The latest report that Nigeria is getting closer to a possible financial ‘blockade’ at the international financial market, is damning. The looming financial blockade will not augur well for the economy that is already bleeding from all sides. The financial blockade, which comes with dire consequences, is due to the alleged strained relationship with international development and funding partners, especially the World Bank Group and the International Monetary Fund (IMF).
One of the immediate consequences of the blockade is the inability of raising funds from international markets. Already, the yields of Nigeria’s Eurobond have reportedly increased very high recently, from an average of 6.5 per cent at the beginning of the year to about 12.5 per cent, representing almost 100 per cent rise in six months. Eurobond is a debt instrument that is denominated in a currency other than the home currency of the country or market in which it is issued. With the continued depreciation of the Naira, and rising debt profile of Nigeria put at over N40 trillion, the country is at a high financial risk.
In recent months, several external factors, such as the global hike in interest rates and high inflation rate, have had significant impacts on the cost of borrowing from the international market. Not quite long ago, the Central Bank of Nigeria (CBN) increased interest rate to 13.5 per cent, a rate considered too high, while the latest inflation rate, according to the National Bureau of Statistics (NBS), is 17.71 per cent. For Nigeria, this is not good for sustainable economic growth. Rising risks and deteriorating sovereign rating are responsible for the sudden increase in Nigeria’s underpriced bonds.
We believe that the current financial risks that the country faces would have been prevented if government’s policymakers had been foresighted in the relationship with international lenders. Ideally, measuring the risks taken to produce acceptable returns during challenging period is important for any economy to make steady progress. Implementing fiscal and monetary policies affects the country’s valuation in international markets, and the ability of the government to borrow funds from funding partners. Recently, JP Morgan, an American leading Investment Bank, delisted Nigeria from the class of emerging sovereign market that investors should be careful with. Nigeria’s delisting arose from its ‘fiscal woes amid a worsening global risks backdrop that have raised market concerns despite a positive oil environment.’
Though the Federal Government disagreed with JP Morgan, experts interpreted the Investment Bank’s action as a worrisome ‘red light,’ with negative implications for Nigeria’s investment outlook and credit worthiness. Credit worthiness is anchored on the borrower’s character and soundness as well as commitment to debt repayment. Other credit rating agencies, including Fitch Ratings, Moody’s and Standard & Poor’s, have equally raised concerns about Nigeria’s competitiveness in the global market, while calling for economic reforms. To avert the looming financial blockade, there is need to comprehensively review
our Sovereign Debt laws. Credit risk has many implications for the borrower’s record of financial responsibility, and also determines willingness of funding partners to give loans. Also, the degree of commitment of the borrower regarding repayment is of great consideration. The government must stop the borrowing binge. Let there be a moratorium on further borrowings. And if the government must borrow, let it be for production purposes and not for consumption. The government cannot borrow for the purpose of paying salaries of workers purposes. The World Bank estimates that low-and-middle- income economies like Nigeria owe a record $9.3trillion to foreign creditors and those of 40 poor countries, and about half a dozen middle income ones, are either in debt distress or at a high risk. However, we advise government to be circumspect in accepting global lenders’ recommendations. We say so because some of their recommendations may not work well for us. Some may have adverse effect on the welfare of Nigerians and the economy as well. Nonetheless, we agree that some of the risks the economy is facing today are mainly as a result of poor leadership, lack of accountability and transparency in the management of resources, corruption in high places as well as high cost of governance.
Henceforth, the government should muster the political will to drastically reduce the cost of governance, stop excessive borrowing and tackle corruption. It must map out holistic plans to aggressively promote the non-oil exports. Since Nigeria cannot afford another recession, a third in six years, everything must be done to avert it. The consequences of such economic contraction will be unbearable. There should be clearly defined fiscal and monetary policy measures, with timelines to measure performance of growth. Above all, let the government relate well with international development fund lenders.