N33.8trn Private Debt: States May Not Pay Salaries – IMF Warns

N33.8trn Private Debt: States May Not Pay Salaries – IMF Warns

By Cyril Ogar

World Bank has again expressed concerns over Nigeria government’s policies, warning that unless there are changes, things will remain unchanged.

The International Monetary Fund IMF, has said rising private debt would slow economic recovery in Nigeria and across the world, stating vulnerable households and firms might struggle with repayment.

The IMF disclosed that this would have an impact on economic production, recalling that various governments had offered credit facilities to households and companies, including small and medium enterprises to support the economy.

The Central Bank had cut interest on loan from 9% to 5% in 2020 to increase loan demand, and this rate has remained till date. As of September 2021, private sector debt hit an all-time high of N33.8 trillion.

Although, Non-Performing Loans ratio ,NPLs, has dropped to 4.84% from 4.9% as of February 2022, this slight decline in NPLs might not be enough to prevent the debt from slowing down the economic recovery.

IMF, in a statement seen by AljazirahNigeria, said countries will experience the impact at various scales “In short, the recent surge in indebtedness of households and firms poses risks to the pace of recovery. Yet this risk is not equally distributed.

Careful, real-time monitoring of the balance sheets of low-income households and vulnerable firms is key to calibrating the unwinding of support measures. This could prevent sudden distress when financial conditions tighten”, IMF wrote.

It advised governments to consider out-of-court settlement in restructuring the loans and insolvency mechanisms, and reallocate the capital to most productive firms.

“if large household debts threaten recovery, governments should consider cost-effective debt restructuring programs aimed at transferring resources to relatively vulnerable individuals who are more likely to spend their income”. The global financial company said.

The group listed the consequences warning that many Nigeria states won’t be able to pay salaries by the end of 2022.

The President of the World Bank Group, David Malpass at the ongoing World Bank/International Monetary Fund Spring Meetings in Washington DC stressed the need for the Federal government to reconsider its policy on fuel subsidy, saying that the huge amount being expended on the policy could be channeled to other critical sectors.

Malpass pointed out that subsidies have significant negative effects on any system.

He says “One is that they are expensive because they go to everyone and they are often used by people with upper incomes than by people with lower incomes so they are not targeted.

“So, we encourage that when there is need for subsidy, either food or for fuel, that it should be carefully targeted at those most in need of it. And so, we have encouraged Nigeria to rethink its subsidy effort”.

The World Bank boss emphasized that the country must get rid of its multiple exchange rate system. Noting that “The multiple exchange rates is complicated and is not as effective as it would be if there were a single exchange rate”.

The group further reveals “The most useful thing for developing countries is to have a single exchange rate that is market-based, that is stable over long periods of time as that attracts investment and so that would help”.

In addition, Nigeria has trade barriers that impede trade and capital flows, and the federal government should improve these conditions in order to help the economy and its people move forward.

Commenting on the spate of insecurity in the country, Malpass says “I take note of the complicated situation that they face where there are weapons flowing into northern Africa that find their way into non Nigerians that create violence in Nigeria.

“This is a very challenging situation that the government faces. I think all over the world, people should have an understanding of the fragility that is facing several parts of the world, but in particular, the Sahel and the Sub-Saharan Africa area where the weapons flow from outside of Africa are putting a great burden on governments around the continent”.

The World Bank had in the past said Nigeria’s economy under President Muhammadu Buhari administration is worse than 10 years ago.

These findings are contained in its flagship report for 2022, titled ‘Global Economic prospect’. 

“The pandemic has reversed at least a decade of gains in per capita income in some countries in almost a third of the region’s economies, including Angola, Nigeria, and South Africa, per capita incomes are forecast to be lower in 2022 than a decade ago”, the report said. 

The report added that the hike in food prices could amplify the negative impact of increased poverty on economic growth, noting nearly 110 million people in countries like Nigeria, the Democratic Republic of Congo, Ethiopia, and South Sudan had been in situations characterised by food crises.

However, Some states are set to face fresh economic challenges as the Federal Allocation has dropped to a four-year low,  AljazirahNigeria has learnt.

In January, the Federation Accounts Allocation Committee shared the sum of N574.66bn to the Federal Government, states and local government councils. The amount shared in January is lower than the N699.82bn disbursed in December 2021.

This fall in FAAC allocations follows the Federal Government’s announcement of its plans to deduct N950bn for the payment of fuel subsidy from allocations due to states in 2022.

Details of the allocations for January are contained in a communiqué issued at the end of a virtual meeting of the FAAC for February 2022 released on Thursday night.

The N574.66bn total distributable revenue comprised distributable statutory revenue of N291.40bn, distributable Value Added Tax revenue of N178.06bn and Exchange Gain of N5.202bn and Non-Mineral Revenue of N100bn.

In January 2022, the total deduction for the cost of collection was N25.421bn and the total deductions for statutory transfers, refunds and savings was N92.767bn. The balance in the Excess Crude Account was $35.36m.

The communiqué confirmed that from the total distributable revenue of N574.668bn; the Federal Government received N204.580bn, the State Governments received N179.251bn and the Local Government Councils received N131.878bn. A total of N58.959bn was shared to the relevant states as 13% derivation revenue.

The distributable statutory revenue of N291.4bn was available for the month. From this, the Federal Government received N122.749bn, the state governments received N62.260bn and the local government councils received N48bn. The sum of N58.391bn was shared with the relevant states as 13% derivation revenue.

In the month of January 2022, the gross revenue available from the Value Added Tax was N191.2bn. This was lower than the N201.255bn available in the month of December 2021 by N10.033bn.

The sum of N5.507bn allocation to NEDC and N7.649bn cost of collection were deducted from the N191.2bn gross VAT revenue, resulting in the distributable VAT revenue of N178.06bn.

From the N178.066bn distributable VAT revenue, the Federal Government received N26.710bn, the state governments received N89.033bn and the Local Government Councils received N62.32bn.

According to the communiqué, in the month of January 2022, Companies Income Tax, Petroleum Profit Tax, and Oil and Gas Royalties decreased significantly while Value Added Tax, Import and Excise Duties decreased marginally.

Now that FAAC allocations are declining, there is no doubt that some states will find it hard to pay salaries. This will lead to untold hardship for Nigerians as their purchasing power will be diminished”.

Cross River State government has decried its poor federal allocations for the month of March.

The government got N34.9m, which is only about 15% of its statutory allocation from the Federation Account in March.

Figures released show that out of the state’s gross allocation of N2.22bn, only N34.9m was received by the state as N2.18bn was deducted to service debts incurred by previous administration.

With this, Payment of salaries by the state government is uncertain as the decision of the federal government to debit local government accounts in commencement of a payment of $418 million ,N172 billion, to private consultants on Paris Cub refund has pitched states and local governments against it ,FG.

BudgIT, a civic group committed to government financial transparency, in its report, ‘State of States 2019’, said only three Nigerian state governments ,Lagos, Rivers and Akwa Ibom, can finance their recurrent expenditure without allocation from the federal government.

There had been pressure from the Nigeria Governors Forum ,NGF, and the general public to stop the suspicious payments to the consultants.

However, in a dramatic twist, less than a month after a directive by President MuhammaduBuhari, the Ministry of Finance, Budget and National Planning has commenced deductions to pay the claimants.

Also the Economist Intelligence Unit ,EIU, had said it expects Nigeria’s economic growth to slow more than expected in 2022 as power-supply issues, high inflation and expected monetary tightening hurt output.

From an initial forecast of 3.3% in February, the EIU now expects real GDP growth to decelerate to 3% in 2022 from 3.6% in 2021.

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