Finance Minister, Zainab Ahmed, has disclosed that Nigeria is working on restructuring its debt as it is confronted with a rising debt-service burden, and is in discussions with the World Bank and IMF.
The minister made this disclosure in a media interview at the ongoing annual meetings of the World Bank and IMF, according to a report by Vanguard.
The government is also planning to extend the repayment period of its credit obligations and wants to refinance domestic debt obligations that are due this year and next.
Debt issues are rising in emerging markets. In an event that the sharp tightening of financial conditions around the world results in a global recession, if this is accompanied by an interaction with preexisting vulnerabilities, a significant percentage of emerging market banks could breach capital requirements.
What the Minister is saying
While speaking at the event, the Minister stressed that going by 2023 projections, Nigeria will need to use about 65 percent of its revenues to service debt.
She said: “It is a fact that Nigeria’s debt has increased over the last three to four years and this increase in debt was occasioned by the different kinds of exogenous shocks that the country faced which are not unique to Nigeria.
“Unfortunately, the cost of debt service is rising because of the rising interest rate globally which is resulting also in higher debt service costs. But our projection from the debt sustainability analysis is that Nigeria can cope with its debt service in 2022 as well as in 2023.
“We have been engaging financial institutions to look at the opportunity to restructure our debt to further stretch the debt service period to give us more fiscal relief. Those are some of the things we want to achieve in this meeting.”
She highlighted that rising interest rates in taming inflation and the strengthening dollar are hurting dollar-denominated loans as they raise debt servicing costs.
Mrs. Zainab said, “on the borrowing side, it means that we are having to use more of our naira to pay debts that are dollar-denominated and as the dollar strengthens and the interest rate goes up globally, it affects us so we end up having to use more of our revenues to pay the debt.”
“Our hope is that the tightening that the central banks across the world are undertaking will have the desired result because the cost is very stiff for us and it means we are having to use more of our local currency to service debt because of the exchange rate depreciation.”
What you should know
Given the economic realities of very high inflation and monetary tightening, interest rates and cost of borrowing are going up around the world at an unprecedented time (coming 2years after the pandemic and exacerbated by the war in Ukraine), causing the fiscal space to deal with these situations very little.
Given the negative turn in credit conditions, sovereign default rates are projected to pick up over the next couple of years. Already there are six sovereign defaults this year 2022 compared to the usual 1 to 2 defaults on average in a year, according to Elena Duggar, Chair of Moody’s Macroeconomic Board and Chief Credit Officer at Moody’s Investors Service.
Restructuring debt has become very critical at this time. Considering that in low-income countries (LICs) about 60 percent of LICs are already in debt distress or at a high risk of debt distress, and for emerging markets that number is about 25%, according to Gita Gopinath, the Deputy Managing Director of the IMF.
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