Reforms can stabilize debt ,foster growth in Nigeria, others-IMF

International Monetary Fund (IMF) recent report has said there is need for developing countries including Nigeria to initiate reforms need to reignite growth and secure a full recovery.

The Debt Management Office has disclosed that Nigeria’s total foreign debt for the period ending March 31st, 2023, has risen to N49.85 trillion ($108.30 billion) from N46.25 trillion as of December 21st 2022.

Recall that President Bola Tinubu on assumption office wasted no time in implementing a series of much-needed reforms aimed at realising the potential of Africa’s largest economy, after a decade-long swing between slowdown and inflation.

The reforms initiated by Tinubu  include the elimination of a costly fuel subsidy, the replacement of the country’s central bank governor, and the initiation of a deep overhaul of Nigeria’s power industry described as chronically inadequate in recent memory.

The measures have garnered a positive response, with Nigeria’s dollar bonds experiencing a rally and stocks reaching a 15-year high as per a Bloomberg report. The economic reforms have been reported as Nigeria’s shift towards economic orthodoxy – unconventional leadership decisions taken with an aim towards overall betterment of the economy in the face of scarcity.

The IMF in its report noted that the global economy has experienced multiple shocks in the past three years. Emerging markets and developing economies not only need to reignite growth and secure a full recovery, but they also must manage rising debt and other policy considerations.

 It argued that regulatory changes and other market reforms can ease this challenge, as “we outline in a new staff discussion note. Examples include lowering barriers to entry in utilities markets, establishing financial supervision and regulatory frameworks, and lowering restrictions on foreign exchange transactions and cross-border capital flows.

“Major changes in regulations are associated with a 3 percentage point reduction in the ratio of debt to gross domestic product, according to our analysis. This decline in a key measure of debt burdens takes place not only by increasing GDP, but also by improving public finances through higher tax revenues and lower borrowing costs. The effect we estimate is comparable to the effect of major fiscal consolidations, as outlined this year in chapters of our World Economic Outlook and Fiscal Monitor.”

According to IMF, “the typical first step toward stabilizing debt is to reduce new borrowing through fiscal consolidation or to decrease the total outstanding through debt restructurings. However, debt-to-GDP ratios can also be cut by increasing the denominator: economic output. One way to accomplish this is with improved market functioning, as IMF research showed in 2016 and 2019.”

The IMF Structural Reform Database, covering 90 advanced and developing economies over the past four decades, measures how markets work in five broad areas: trade, domestic finance, external finance, product market and labour market.

 Due to the large gap in how well markets function between advanced and developing economies, there is considerable scope for governments to use market reforms as a policy lever to revitalize growth and reduce debt burdens in developing economies. Enacting changes in regulations that aim at improving how markets work, for example by increasing competition or establishing appropriate regulatory frameworks, can boost economic output.

“Our research shows that improved market functioning not only lowers the debt ratio through the denominator effect, but also strengthens fiscal outcomes and helps reduce new borrowing. However, some market-oriented policies, such as lowering trade barriers, could have the opposite of the intended effect on fiscal accounts. Scrapping tariffs, for example, would—at least in the short term—reduce tax revenue and could in turn increase debt. This may be partially offset in the longer term, however, by increased economic activity.”

 On how reforms  can stabilize debt IMF states “we find that gains from reforms materialize through higher tax revenues and narrower sovereign debt spreads. The higher tax revenues likely reflect that the effect of improving economic activity makes up for lost revenues directly linked to reforms. The lower borrowing costs instead reflect the improvement in investors’ confidence after the reforms.

“Our analysis also shows that some reforms work better than others. For example, the debt reduction associated with reforms is larger when governments are better at collecting taxes, have higher initial debt, and implement reforms during an economic expansion. This means that, while reforms help reduce debt on average, that’s not always true in every circumstance.

 In Nigeria, while there remains scepticism on overall implementation of the reforms given the country’s tumultuous history of leaders failing to scale through the initial economic optimism, investors view these policy changes as the beginning of a broader economic transformation.

The shift also aligns Nigeria with other countries like Turkey and Colombia, where similar policy changes have generated market enthusiasm after authorities signalled a departure from investor-unfriendly economic practices.

In a Bloomberg report, Amaka Anku, Africa director at Eurasia Group, commended the swift implementation of challenging reforms during the initial period of Tinubu’s presidency.

This demonstrates determination and creates momentum and goodwill, which in turn boosts both domestic and international confidence and encourages investment, he noted.