IMF, World Bank Raise Concerns Over Nigeria, Other Emerging Economies
Olusola Bello
International Monetary Fund (IMF) and the World Bank, both institutions which are based in Washington have raised concerns about Nigeria and other emerging economies.
World Bank President, David Malpass while speaking at a roundtable opening section to mark the beginning of this month’s Spring Meetings, suggested steps to improve the implementation of the common framework on debt and inflation reduction.
The IMF on the other hand has in its report titled “Emerging-Market Banks’ Government Debt Holdings Pose Financial Stability Risks”. raised concerns about a potential “doom loop” for Nigeria and other emerging economies.
It stated that Nigeria’s bank credit to the government surged to N14.9 trillion as of February 2022, an uptick from the N14.2 recorded in January 2022, saying further that as a result of the Covid 19 pandemic, emerging-market banks now hold unprecedented levels of government debt, raising the risk that public-sector financial pressures would jeopardize financial stability.
David Malpass highlighted steps for low-income countries experiencing high debt and deficit levels to avoid debt distress and turn their deficits to surplus.
High debt and inflation are two big problems facing global growth. Due to high debt and deficit levels, countries such as Nigeria and other developing economies are under severe financial stress. Sixty percent of low-income countries are already in debt distress or at high risk of it.
Speaking at a roundtable opening section to mark the beginning of this month’s Spring Meetings, Malpass suggested steps to improve the implementation of the common framework on debt and inflation reduction.
The World Bank chief asked Nigeria and others to establish a timeline for forming creditors’ committees, suspend debt service payments and penalty interest and focus on expanding eligibility. He also called for a simple rule so that it can be evaluated and enforced, and engaging commercial creditors at the beginning of the process.
The debt crisis is expected to continue to worsen in 2022.
On the contagious issue of rising inflation problem, which is causing immense strain, he said policies need to be adjusted to enhance supply, not just increasing demand.
“Markets are forward-looking so it’s vital for governments and private sectors to state that supply will increase and that their policies will foster currency stability to bring down inflation and increase growth rates. This is especially important as global supply chains shift away from dependency,” he stated.
Malpss said central banks need to use more tools under current policies, adding the inequality gap has widened materially, with wealth and income concentrating in narrow segments of the global population.
His said interest rate hikes, if that’s the primary tool, will add to the inequality challenge that the world is facing.
He urged central banks to use more of their tools, not just interest rates.
“Capital is being misallocated now. One of the focal points should be using all the central bank tools so that capital is allocated in a way that helps increase supply. That will be an effective way to address inflation,” he said.
Some of the tools advocated by Malpass include: changing the duration of their portfolio – it would be very helpful to shorten it; encouraging supply through their regulatory policies; providing forward guidance that fosters currency stability and other tools as well to powerfully addressing the inflation problem.
According to his, global trade is still facing quotas, high import tariffs, high export tariffs, expensive food price subsidies, and even export bans on food products.
“These should stop,” he said, adding that the international community needs to immediately step up emergency assistance for food insecurity and help bolster social safety nets.
He announced that the World Bank was providing roughly $17 billion per year to strengthen food security – a big part of the global effort.
On COVID-19, he said the World Bank Group expanded its financing rapidly, reaching $157 billion in the 15 months ending June 2021, with vaccines a big part of this effort.
“We now expect to have committed $11 billion to purchase and deploy vaccines in our current fiscal year ending June 30, benefiting 81 countries. This has been a massive effort by our country teams around the world and has brought hundreds of millions of shots to arms,” he stated.
In the report, the organization raised concerns about a potential “doom loop” for Nigeria and other emerging economies.
IMF in its report however stated that there is a reason to worry about this nexus between banks and governments. “Large holdings of sovereign debt expose banks to losses if government finances come under pressure and the market value of government debt declines,” it stated.
The Bank stated that a crisis with the credit to the government could force banks, especially those with less capital “to curtail lending to companies and households, weighing on economic activity.“
The Bank added that “The sovereign-bank nexus could lead to a self-reinforcing adverse feedback loop that ultimately could force the government into default. There is a name for that, too—the “doom loop.” It happened in Russia in 1998 and in Argentina in 2001-02.”
The IMF also noted that rising returns in advanced countries as central banks start to normalize monetary policy might make emerging-market debt less attractive and put upward pressure on borrowing prices.
This situation it added could cause what is known as ‘doom loop’
- A doom loop is a negative spiral that can occur when banks hold sovereign bonds and governments with weak public finances bail out such banks.
- Governments are exposed to bank risk, as well as banks are exposed to sovereign risk by holding government bonds in their portfolios. Other names for the doom loop include the “diabolic loop” and “vicious circle”.
- The IMF stated that “A sharp tightening of global financial conditions—resulting in higher interest rates and weaker currencies on the back of monetary policy normalization in advanced economies and intensifying geopolitical tensions caused by the war in Ukraine—could undermine investor confidence in the ability of emerging-market governments to repay debts.“
- Domestic shocks, such as an unanticipated economic slowdown, might also have the same effect, according to the World Bank.
- Bank credit to the government increased by N1.33 trillion in 2021, rising to N13.73 trillion as of December 2021 from N12.4 trillion recorded the previous year.
- Nairametrics reported that the Debt Management Office revealed that Nigeria became the first African country to raise USD1.25 billion through the issuance of Eurobonds in the International Capital Markert.
- The Debt Management Office (DMO) has revealed that Nigeria’s total public debt has risen to N39.55 trillion as of December 2021.
- This represents an N1.55 trillion or 4.1% increase in 3 months when compared to the N38 trillion total public debt that was recorded as of September 2021.
- Emerging-market governments rely significantly on their banks for lending, while banks rely heavily on government bonds as an investment that they can use as collateral to secure central bank funding.
- According to the IMF’s April 2022 Global Financial Stability Report, the average ratio of public debt to the gross domestic product—a key measure of a country’s fiscal health—rose to a record 67% in emerging market countries last year.
§ Emerging-market banks have given the majority of the lending, pushing government debt holdings as a proportion of assets to a new high of 17% in 2021
