Going by the World Bank data, total external debt for SSA jumped nearly 150 per cent to $583 billion in 2018, from $236 billion in 2008. Many, especially, in Nigeria, now worry the debt load is becoming unsustainable as the average public debt now settles at 59% of Gross Domestic Product (GDP) for the sub-region.
“It’s a problem across the low income developing world but particularly acute in the subregion. The trend has been driven by a number of factors, including cheap money in more advanced economies. So, investors have been keen to seek yield in African countries promising up to eight per cent or nine per cent on eurobonds,” IMF Managing Director, Kristalina Georgieva, said.
For her, the challenge is that even at the single digit rate of eight per cent or nine per cent “isn’t cheap for many countries paying out the yield.”
More worrisome, according to recent comments of the IMF and World Bank, is about the lack of transparency, weak debt management and a lack of capacity in an increasing number of low income countries.
Yinka Adegoke of Quartz Africa, succinctly captured the global institutions dilemma, quoting them as seeing China as the elephant in the room, with its deals often referred to as a “non-traditional lender”. World Bank president David Malpass was especially exercised about the non-disclosure clauses of China deals.
But Malpass grabbed most headlines for his attack on the Asia Development Bank, European Bank for Reconstruction and Development and the African Development Bank (AfDB) blaming them for “a tendency to lend too quickly and add to the debt problem of the countries.
“In the case of Africa, the African Development Bank is pushing large amounts of money into Nigeria, South Africa and others without the strongest program to sustain it and push it forward.”
In one of those grab-your-popcorn moments, the AfDB immediately hit back, describing Malpass’ comments as “inaccurate and not fact-based.” It added: “It impugns the integrity of the AfDB, undermines our governance systems, and incorrectly insinuates that we operate under different standards from the World Bank.”
It comes at an interesting time for both institutions. Malpass, who took the role a year ago, as a former Trump advisor and previous World Bank critic, has recently revealed he’s splitting the World Bank’s Sub Saharan Africa unit into two, a West/Central Africa and East/Southern Africa with two vice-presidents.
This is widely seen as the bank likely doing more business in the region—and could be going up head-to-head with the AfDB more often and in a less collegial fashion than it has traditionally.
As for AfDB, its President, Akinwumi Adesina, is on the verge of being re-elected this May, to run the bank for another five years by its shareholders. Nigeria is AfDB’s biggest shareholder and the next largest is the United States, which picked Malpass to run the World Bank.
Recently, the Chief Economist, Africa and Middle East for Standard Chartered Bank Group, Razia Khan, noted that until the numbers begin to fall in place and infrastructure investments that are needed to facilitate businesses are clearly seen, Nigeria’s fiscal turnaround contained in the Finance Act 2020 would still not reduce significantly the high premium now charged for investments in the country.
According to her, from the international financial institutions to investments analysts, the concerns have been the disproportionate relationship between the country’s revenue flows and its debt service bills. More worrisome is that debt negotiations, triggered by yearly fiscal deficits, has assumed a permanent feature of Nigeria’s discourses.
For foreign investors, it is unsettling, as worries about the low level of government revenue and the projected implications, particularly the country’s ability to service its debt in the longer term, remains doubtful.
For one thing, Nigeria’s economic diversification from crude oil as a major source of revenue and export, has not significantly changed, but she acknowledged government’s latest efforts in improving the fiscal operations, saying it was a welcome development.
However, she pointed out that the effectiveness of the measures, especially in raising revenues to bridge the widening revenue-to-debt service ratio, is what the investors are interested in.
She explained that the higher Value Added Tax (VAT) rate of 7.5 per cent and the revised Production Sharing Contract, will result in more revenue to the government and are steps in the right direction.
“The VAT increase is the obvious solution, but it was not obvious at the time that it was going to be implemented. Even though some will argue that 7.5 per cent is not really that high and still way below the regional peers, tax compliance must be tightened at the same time to be positive,” she said.
Noting that the investors are not quite interested about the debt profile, just as government officials have been chorusing same, she warned that Nigeria must achieve significant rise in revenue level or face demand for higher premium from investors to compensate their risks.
The banker urged Nigeria and other Sub-Saharan African economies to work at containing large fiscal deficits, stressing that this is one of the moves that would help to attract investors.
“It is very clear from the concerns outlined by Fitch and Moody’s last year that one thing that Nigeria will have to do in a big way is revenue mobilisation. Nigeria’s problem is a revenue problem and when you don’t do anything on revenue, then everyone focuses on debt.
“A very key metric everyone needs to pay attention to is the revenue-to-debt service ratio. We think the fiscal authorities are already reacting to this. They have already outlined their intention to seek more concessionary sources of financing wherever they are available.
“So I think there is this realisation at the finance and budget ministry level that the way to keep on borrowing to drive spending is not unlimited and that Nigeria needs to show an immediate difference in controlling the near term cost of debt service and especially in terms of ramping up the revenue.
“So it is not that they can do one part of that equation without looking at the other. You have to do both at the same time. This is because if there is no revenue growth, then even the amount of credit that creditors are previously willing to lend or investors are willing to put into the debt market, will be on higher returns for higher risks, just because revenue growth is not there,” she said.