IMF to Nigeria: Reduce Public Debt To Avoid “Doom Loop”
International Monetary Fund has expressed concerns about a potential “doom loop” for Nigeria and other emerging economies.
According to the IMF’s April 2022 Global Financial Stability Report, the average ratio of public debt to the gross domestic product, a key measure of a country’s fiscal health—rose to a record 67% in emerging market countries last year.
Nigeria’s bank credit to the government topped N14.9 trillion in February 2022, up from N14.2 trillion in January 2022.
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Bank credit to the government increased by N1.33 trillion in 2021, rising to N13.73 trillion as of December 2021 from N12.4 trillion recorded the previous year.
IMF stated that there is a reason to worry about this nexus between banks and governments. “Large holdings of sovereign debt expose banks to losses if government finances come under pressure and the market value of government debt declines,” it says.
It further noted that crisis with the credit to the government could force banks, especially those with less capital “to curtail lending to companies and households, weighing on economic activity.“
“The sovereign-bank nexus could lead to a self-reinforcing adverse feedback loop that ultimately could force the government into default. There is a name for that, too—the “doom loop.” It happened in Russia in 1998 and in Argentina in 2001-02.”
IMF also explained that rising returns in advanced countries as central banks start to normalize monetary policy might make emerging-market debt less attractive and put upward pressure on borrowing prices”.
The Debt Management Office (DMO) revealed that Nigeria’s total public debt has risen to N39.55 trillion as of December 2021.
This represents an N1.55 trillion or 4.1% increase in 3 months when compared to the N38 trillion total public debt that was recorded as of September 2021.
Meanwhile, Nairametrics had reported that the Debt Management Office revealed that Nigeria became the first African country to raise USD1.25 billion through the issuance of Eurobonds in the International Capital Market.
