Be prepared when it’s time to pay up

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Chris Chenga recently in WASHINGTON
-debt outlooks should keep policymakers up at night!

At last week’s IMF Spring meetings in Washington DC, the surveillance institution issued its annual Fiscal Monitor, this year titled “Capitalizing on Good times” where it gives a focused assessment of the fiscal outlook of Governments around the world. Issued in a global context, the report’s title should be interpreted with a caution of portraying a universally opportune global fiscal outlook. As broad as the report is, this opportunity applies for certain countries more than others. Particularly, it is high income and advanced economies that can bask in the current sunshine, as per analogy given by the IMF’ Managing Director at her formal presentation at the meetings. It is the IMF’s recommendation that such economies build fiscal buffers in the current growth upswing so as to create room for fiscal support in inevitable downturns. As high income and advanced economies are currently experiencing macro-economic growth due to extraordinary fiscal and monetary expansion practices after the last global recession, the IMF asserts that now is the opportune moment to utilize this growth to prepare for fiscal consolidation where Governments will inevitably have to rationalize high expenditures to correspond with more modest revenues, and unsustainable deficits built up post-recession. Expansionary practices in the last several years have created a global debt of $164 trillion, with advanced economies averaging 105% debt to GDP, a record high.

The IMF has consciously chosen to put a spin of optimism in the current growth for advanced and high income economies; structural metrics such as employment and financial returns may indeed range from improving to impressive, but, real wages, entitlements, and welfare indices are still depressed. Elsewhere, considering that growth is marginal, the theme of the current cyclical upswing does not truly apply for developing low income countries, particularly the Sub-Saharan region. The optimism may not be extended to developing low income countries in the region as growth metrics do not suggest a familiarity to the sunshine analogy of the IMF. Growth remains irresolute with Sub-Saharan Africa projected growth to rise 0.6% to 3.4 % in 2018, anchored on disloyal commodity dependence.

The fiscal outlook is cloudy. As referenced in last year’s Regional Economic Outlook for Sub-Saharan Africa, debt per capita has risen and the standard of living per capita is equally as compromised. More disconcerting is that of the debt accumulation within the region, over nearly half of this debt is on non-concessional terms which the IMF says has caused a doubling of the interest burden as a share of tax revenues in the past 10 years. Low income countries face a quandary of trade-offs, as they can neither buttress any notable growth nor create the fiscal buffers as prescribed for high income advanced economies. Non-concessional debt obligations mean that fiscal consolidation will be painful process that cuts into citizen welfare as payments become due. Already high debt burdens are inopportune going ahead as there is a predicted tightening in global financing conditions, moving away from the low rates that characterized the last decade. Yet, most African policymakers today are looking at further debt as the means to stimulating growth. This year African sovereigns have now sold $10.7 billion of Eurobonds, which is more than half the record $18 billion in 2017.

Accumulating debt must not be advised for commodity dependent nations. As per the IMF tabulated revenue data, guidance must be drifted away from debt for commodity dependent nations which have struggled to generate government revenues. Nigeria last peaked in 2011 with 17.7% government revenue to GDP, losing more than 10% to meager 6% government revenue to GDP in 2017. Angola peaked in revenues in 2012 at 46.5% of GDP to a significantly lower 16.5% in 2017.

The IMF Fiscal Monitor of 2018, “Capitalizing on the Good times”, is correct in encouraging reflection on debt utility, but there is not much growth and fiscal room for buffers in Sub-Saharan Africa. Preceding reports by the IMF have however offered recommendations on the use of instruments such as fiscal multipliers by developing low income countries as a means of calibrating their fiscal outlook. Smart choices have to be made, especially on the use of government debt and its ability to stimulate growth and generate revenues. More importantly, as debt obligations come due, revenue mobilization as an alternative to debt financing will be crucial for developing low income economies. Strategies such as export diversification, which accumulates not only revenues for government, but much needed foreign currency for settlement of foreign denominated debts, must be a priority. Furthermore, developing low income countries must start to resort to creating environments for investment. Much of the government spending that forces accumulated debt can be eased by private investment into economies. Debt in developing economies is presently perceived as high, but it is relatively low as compared to the normative potential of private investment inflows. The IMF has consistently advised creating room for private sector in these economies, and perhaps our policymakers should start taking these reports in serious consideration.

Taken in befitting context, and interpreted with a customized view on our macro-economic circumstances, there is merit to these reports. We may not be enjoying sunshine at the moment, but we must avert rainy days and be prepared when it is time to pay up debts!

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