Lessons for Nigeria, others — Business — The Guardian Nigeria News – Nigeria and World News

The global community is currently mired in three crises: the impacts of the COVID-19 pandemic, the rising cost of sovereign debt, as well as an alarming increase in the prices of food, fuel and other essentials.

The United Nations Conference on Trade and Development (UNCTAD) has attempted to quantify the scale of the challenges, suggesting that 107 countries are currently grappling with at least one of the shocks. He added that 69 economies – 25 in Africa, 25 in Asia and 19 in Latin America and the Pacific – are plunged into the three economic shocks.

At the recent spring meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG), WBG President David Malpass said that crises are hitting Africa hardest. The institutions and other advocacy groups, however, called for urgent policy actions, especially by countries facing pre-existing macroeconomic challenges, to prevent major crises, which could trigger social unrest.

As many countries explore policy options to avert the apocalypse, Sri Lanka has succumbed to the crumbling crisis. The South Asian country, with an economic history and headwinds similar to many African states (including Nigeria), is widely seen as the first domino to fall in the face of global threat.

From rampant public borrowing projects of white elephants, risk of revenue concentration, high propensity, Beijing-based extravagance to corruption, Sri Lanka shares a lot with Nigeria and other countries in sub-Saharan Africa (SSA). Citizens objected to the increase in debt guaranteed by China, expressing fear of possible default, but the obsession continued as the political hegemony led by the powerful Rajapaksa family imposed its wishes against the common sense.

He borrowed and spent heavily on white elephant projects, adding to the existing debt profile. In the district of Hambantota, for example, a huge deep-water port lost more than 300 million dollars in six years after its commissioning. There was a $200 million airport that couldn’t generate enough money to pay its energy costs, for example.

From 2015 to 2018, its debts soared, triggering bailout deals with the IMF and China in 2016. At the end of 2016, its public debt was estimated at $64.9 billion, around 80% of gross domestic product. (GDP). An additional $9.5 billion was committed by state enterprises.

A newly inaugurated administration in 2019 played the gallery and embarked on the biggest tax cut in the country’s history in fulfillment of its promised economic relief, worsening chronic budget deficits. Rating agencies quickly downgraded the country as public debt spiraled out of control. This made it difficult for the government to obtain new loans.

The 2019 tax incentive was also mistimed for two reasons. COVID-19 hit soon after, crippling the two sources the government relied on to service its debt: tourism and diaspora remittances.

The government began to empty its foreign exchange reserve at an alarming rate to service the external debt, prompting the authorities to ban several imports, including fertilizers and agricultural chemicals that farmers need to grow their crops. cultures. The government said the policy was part of an effort for Sri Lanka to become the first country in the world to practice all-organic farming, but its impacts were nothing short of a disaster. Low yields have hit the agricultural sector, including tea production – an important source of export revenue.

Sooner than expected, the government has lost control over its citizens, including farmers, who have had to watch its reckless officials waste their scarce resources and mismanage the economy over the past few decades. The police were abandoned, but the damage was done.

Tough decisions, including a change in leadership and the replacement of the central bank governor, have been made as the government walks a tightrope to appease the masses and save the bleeding economy. But with around $50 million in external reserves at the start of May, the possibility of defaulting on $51 billion in external debt, an inflation rate of around 30% and an army of angry citizens, the new administration is racing against time to gain modest confidence with negotiations for an IMF bailout on the table.

The tiny island is a scourge in the Asian region but could be a canary in the coal mine with Africa at the center of growing concern over a possible sovereign economic crisis in the coming months.

High inflation estimated at 23.6% and rising public debt, which stood at 77% of GDP last year, are currently fueling an economic crisis in Ghana. Last week, Finance Minister Ken Ofori-Atta said the country was determined to navigate the debt trap without resorting to IMF help.

“We’ve made a commitment not to go back to the fund because the fund knows we’re in the right direction,” Ofori-Atta told a press conference attended by The Guardian online, adding that he there are questions about whether the IMF can afford the amount. the country needs to navigate.

As the Ghana cedi is in freefall with consequence for the repayment of foreign debt in the future, the minister said that the government is considering prioritizing domestic facilities, which have higher interest rates in its debt restructuring profile. “We have to decide for ourselves which structure would be useful to us,” he insisted.

In March, the Ghanaian monetary authority raised the policy rate by 250 basis points, one of the highest in recent times, to contain soaring inflation. With another meeting scheduled for May 23, Ofori-Atta said another rate hike would be a knee-jerk reaction to “imported inflation”, but promised the government would continue to work hard to address the evident fiscal imbalance. .

Fear of inflation has raised questions about whether a return to price controls has gone out of fashion. The Ghanaian government had in March announced a 30% pay cut for its appointees to ease the looming budget crisis. Other measures have been taken in recent months, including the 1.5% tax on electronic payments otherwise known as e-levy.

As the cedi continues to lose value against the dollar, the Bank of Ghana issued a dollarization warning in April, insisting that the cedi remains the only legal tender currency. It also banned illegal trade in hard currency.

“It is prohibited for firms, institutions and individuals to engage in foreign exchange transactions without a license issued by the Bank of Ghana or to fix prices, advertise, receive or make payments for foreign currency goods and services in Ghana, without the written permission of the Bank of Ghana,” the bank said. However, the end of the Ghanaian fiscal shock is far away.

The complex crisis has had a serious impact on the investment prospects of this West African country. In March, sales of government treasury bills fell 66.8%. According to the results of the Bank of Ghana auction, the government was only able to secure 733 million yen, out of a target of 2.21 billion yen.

Although the IMF placed the granularity of Kenya’s risk rating in the moderate range last year, key indicators point to a possible serious debt crisis. According to official statistics, Kenya spent 1.1 trillion shillings out of 1.3 trillion consolidated fund, or 85%, on debt repayment in the first half of the 2021/2022 financial year. This implies that it was left with 15% for operating and capital expenditure, forcing the government to borrow further for salaries, in violation of its fiscal responsibility guidelines.

With public debt already exceeding 8 trillion shillings and 1 trillion shillings of debt repayments captured in the current financial year, there is no doubt that the East African country is facing a fiscal shock. . With inflation yet to peak, the Kenyan government two weeks ago raised the national minimum wage by 12% to cushion the effects of the rising cost of living on cash incomes – a move that will aggravate the public spending crisis.

Then Nigeria, the only African country touted to have the ability to trigger regional upheaval if it descends into crisis, mirrors Sri Lanka on all fronts – from declining reserves (which have fallen to 39.04 billion dollars, the lowest since the start of the year (YTD ) last week), unsustainable public infrastructure financed by Chinese loans, rising imports, a political volte-face, a falling naira and over-indebtedness troubling public and a growing deficit.

With the CBN overdrafts, which are not fully disclosed, the country’s national debt has passed the N50 trillion mark. While the debt-to-GDP ratio, at less than 40%, is among the lowest in the region, more of the revenue is spent on servicing debt and subsidizing premium automotive gasoline (PMS ) – more like the Sri Lankan tax cut in a declining income environment. And these are complemented by a rampant official transplant.

Last week, JP Morgan removed the country from its emerging market category for its failure to take advantage of rising international oil prices to reduce its fiscal imbalance. There is certainly no clearer signal that the country is heading for a fiscal cliff than the determination of the investment bank.

Nigerians may not throw tantrums at political leaders the way Sri Lankans have over the past months of torture, but the economic hardship fueling the island’s uprising is a constant reminder of the threat on the largest African country. The same threat looms in Ghana, Kenya, South Africa, Ethiopia and almost every other African country.