CBN warns against excessive borrowing practices in W’Africa
By Sodiq Adelakun
The Central Bank of Nigeria has issued a cautionary statement to Nigeria and other West African nations regarding their borrowing practices.
Traditionally, countries in the region have relied on loans from the Paris Club, a group of creditor nations. However, the CBN has noted a significant shift towards borrowing from non-Paris Club members and private lenders, such as banks and investors purchasing government bonds.
The West African Institute for Financial and Economic Management has raised concerns about Nigeria’s increasing risk of falling into debt distress and has urged the federal government to focus on enhancing revenue generation.
During the Joint World Bank/IMF/WAIFEM Regional Training on Medium Term Debt Management Strategy in Abuja, CBN Governor Yemi Cardoso, represented by Dr Mohammed Musa Tumala, Director of the Monetary Policy Department, highlighted the importance of this shift in borrowing patterns and its potential serious implications.
He argued that the way countries manage debt owed to the Paris Club may not be as effective for these new lenders.
Cardoso expressed concern that this new debt landscape could pose a threat to financial stability and economic recovery for many countries.
Cardoso said, “Public debt dynamics are increasingly influenced by significant debt servicing obligations to non-Paris Club members and private lenders, including commercial banks and bond investors.
“This shift in the debt structure represents a critical evolution in the global financial framework, with profound ramifications for public debt management in our countries.”
He also stated that recent events like the COVID-19 pandemic, geopolitical conflicts, and natural disasters have put a strain on many countries’ finances, making them more likely to seek loans from diverse sources.
However, these non-traditional lenders might come with stricter repayment terms and potentially higher risks compared to Paris Club loans.
“Following the COVID-19 pandemic, along with other developments such as geopolitical conflicts and natural disasters, the financial strain on our sub-region has escalated, posing a threat to their macroeconomic and financial stability and prospects for faster recovery,” he said.
Nigeria, despite being classified as having generally moderate debt risk, the CBN urged the federal government to remain cautious, particularly regarding potential liquidity risks. These risks, if not addressed effectively, could stem from weak revenue mobilisation, a persistent challenge hindering debt sustainability and economic stability.
The Central Bank of Nigeria (CBN) has stated that although Nigeria’s overall debt risk is considered moderate, the country must exercise caution regarding its ability to repay its loans, specifically in terms of liquidity risk.
This risk could pose a problem if the government fails to generate sufficient revenue in the future. According to Dr. Baba Yusuf Musa, the Director General of the West African Institute for Financial and Economic Management, Nigeria still has the capacity to borrow when compared to other countries, given its debt-to-GDP ratio of 37 percent.
However, the issue lies in the fact that Nigeria cannot use its GDP to repay debts; rather, it must rely on revenue generated to fulfill its debt obligations.
He added, “If you look at it from the revenue side Nigeria is 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 the ratio of debt to revenue we have.”
WAIFEM, he said, is “very much in support of what the federal government is doing because there is a window for the government to raise more revenue, all that the people need to do is to support the federal government diversify the sources of revenue and of course generate more sources of revenue, once we have this we don’t have debt problem but rather revenue problem.”
He added, “What the Medium Term Debt Strategy does is that it smoothens the debt service so that going forward when borrowing, you take into consideration the redemption profile that you have and the type of loans that you have in your existing portfolio and then it will enable you also to minimise the cost and risk the future loans will add to the debt portfolio.”
