Cardoso Decries Rising Global Public Debt, Says Nigeria’s Sovereign Obligations Stable

Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, has on Monday, decried rising global public debt saying borrowing remained a significant concern globally, particularly in developing nations, where high debt levels were worsened by greatly restricted fiscal space and limited opportunities for concessional finance. He said Nigeria was at “moderate” overall risk of sovereign stress.

Stating that the country’s sovereign profile remained stable despite near-term risks attributed to unfavourable global market conditions and increased debt burden since the COVID-19 pandemic.

Equally, on Monday, CBN adjusted the foreign exchange (FX) rate on Customs import duties to N1, 544.081 to a dollar, from N1, 630.159 to a dollar, representing a 5.3 per cent reduction.

However, Director-General of West African Institute for Financial and Economic Management (WAIFEM), Dr. Baba Musa, warned that Nigeria was at a high risk of debt distress given its current revenue challenges related to borrowing.

Cardoso and Musa spoke at the opening of the World Bank/IMF/WAIFEM regional training on Medium-term Debt Strategy (MTDS), which was jointly organised by the parties.

Speaking at the occasion, the CBN governor said the external debt-to-GDP ratio had been manageable at nine per cent, indicating cautious external borrowing.

Represented by CBN Director, Monetary Policy Department, Dr. Mohammed Musa Tumala, the apex bank boss pointed out that slow economic growth, elevated borrowing costs, constrained liquidity, and eroded reserves had frequently aggravated the precarious economic situation.

He explained that the developments also hindered government and private sector efforts to tackle economic downturns or fund initiatives that stimulate growth, which were essential for stabilising the debt-to-GDP ratio and achieving long-term debt sustainability.

Cardoso said public debt dynamics were increasingly influenced by significant debt servicing obligations to non-Paris Club members and private lenders, including commercial banks and bond investors. 

He added that this shift in the debt structure represented a critical evolution in the global financial framework, with profound ramifications for public debt management in respective countries.

The central bank governor said following the COVID-19 pandemic, along with other developments, such as geopolitical conflicts and natural disasters, the financial strain on the sub-region had escalated, posing a threat to macroeconomic and financial stability and prospects for faster recovery.

Furthermore, he stated that to diversify their financing sources, some countries broadened their presence in international capital markets by issuing sovereign bonds and interacting with diverse private lenders.

Cardoso said there was also a noticeable move towards borrowing within domestic markets by issuing bonds in local currencies.

“However, these approaches have increased vulnerabilities, evidenced by payment delays, defaults, and the necessity for debt restructuring,” he said.

Quoting the latest World Bank/IMF data, Cardoso said of the 69 Poverty Reduction and Growth Trust (PRGT) eligible countries, 13 remained in debt distress, with an additional 26 at high risk of debt distress. He added that these developments underlined a critical juncture in public debt management and the urgent need for comprehensive strategies to stop further progression into debt crises.

But Cardoso believed the MTDS was a significant aspect of the broader medium-term economic management and fiscal policy framework for Nigeria.

He said the primary goals of the strategy were to ensure that borrowing activities were conducted within sustainable levels, optimise the debt portfolio for cost and risk, and improve debt management capabilities.

According to him, the strategy aims to diversify funding sources through domestic and international borrowings, including issuing sovereign bonds and focuses on extending debt maturities from 10 to 30 years in domestic and international markets to lower refinancing risks and pressure on domestic markets.

He said the strategy remained the most cost-effective among the three options, primarily due to its reduced reliance on external borrowing, which lowered exposure to currency risk.

Cardoso stated that while significant progress had been made in implementing the MTDS, current exchange rate volatility, inadequate revenue generation, and external shocks, including oil price volatility, would necessitate continuous refining of the strategy to address these challenges and leverage opportunities.

He said at 37 per cent to GDP, Nigeria’s debt level showed a relatively favourable position in terms of sustainability.

Cardoso added, “However, despite the generally moderate risk assessments, Nigeria must remain vigilant, especially regarding potential liquidity risks.

“If not adequately addressed, these risks could arise from weak revenue mobilisation, a persistent challenge undermining debt sustainability and economic stability.”

He stated that in recent times, the West African sub-region had been struggling with significant economic and financial challenges, including high fiscal deficits and rising public debt levels, low growth rates, persistent external imbalances, and weak domestic resource mobilisation capacity.

Cardoso stressed that improving debt management strategies and practices to ensure debt sustainability and long-term economic growth had become urgent.

He insisted that an effective debt management strategy will ensure that a country’s borrowing was sustainable and supported its development objectives.

“The plan must balance the need for financing against the costs and risks associated with borrowing options, including the risk of default and the potential for debt distress,” he said.

On his part, Baba said Nigeria, with a debt to GDP ratio currently at 37 per cent compared to its peer countries, still had room to borrow.

“But the issue with the Nigerian debt is, you don’t use GDP to pay rather you use the revenue to pay for any debt,” he stated.

According to Baba, “Therefore if you look at it from the revenue side, we are at a high risk of debt distress in terms of our borrowing. So, what we need to do now is to step up our capacity to generate revenue, the more revenue we have, the less ratio of debt to revenue we have.

“If you look at the revenue to GDP ratio of Nigeria, I think it’s among the lowest in developing countries and then we still have room to generate more revenue; if we generate more revenue, we still have more room to borrow.”

The WAIFEM director-general said amid concerns over the country’s rate of debt accumulation, the meeting would examine existing portfolios, including pipeline loans, and be able to design its borrowing plan going forward, taking into consideration the cost and risks associated with existing debts.

He said the institute was in support of the federal government’s efforts to raise additional revenue.

Baba insisted that the country did not have a debt problem but rather a revenue challenge, adding, “All we need to do is to support the federal government to diversify the sources of our revenue and, of course, generate more sources of revenue.”

He said the MTDS sought to assist countries to design borrowing plans, taking into consideration the cost and risks associated with the existing and future debts they were likely to borrow.

Baba stated, “So, what it does is that in the medium term, countries can prepare a borrowing strategy that minimises the cost and risk that they are likely going to face in the next three to five years.

“The essence of this training is to train those participants in the formulation of the debt management strategy and, then, the design of an annual borrowing plan.”

CBN Reviews FX Rate on Import Duties to N1, 544.081/$

CBN on Monday, adjusted the FX rate on Customs import duties to N1, 544.081 to a dollar, from N1, 630.159 to a dollar, representing a 5.3 per cent reduction.

Effectively, importers opening Form M for trade on Monday, would benefit from a lower import regime.

The review came barely 10 days after the central bank advised the Nigeria Customs Service (NCS) and other related parties to adopt the closing FX rate on the date of opening Form M for the importation of goods, as the rate to be used for import duty assessment going forward.

However, the central bank added that effective February 26, the new rate would remain valid until the date of termination of the importation and clearance of goods by importers.

The bank disclosed this in a circular dated February 23, 2024, titled, “Foreign Exchange Rates for Import Duty Assessment”, which was signed by CBN Director, Trade and Exchange Department, Dr. Hassan Mahmoud, and addressed to all authorised dealers, NCS, and the public.

Checks on the customs’ Single Window for Trade portal showed that the exchange rate had been adjusted to reflect the new rate regime.

CBN stated that following the liberalisation of the FX market on the Willing Buyer-Willing Seller trading principle, there had been concerns by importers of goods and services over the irregular changes in the import duty assessment levies applied by the customs.

The developments, the bank stated, had further built uncertainties around the pricing structure of goods and services in the economy, creating abnormal increases in the final sale prices of items, which were largely driven by uncertainties, rather than traditional market fundamentals, with implications to near-term inflation trend.

The apex bank clarified that the new directive would enable the customs and importers to effectively plan appropriately and reduce the uncertainties around varying daily exchange rates in determining their revenue or cost structure, respectively.

It stated that it was particularly mindful of the initial volatility and price distortions in the aftermath of the FX market liberalisation.

CBN and expressed confidence that the reforms in the FX segment would in the medium term ensure stability in the market and entrench market confidence necessary to attract investment capital for economic growth and development.

The central bank has the sole responsibility of formulating the exchange rate policy in the country.

 James Emejo

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