The International Monetary Fund (IMF) has revised upwards, its 2020 Gross Domestic Product (GDP) contraption forecast for Nigeria to 5.4%, higher than the 3.4% negative growth it had estimated for the country in April. This is as one of the leading global rating agencies, Fitch Ratings yesterday warned that government debt burdens, most notably an increase in Nigeria’s sovereign debt and a ballooning financing deficit could trigger a rating downgrade.
“Our projection for sub Saharan Africa overall is -3.2 per cent in 2020 with recovery in 2021 at 3.4 per cent. So, this is a significant downward revision and we have some very large negative growth forecast for instance; South Africa is -8 per cent and for Nigeria, it is -5.4 per cent growth,” according to IMF’s Chief Economist and Director of the Research, Gita Gopinath; who gave the projection during an online press conference on the latest World Economic Outlook (WEO) released yesterday in Washington DC.
According to the IMF, fiscal responses since the outbreak of Covid-19 have resulted in an increase in government debts across all emerging economies. “Government debt is now projected to average 63 per cent of GDP in 2020, continuing its upward trend with a 10 percentage point surge from a year ago. As many low-income developing countries face tight financing constraints and a less severe impact of the pandemic thus far, the fiscal response to the pandemic has been modest, at 1.2 per cent of GDP on average, and mostly through budgetary measures. For example, Nigeria provided tax relief for employers to retain workers and raised health care spending 0.3 per cent of GDP.”
The dire economic prediction also reflects the impact of lower global oil prices while inflation in the country is expected to tick up. In addition, the IMF predicted that deteriorating terms of trade and capital outflows will further weaken Nigeria’s external position. To which end, the IMF said growth projection in some other emerging and developing economies were also revised downward.
“For the first time, all regions are projected to experience negative growth in 2020. There are, however, substantial differences across individual economies, reflecting the evolution of the pandemic and the effectiveness of containment strategies; variation in economic structure (for example, dependence on severely affected sectors, such as tourism and oil); reliance on external financial flows, including remittances; and pre-crisis growth trends,” the Washington-based institution stated.
The IMF said external vulnerabilities in Nigeria were increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals. High fiscal deficits are complicating monetary policy; weak non-oil revenue mobilization led to further deterioration of the fiscal deficit, which was mostly financed by CBN overdrafts. While the interest payments to revenue ratio remains high at about 60%, the debt-to-revenue ratio for Nigeria is set to worsen to 538% by the end of 2020, from 348% a year earlier. Under current policies, the outlook is challenging.
This economic doomsday scenario was echoed by Mahmoud Harb, Sovereign Ratings Director at Fitch, who warned that a sharp rise in Nigeria’s sovereign debt and a ballooning financing deficit could trigger a rating downgrade. The global ratings agency had downgraded Nigeria to “B” in April with a negative outlook from “B+” citing aggravation of pressure on external finances. Nigeria is under increasing pressure to stimulate growth and cut debt after its first quarter current account turned negative, overvaluing its naira currency. The oil price slump has slashed government revenues.
“We have two elements that could lead us to take a negative rating action/downgrade on Nigeria. Aggravation of external liquidity pressures and a sharp rise in government debt to revenues ratio,” Harb, told Reuters. Fitch estimated that Nigeria will need $23 billion to meet its external financing needs this year, noting that the country has few options, including running down its reserves, after shelving plans to issue Eurobonds. Nigeria’s foreign currency reserves could fall to $23.3 billion this year, from around $36 billion if foreign exchange policy is not streamlined by the CBN, Harb said.
Ostensibly in response to the dire economic predictions, the Federal Executive Council (FEC) yesterday, approved a N2.3 trillion sustainability package, recommended by the Economic Sustainability Committee chaired by Vice-President Yemi Osinbajo, to revamp the economy. The FEC also approved N122.280billion billion to build seven roads in different parts of the country and another N14.90 billion for the award of contracts for 11 ecological projects in the six geopolitical zones. President Muhammadu Buhari had set up the Osinbajo committee on March 30 to come up with economic sustainability plan as a response to challenges posed to the economy by the COVID-19 pandemic.