP) has increased to 60 percent as of 2022, which is a 30 percent rise compared to the figures of 2013. According to the Fund, this is what makes debt repayment costlier. “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 has resulted in frequent breaches of fiscal rules and ever-increasing public debt levels. “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. “The paper suggests a novel approach to estimating country-specific medium-term debt anchors, which ensures that debt service costs remain manageable. “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 the report, the IMF said more than half of the low-income countries on the continent are at high risk or already in debt distress as at the end of last year. The multilateral also said mobilising more domestic revenue through the elimination of tax exemptions or digitalising filing and payment systems is key to avoiding a debt crisis as well. “Sub-Saharan African countries tend to rely excessively on expenditure cuts to reduce their fiscal deficits. “Although this may be warranted in some circumstances, revenue measures, like eliminating tax exemptions or digitalizing filing and payment systems, should play a greater role.” The IMF noted that mobilising 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.