‘Why developing nations pay more for IMF, World Bank loans’
• Nigeria remains attractive to external markets Group of 24 (G-24) Director/Head of Secretariat, Dr. Iyabo Masha, has explained why loans from international financial institutions to developing economies are priced
• Nigeria remains attractive to external markets
Group of 24 (G-24) Director/Head of Secretariat, Dr. Iyabo Masha, has explained why loans from international financial institutions to developing economies are priced higher.
Credit facilities from International Monetary Fund (IMF), World Bank, bilateral institutions and private lenders to developing countries come at a premium far higher than what advanced economies pay for same loans, the director said yesterday.
The G-24 coordinates the positions of developing countries on international monetary and development finance issues to ensure their interests are represented in IMF and World Bank negotiations.
Speaking on the sidelines of the just-concluded IMF/World Bank Group Spring Meetings in Washington DC, United States (U.S.), she explained that creditors look out for borrowers’ income analysis from taxes, debt burden, neglecting the long-term potentials of the economy in their loan decisions.
According to her, many developing economies do not have strong tax framework and are already limited by huge debt burdens making it difficult for them to get lower interest rate on loans.
She said: “Indeed, research has shown that developing countries pay interest rates that are sometimes even three or four times more than that of advanced economies in the private market.
“We have to make a distinction between what is happening in the private market and the cost they pay to maybe World Bank, IMF and other bilateral organisations.”
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Explaining that loans from World Bank, IMF are relatively cheaper, sometimes at zero rate, she said: “Whereas, if they are able to get the financing from World Bank, IMF, it will come at a much lower rate. Some of them actually at zero rate.”
Explaining that high cost of borrowing has become a big issue, she said when creditors decide to fix the interest rate, they are looking basically at the income of the country.
“How much is this country pulling in from tax? Because that is what you are going to use to service your debt. And then, they come up with what they think will be a good interest rate for them.”
Mrs. Masha said credit agencies practice of framing their methodology just based on income, without taking into consideration, the long-term potential of an economy or the endowments of an economy deprives the borrowers opportunity to get lower rates.
“So, when you use the judgment of only the income that is coming in, only the tax that is coming in, then you are going to have a situation where banks are now in a position to give those high interest rates,” she said.
Masha also said that for a country to get debt relieve, such country must declare that it cannot pay its debt.
“Well, you know that a country has to declare that it cannot pay its debt before it can even get involved in relief. So, if a country does not make that declaration, it continues to pay its debt,” she said.
On Nigeria’s attitude to its debt obligations, she said: “Nigeria is paying its debt. But there is a problem we’ve seen in some other countries, and that is that even when they get to a point where paying their debt becomes difficult, they don’t want to come out and say that they have difficulties because that would even create more negative impact on other areas of their economy.
“So, one of the things we are also working on is how to remove that stigma. But it depends on how the debt resolution framework is constructed. Then, if they remove that stigma, then countries that are in real difficulty can come out and say that we are in difficulty and we need debt relief. But Nigeria is not there. Nigeria is still attractive to the external market. They are still able to borrow.”
She called for a reform of the global financial safety net and multilateral lending, which remains burning issue in the G-24 communique.
On steps being taken by the World Bank and IMF to support lending to economies, she said: “The World Bank and the IMF have some programs. For example, one program with the World Bank is called the policy-based guarantee, in which they provide a guarantee for the loan that the country is taking in the private market. Now, because that guarantee is there, the private market will now give that country a lower interest rate”.
On debt burdens in developing economies, she said: “The G-24 is working on finding ways to lower the debt burden through debt relief and other methods, so that these countries can now be able to attract better terms when they go to the market.”
Mrs. Masha said that certain rules around debt reliefmake it difficult for countries to benefit from it.
She noted: “First is that for a generalised debt relief, it cannot apply to one country. There are standard laws. There is what we call the comparability of treatment.
“That’s one of the reasons why debt reliefs are usually generalised - even the one that Nigeria got in the 2002, 2003.
“That’s a debt relief program that was applicable to all the countries that were in that category. It wasn’t a special initiative for Nigeria, though many people assumed that was the case.
“The second issue”, she added, “was that when borrowers seek loans, they have different types of agreements with private creditors that may be difficult to have a resolution on.
“To address this issue, the international community has brought out the common framework. The Common Framework applies only to bilateral debts.
“It doesn’t cover multilateral debts like debt owed to World Bank, IMF, and it doesn’t cover debt owed to private creditors. But at least some countries have gone through the common framework.”
