Nigeria, others at risk of financial weakness, more inflation – IMF

The International Monetary Fund has cautioned Nigeria and other low-income nations that increased public and private borrowing will likely increase financial vulnerability and lead to increased inflation.

The IMF disclosed this in a new report titled, ‘Restructuring debt of poorer nations requires more efficient coordination.’

According to the Washington-based lender, the war in Ukraine is adding risks to unprecedented levels of public borrowing and the pandemic is still straining many government budgets.

It said, “High public and private borrowing contribute to financial vulnerabilities, which are already concerning. The number of advanced economies with debt ratios larger than the size of their economy has increased significantly.

“There is a risk that ever-higher levels of debt lead to a widening of interest rate spreads for countries with weaker fundamentals, making it costlier for them to borrow. Moreover, although inflation surprises may lower debt-to-GDP ratios in the short-run, persistent inflation—and inflation volatility—ultimately can raise the cost of borrowing.

“This process can happen quickly in countries with short debt maturities.”

The lender said increases in energy and food prices were adding to pressures on the poorest and most vulnerable since food accounts for up to 60 per cent of household consumption in low-income countries.

It added that low-income countries that rely on imported fuel and food might require more grants and concessional financing to make ends meet while supporting households in need.

The IMF said debt restructurings were likely to become more frequent and would need to address more complex coordination challenges than in the past owing to increased diversity in the creditor landscape.

It said, “For low-income countries, the Debt Service Suspension Initiative expired at the end of 2021. And the Group of Twenty’s Common Framework for Debt Treatments beyond the DSSI has yet to deliver.

“Improvements are needed. Options should also be explored to help the broader range of emerging and developing economies that are not eligible for the Common Framework but who would likely benefit from a globally cooperative approach in the period ahead. Muddling through will amplify costs and risks to debtors, creditors and, more broadly, global stability and prosperity. In the end, the impact will be most sharply felt by those households that can least afford it.”