The International Monetary Fund (IMF) last week published critical and unusually prescriptive assessments of the administration’s macroeconomic policies as part of the annual article IV consultation. Meanwhile, the cabinet raised the medium-term debt ceiling from 25% to 40% of GDP. In the immediate term, more than 80% of the projected 2021 budget deficit of NGN 5.2tn (USD 12.7bn) is supposed to be financed via domestic and external borrowing, with preference regarding the latter for “concessional funding from multilateral and bilateral sources.” Furthermore, a supplementary budget will be needed to procure Covid-19 vaccines, although details are yet to be determined. Nevertheless, given the antagonistic stance vis-à-vis the IMF and a similar feud with the World Bank, Abuja will likely need to tap more domestic sources or return to international capital markets before too long.
Even though the juxtaposed positions between the Fund and Abuja on key macroeconomic policies are longstanding and well-known, the most recent IMF review has a particular ring to it. Whilst commending the government for responding swiftly to the Covid-19 challenge – notably, Abuja was quick to source USD 3.4bn from the Fund’s Covid-19 emergency funds – the key conclusion is much less flattering: “Policy adjustment and reforms are urgently needed to navigate this crisis and change the long-running lackluster course.” Unsurprisingly, the cure prescribed revolves around two long-running themes: in the short term, Abuja should adjust and unify its multiple exchange rates, which, according to IMF estimates, are overvalued by 18.5%. Secondly, the Fund urges a sustained medium-term drive to mobilize additional revenue, notably by hiking value added tax (VAT) from its current 7.5% to “at least 10% by 2022 and 15% by 2025.”
As the Fund is doubling down on long-standing policy recommendations that are unlikely to have gained any popularity in Abuja in the meantime, this will likely put to bed any speculation that Nigeria would approach the Fund for further funding. This is all the more so since, unlike last year’s emergency injection, this would come with strings attached. In fact, already by mid-January, Finance Minister Zainab Ahmed had stated that Nigeria would not seek further IMF loans this year. Meanwhile, since April 2020, the government has been wrangling over the terms of a USD 1.5bn budget support loan from the World Bank. Yet negotiations have stalled as the Bank has tabled conditions very similar to its IMF sibling.
Less inclined to do business with the two main multilateral donor organizations on their terms, Abuja is thus more likely to go to the market to fund its budget. In line with the 2020-2023 debt management strategy adopted last week, which targets a 70:30 domestic-to-external debt portfolio (60:40 previously), this will likely reinforce the focus on domestic debt markets already underway. However, the question remains how much can be absorbed domestically, particularly since the government also aims to securitize the large stock of underhand funding by the central bank. Pressures are set to grow as the government will also need to fund the procurement of Covid-19 vaccines beyond its free-of-charge COVAX share , although details remain murky. Consequently, despite the stated preference for bi- and multilateral funding as far as external debt is concerned, Abuja may ponder following the recent example set by Cote d’Ivoire and tap the Eurobond markets again this year.