The International Monetary Fund
(IMF) has warned Nigeria and other emerging market countries taking excessive
loans from China to consider the terms of such facilities, especially, their
compliance with the Paris Club arrangements.
Speaking on Wednesday at the
ongoing IMF/World Bank Spring Meetings in United States of America, Director,
IMF Monetary and Capital Markets Department, Tobias Andrian, said that there
was nothing bad in borrowing from China, except that the terms of such loans
are always questionable.
He said: “Loans from China are
good, but the countries should consider the terms of the loans. And we urge
countries that when they borrow from abroad, the terms are favorable for the
borrower, and should be conforming to the Paris Club arrangements”.
Continuing, Andrian, who spoke on
the Global Financial Stability Report (GFSR) said: “Let me reiterate that in
many frontier markets, we see that the share of debt that is not conforming to
the Paris Club standards is on the rise. And that means that if there is any
debt restructuring down the road one day, that can be very unfavorable to those
countries. So, the borrowing terms, the covenants, are extremely important. And
we do see a deterioration in that aspect.”
Data from Debt Management Office
(DMO) showed that Nigeria’s total public debt rose to N24.39 trillion or $79.44
billion as at December 31, 2018 representing a year-on-year growth of 12.25 per
cent. The 2018 debt stock is higher than the one recorded in 2017 by N2.662
billion.
DMO said that as at June 2018,
loans obtained by the Federal Government from China represented about 8.5 per
cent of Nigeria’s external debt and that there taken under concessionary terms.
But Nigeria was last year seeking $6 billion from China to fund the
construction of the Ibadan-Kano rail line project.
Andrian said Nigeria has been
borrowing from international markets, which gives the IMF some worries, saying
however that such loans are good as it allows the country to invest more, but
expressed concerns over rollover or repayment risks going forward.
“At the moment, funding
conditions in economies such as Nigeria and other Sub-Saharan African countries
are very favourable but that might change at some point. And there is risk of
rollovers and whether these need for refinancing can be met in the future,” the
IMF director said, advising that Nigeria should seek higher capital for its
banks through recapitalization and also tackle rising non-performing loans in
the sector.
Adrian said that where there are
financial stability concerns, authorities are expected to use prudential tools
such as higher capital in the banking system and more conservative underwriting
standards to reduce financial stability risks.
He said: “We advise countries
that where those downside risks are increasing, to take more steps to ensure
that vulnerabilities are not rising too much. Addressing non-performing loans
is a first order importance for financial stability. Many countries have
tackled that by developing secondary market for non-performing loans. And by
being aggressive in writing off non-performing loans and through provisioning
and use of improved accounting standards through international Financial
Reporting Standards 9 (IFRS 9)”.
He said many countries do not
have all the tools that are necessary to make sure that the system is
financially stable, hence the financial stability concerns can feed into
monetary policy decisions. He therefore urged monetary policy makers to also
look at risks to financial stability both in the short term and in the medium
term.
As a way out of the crisis, the
IMF director advised policymakers to develop and deploy macro-prudential tools
which can mitigate vulnerabilities and make the financial system more
resilient.
“Emerging markets facing volatile
capital flows should limit their reliance on short-term overseas debt and
ensure they have adequate foreign currency reserves and bank buffers. Besides,
monetary policy should be data dependent and well communicated,” he said.
Also speaking, the Division Chief
Monetary and Capital Markets at the IMF, Anna Ilyina, said the institutional
mechanisms for resolution and recognition of non-performing loans, are of
course, extremely important part of the process of cleaning up the banking
system of bad loans and the authorities should continue working along those
lines.
She said: “Credit quality has
declined, underwriting standards weaker and debt levels are much higher. The
concern is that there are very few macro-prudential tools for the corporate
sector. In some countries, supervisors can limit the deterioration of
underwriting standards to the extent that is provided by the banks but, one of
the big trends post-crisis is that market-based finance has become more
important for the corporates”.
She advised that in maturing
credit cycle, farsighted policy actions to reduce vulnerabilities can help
avoid more painful adjustments in the future.
On capital flow to Nigeria and
other emerging markets, the IMF director said that overseas investment run by
managers tracking popular indices have increased dramatically over the past
decade.
She said: “Widening the range of
investors can be positive factor for emerging markets, yet that trend leaves
economies vulnerable to a sudden reversal of capital flows in response to
global trends. The vulnerabilities intensifying in a maturing credit cycle,
this is the time for decisive policy action. The intensification of trade
tensions and the threat of disorderly practices have dented investor
confidence. Policy makers should ensure that post crisis regulatory reform is
fully implemented and resist calls for rolling back reforms,” she said.
She also said that policymakers
should act decisively to renew their commitment to open trade, discourage the
buildup of debt and communicate clearly, any shifts in monetary policy.
Speaking on tax reforms at the
Fiscal Monitor Session of the event, IMF Assistant Director, Fiscal Affairs
Department, Cathy Pattillo, said tax reform in Nigeria is very important issue.
She said IMF’s main
recommendation for Nigeria is the need for a comprehensive tax reform that
would sustainably increase non-oil revenue.
“And the reason why that is needed is that Nigeria has one of the lowest
ratios of non-oil revenue to Gross Domestic Product (GDP) at around 3.4 per
cent in the world. And the total tax revenue to GDP at around eight per cent is
also very low compared to peers.
She said that the interest to tax
ratio is low, adding that the funds realized should be spent on important
developmental projects like infrastructure and human capital.
She also advised Nigeria increase
excise taxes, and begin aggressive streamlining of tax incentives and
exemptions.
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