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Thursday, December 8, 2022

Nigeria, Others risks Sri Lanka’s fate as economy creaks

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The global community is currently mired in three-pronged crises – impacts of the COVID-19 pandemic, the rising cost of sovereign debts, as well as an alarming increase in prices of food, fuel and other essential commodities.

The United Nations Conference on Trade and Development (UNCTAD) attempted to quantify the extent of the challenges, suggesting that 107 countries are currently battling with at least one of the shocks. It added that 69 economies – 25 in Africa, 25 in Asia and 19 in Latin America and the Pacific – are neck-deep in all three economic shocks.

At the recent Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG), the President of WBG, David Malpass, said the crises hit Africa most. Both institutions and other advocacy groups have, however, called for urgent policy actions, especially by countries with pre-existing macroeconomic challenges, to prevent major crises, which could trigger social unrest.

While many countries are exploring policy options to avert doomsday, Sri Lanka has succumbed to the dilapidating crisis. The South Asian country, with similar economic history and headwinds to many African states (including Nigeria), is widely regarded as the first domino to fall in the face of the global threat.

From unrestrained public borrowing white elephant projects, concentration revenue risk, high propensity, Beijing-based extravagance to corruption, Sri Lanka shares a lot with Nigeria and other sub-Saharan African (SSA) countries. The citizens kicked against rising Chinese-backed debts, expressing fear of possible default but the obsession continued while the political hegemony led by the powerful Rajapaksa family imposed its wishes against common sense.

It borrowed and spent heavily on white elephant projects, adding to the existing debt profile. In the Hambantota district, for instance, a massive deep seaport lost over $300 million in six years after it commenced operation. There was a $200 million airport that could not generate enough money to pay its energy cost, for instance.

From 2015 to 2018, its debts soared astronomically triggering bailout deals with the IMF and China in 2016. At the close of 2016, its public debt was estimated at $64.9 billion or about 80 per cent of the gross domestic product (GDP). An additional $9.5 billion was incurred by state-owned enterprises.

A newly inaugurated administration in 2019 played to the gallery and embarked on the biggest tax cut in the history of the country in fulfilment of its promised economic relief, worsening the chronic budget deficits. Rating agencies soon downgraded the country as public debt spiralled out of control. That made it difficult for the government to secure fresh loans.

The 2019 fiscal incentive was also ill-timed for two reasons. COVID-19 struck shortly, crippling the two sources the government relied on to service its debt – tourism and remittances from the diaspora.

The government took to emptying its foreign reserve at an alarming rate to service external debts, prompting authorities to ban several imports including fertiliser and agricultural chemicals that farmers need to grow their crops. The government said the policy was part of an effort for Sri Lanka to become the world’s first completely organic-farming country but its impacts were nothing short of a disaster. Low yields hit the agriculture sector, including tea production – a major export earner.

Sooner than expected, the government lost control over its citizens, including farmers, who had to watch its reckless officials fritter away their scarce resources and mismanage the economy over the past decades. The policy was abandoned but the damage had been done.

Tough decisions, including leadership change and replacement of the central bank governor, have been made as the government walks a tightrope to placate the masses and rescue the bleeding economy. But with about $50 million in external reserves at the start of May, the possibility of defaulting on $51 billion in foreign debt, about 30 per cent inflation rate and an army of angry citizens, the new administration runs against time to earn modest confidence with negotiation for an IMF bailout on the table.

The small Island is a blight in the Asian region but could be a canary in the coalmine with Africa at the centre of the growing concern about a possible sovereign economic crisis in the coming months ahead.

Steep inflation estimated at 23.6 per cent and rising public debt, which stood at 77 per cent of GDP last year, is currently stoking an economic crisis in Ghana. Last week, the Finance Minister, Ken Ofori-Atta, said the country was determined to navigate through the debt trap without recourse to IMF assistance.

“We have committed to not going back to the fund because the fund knows we are in the right direction,” Ofori-Atta told a media briefing in which The Guardian participated online, adding that there are questions on whether the IMF can afford the amount the country requires to navigate through.

While the Ghanaian cedi is on a free fall with a consequence for external debt repayment in the future, the minister said the government was looking at prioritising domestic facilities, which have higher interest rates in its debt restructuring profiling. “We need to decide ourselves what 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 fast-rising inflation. With another meeting due on May 23, Ofori-Atta said another rate hike would be a knee-jerk reaction to “imported inflation” but promised that the government would continue to work hard to deal with the obvious fiscal imbalance.

The inflation concern has triggered questions on whether a return to price control would be out of fashion. The Ghanaian government had, in March, announced a 30 per cent salary cut for its appointees to mitigate the brewing fiscal crisis. There are other measures taken in recent months, including the 1.5 per cent tax on electronic payments otherwise known as e-levy.

As the cedi continues to lose its value against the dollar, the Bank of Ghana, in April, issued a warning statement against dollarisation, insisting that Cedi remains the only legal tender. It also banned the illegal trading of hard currencies.

“Companies, institutions and individuals are prohibited from engaging in foreign exchange business without a licence issued by Bank of Ghana or pricing, advertising, receipting or making payments for goods and services in foreign currency in Ghana, without written authorisation from Bank of Ghana,” the bank said. Yet, the end to Ghanaian fiscal shock is remote.

The complex crisis has impacted seriously the West African country’s investment outlook. In March, government treasury bill sales fell by as much as 66.8 per cent. According to auctioning results by the Bank of Ghana, the government could only secure ¢733 million, from a target of ¢2.21 billion.

Though the IMF had last year put the granularity in the risk rating of Kenya at a moderate band, key indicators point to a possible severe debt crisis. According to official statistics, Kenya spent Sh1.1 trillion out of Sh1.3 trillion of the consolidated fund or 85 per cent, on debt repayment in the first half of the 2021/2022 financial year. This implies that he had 15 per cent left for both recurrent and capital expenditures, forcing the government into fresh borrowing for salaries in violation of its fiscal responsibility guidelines.

With the public debt already exceeding Sh8 trillion and Sh1 trillion in debt repayment captured in the current financial year, there is no doubt the East African country is undergoing fiscal shock. With inflation concern yet to peak, the Kenyan government, two weeks ago, increased the national minimum wage by 12 per cent to cushion the impacts of the rising cost of living on money incomes – a decision that will compound the public expenditure crisis.

Then, Nigeria, the only African country touted to hold the capacity to trigger a regional upset if it slips into a crisis, mirrors Sri Lanka on all fronts – dwindling reserves (which dropped to $39.04 billion, the lowest year-to-date (YTD) last week), unviable public infrastructure funded with Chinese loans, rising imports, policy flip-flop, tumbling naira and troubling public debt overhang and growing deficit.

With the overdrafts by CBN, which are not fully disclosed, the country’s national debt has exceeded the N50 trillion mark. Whereas the debt to GDP ratio, at less than 40 per cent, is among the lowest in the region, a larger chunk of the earnings goes into debt servicing and premium motor spirit (PMS) subsidy – more like the Sri Lankan tax cut amid falling revenue. And these are complemented with unrestrained official graft.

Last week, JP Morgan delisted the country from its emerging market category for its inability to leverage the bullish international oil prices to reduce its fiscal imbalance. There is certainly no clearer signal that the country is heading towards a fiscal cliff than the resolve of the investment bank.

Nigerians may not be throwing tantrums at the political leaders as Sri Lankans have done in the past few torturing months, but the economic woes fueling uprising on the Island is a constant reminder of the threat facing the biggest African country. The same threat looms in Ghana, Kenya, South Africa, Ethiopia and almost every other African country.

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