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Nigeria, Other Nations At High Risk Of Debt Distress, IMF Warns In New Report

Nigeria and 72 other countries are at high risk of debt distress, the International Monetary Fund has said in a new report.

The report titled ‘Restructuring Debt of Poorer Nations Requires More Efficient Coordination’ was published on Thursday.

“Low-income countries face fewer debt challenges today than they did 25 years ago, thanks in particular to the Heavily Indebted Poor Countries initiative, which slashed unmanageable debt burdens across sub-Saharan Africa and other regions,” said the global financial institution.

“Although debt ratios are lower than in the mid-1990s, debt has been creeping up for the past decade and the changing composition of creditors will make restructurings more complex.

“Improvements to the Group of Twenty Common Framework for Debt Treatments—from which the 73 countries that were eligible for the G20 Debt Service Suspension Initiative (DSSI) in 2020-21 can now benefit—could clear a path through this increasing creditor complexity.

“So far, only a handful of countries have requested to use the common framework, which was launched in November 2020, underscoring the need for change to build confidence and encourage participation at a pivotal moment for heavily indebted low-income countries.”

IMF stated that the debt ratios of DSSI countries have increased, partly reversing a decline seen in the early 2000s. it added that this was spurred by low-interest rates, high investment needs, limited progress in raising additional domestic revenue, and stretched systems for managing public finances.

It said the economic shocks from the COVID-19 pandemic and the war in Ukraine were adding to the debt challenges faced by low-income countries, even as central banks begin to raise interest rates.

“About 60 per cent of DSSI countries are at high risk of debt distress or already in debt distress—when a country has started or is about to start a debt restructuring, or when a country is accumulating arrears,” the report added.

“Among the 41 DSSI countries at high risk of or in debt distress, Chad, Ethiopia, Somalia (under the HIPC framework), and Zambia have already requested a debt treatment. Around 20 others exhibit significant breaches of applicable high-risk thresholds, half of which also have low reserves, rising gross financing needs, or a combination of the two in 2022.

“On the domestic side, difficult trade-offs will exist between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of such restructurings on financial sector stability and the capacity of domestic banks to finance growth.”

According to the financial institution, local currency debt for the median DSSI country doubled from seven per cent of Gross Domestic Product (GDP) in 2010 to 15 per cent in 2021.

It stated that for those DSSI countries with market access, the share more than tripled from eight percent to 28 per cent in 2021.

“Many of these DSSI countries have also experienced a tightening of sovereign-bank links, with larger holdings of domestic sovereign debt at domestic banks.”

On the way forward, IMF recommended putting in place mechanisms that ensure coordination and confidence among creditors and debtors.

It added that improvements to the G20 Common Framework could play an important role by ensuring broad participation of creditors with fairer burden-sharing.

“Experience so far shows that greater clarity on restructuring steps, earlier engagement of official creditors with the debtor and with private creditors, a standstill in debt service payments during negotiations, and specifying the mechanics of comparability of treatment, is still needed.

“Strengthening debt management and debt transparency should also be priorities. This would help countries manage debt risks, reduce the need for debt restructurings, and facilitate a more efficient and durable resolution if debt becomes unsustainable.

“It is in the interest of debtor countries as well as their creditors that debt restructurings, where necessary, are accomplished speedily, smoothly, and efficiently. This would support global stability and prosperity, too,” the financial institution proposed.




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