Nigeria must stop taking Chinese loans to avoid debt distress, IMF insists

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    Chinese yuan and U.S. dollars are arranged for a photograph in Beijing, China, on Friday, April 2, 2010. Yuan forwards were poised for the biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Photographer: Nelson Ching/Bloomberg

    NIGERIA’S tax to Gross Domestic Product (GDP) ratio is one of the lowest in the world, the International Monetary Fund (IMF) announced on Wednesday.

    IMF’s Assistant Director, Fiscal Affairs Department, Cathy Pattillo, called for an urgent and comprehensive economic reforms to raise the country’s non-oil tax revenue and create needed fund to finance infrastructure and social spending.

    Speaking on Wednesday at the Fiscal Monitor session of the ongoing World Bank/IMF Annual Meetings in Washington D.C, she said Nigeria has big development problems, and should spend more on education and health to meet.

    Pattillo said: “Nigeria has one of the lowest tax-to-GDP ratios in the world. It is not because Nigeria does not have big development problems, Nigeria has a large need for education and health spending. It has some very low indicators in that area and the demographic projections is that Nigeria will be the third most populous country in the world by 2050. So, addressing those challenges is really important.

    “On Nigeria, the priority is a comprehensive reform to durably increase non-oil tax revenue and there are a number of reasons that will contribute to providing space for important spending on infrastructure and social spending.”

    The country’s tax-to-GDP ratio has for several years stood at six per cent despite tax revenue increase by the Federal Inland Revenue Service (FIRS).

    Despite being nothing more than the portion of a country’s output (domestic product) attributable to tax receipts, the tax-to-GDP remains one of the most widely used tool for measuring the efficiency of a country’s tax system.

    The National Bureau of Statistics (NBS) data indicates that Nigeria’s GDP stood at N31.79 trillion in the first quarter of 2019, the total government collection in taxes was barely N1.5 trillion in that quarter.

    Speaking on Nigeria’s rising domestic and foreign debts, Financial Counselor and Director, Monetary and Capital Markets Department at the IMF, Tobias Adrian, said rising borrowing and debt service costs remain big challenges.

    He said that borrowing at high rates makes it difficult for the country to pay back and also increase debt service costs, which he described as dangerous for economic growth.

    Adrian also warned Nigeria against taking loans from non-Paris Club creditors, especially China.

    He said: “The issue of borrowing from non-Paris Club creditors has been identified as potentially creating some instability or some vulnerability in the debtor countries. Not that the debt itself creates problems, but they have to be used for productive purposes. Usually debt given under non-Paris Club or multilateral types of agreements to low income countries, particularly a lot of sub-Saharan African countries have led to debt vulnerabilities.”

    Tobias, who spoke on the Global Financial Stability Report, said IMF’s evaluations showed that more than a dozen countries are either in distress or high risk of debt distress.

    He said: “Among emerging and frontier economies, external debt is increasing as they attract capital flows from advanced economies, where interest rates are lower.

    “External debt has risen to 160 per cent of exports on average, up from 100 per cent in 2018. A sharp tightening of financial institutions and higher borrowing costs would make it more difficult for them to survice their debts.”

    Asked to choose between domestic and foreign borrowing, Adrian noted that both domestic and external debts markets are important for economic growth and development and both markets should be well developed.

    He added that any borrowing has to be managed in a responsible manner as there are both costs and benefits.

    “So, borrowing can be helpful for economic growth and investment, but it can also be dangerous when negative shocks arise. We have done a lot of work in the IMF on debt sustainability and debt management and we have a host of recommendations of how to manage debt in a responsible manner,” he said.

    Also speaking, the Deputy Division Chief, Monetary and Capital Markets Department, IMF, Evan Papageorgiou, stressed the need for the Federal Government to ensure prudent debt management.

    “Nigeria has a large exposure to non-resident holders of domestic debt, particularly with central bank bills; and then as we understand in the central bank bills, there are lots of higher redemptions or those that have to deal with more rollovers in the coming quarters. So managing those risks, particularly with respect to local currency and the behaviour of non-resident investors is very important,” he added

    Continuing, Tobias said capital flows to sub-Saharan Africa has been strong and expected to reach record high this year.

    He added that global financial conditions remain favourable to countries, including Nigeria, at the moment and that issuing bonds in hard currency and the domestic currency is possible because of favourable global financial conditions.

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    Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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