Due to the increased government debt held by Nigeria and other emerging economies, the IMF warned that sovereign debt crisis could spread to banks, pension funds, households, and other segments of the domestic economy.
This was disclosed by the International Monetary Fund in a report titled “SHINING A LIGHT ON DEBT”
According to the report, persistent inflationary pressure will limit central banks’ ability to borrow money from governments in Nigeria and other emerging markets to fund their budgets.
What IMF is saying
IMF revealed that authorities moved inward to source for finance through domestic banks.
It stated, “Governments turned to the domestic banking system to meet their financing needs as overseas investors withdrew during the pandemic. The increase in government debt held by emerging market domestic banks implies that sovereign debt distress could spread to banks, pension funds, households, and other parts of the domestic economy.”
Highlights of the report
- Debt risks are high and are likely to remain so for several years, as the pandemic has increased the gross financing needs of the public sector on a sustained basis among emerging market and developing economies.
- Many have run down domestic sources of financing. And their ability to borrow from domestic central banks—which some countries have done extensively since early 2020—will be more limited if inflation pressure persists.
- These developments may make emerging market and developing economies more dependent on external financing and expose them to greater risks of a sudden stop in external financing.
- Last, but not least, financing needs—and debt—have a habit of coming in higher than expected.”
What you should know
- According to data obtained from the CBN, Banks’ credit to the government sector of the economy currently stands at N14.277 trillion as at January 2022.
- This figure is indicative of an N1.973Trillion increase from the N12.304 held in January 2021.
- Banks’ credit to the private sector of the economy rose Year-on-Year (YoY) by 33.7 percent to N35.3 trillion in November 2021 from N26.4 trillion in the corresponding period of 2020.
- Banks’ credit to private sector hit its highest level in December 2021, reaching N35.73 trillion from N30.15 trillion recorded as of December 2020, representing a N5.58 trillion increase in one year
The growth in credit to both private and government parastatal could be attributed to the Central Bank’s policies to stimulate the economy.
