The International Monetary Fund (IMF) has cautioned Nigeria and other low-income countries that excessive public and private borrowing will exacerbate financial vulnerability and lead to higher inflation.
In a new paper titled ‘Restructuring Debt of Poorer Nations Requires More Efficient Coordination,’ the IMF revealed this.
The war in Ukraine, according to the Washington-based lender, is putting unprecedented levels of public borrowing at risk, and the epidemic is still putting a pressure on 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.”
Increases in energy and food prices, according to the lender, are increasing pressures on the poorest and most vulnerable, because food accounts for up to 60% of household consumption in low-income nations.
It went on to say that low-income countries that rely on imported gasoline and food may need more subsidies and concessional funding to make ends meet while assisting low-income people.
Because of the increased diversity in the creditor environment, the IMF predicted that debt restructurings would become more common and would need more complicated coordination challenges than in the past.
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.”
