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IMF cautions on Nigeria’s debt servicing ratio


The International Monetary Fund, IMF, has again expressed concerns about Nigeria’s debt servicing capacity, as the size of the total debt keeps rising against its revenue.

Speaking at a press conference, yesterday, on the side-lines of the on-going World Bank Group Spring Meetings in Washington DC, Mrs Catherine Pattillo, Assistant Director, Fiscal Affairs Department, IMF, described the country’s debt to revenue ratio, which she put at 63 per cent, as “extremely high.”

She, therefore, recommended that in line with the IMF staff report on Nigeria, the Fund would want to see increases in tax rates and collection capacity to help reduce government’s budget deficit while financing key development projects.

She stated: “The ratio of federal government interest payment on debt to revenue is extremely high, 63 per cent. So there is a need to build revenue so that you have more space to spend for infrastructure, social safety nets etc otherwise interest is eating up most of your revenue.

“So building revenue is key and how do you do that? The recommendation in the IMF staff report 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.”

Apparently, the government may have begun to review its positions on addressing the debt issue, as the Director General of the Debt Management Office, DMO, Mrs Patience Oniha, speaking at last week’s Vanguard Economic Discourse, said the government is already shifting focus to ‘Debt Servicing-to-Revenue ratio’ from ‘Debt-to-GDP ratio’.

The former addresses the issues of capacity of the economic output (GDP) to accommodate the size of debt while the later addresses the capacity of the national revenue to service the debt obligations on sustainable basis.

But the build-up of debt by the federal government has continued into 2018 with total debt now at N21.7 trillion, though the government said it was shifting from domestic debt accumulation to foreign borrowing to enable it manage the total servicing cost.

Pattillo, aligned with the new position of the government saying that Nigeria still has headroom for foreign borrowings.

Mrs Catherine Pattillo
Mrs Catherine Pattillo

She stated: “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.”

She, however, noted that, “The emphasis is that countries have these risks of very high interest payments to revenue because of large borrowing and exhibiting change in borrowing. There’s more non-concessionary borrowing, there’s more domestic borrowing so if you have problems repaying your debts then yes, its a risk for future borrowing. People don’t want to lend if they think that there’s some risk that repayment won’t happen.”

In her general appraisal of the debt profile she stated: “Borrowing by countries can create benefits if used for investments of high returns. Our evidence suggests that’s not the case in some countries. So rising debt then create the vulnerabilities. There will be interest rate risks, market risks and large interest burdens that will squeeze out spending priorities. With high debt, countries need to deliver on their fiscal plans for adjustments and use borrowed funds for high return investments.”