Economic reform, no matter how painful to the population, is key to bringing in private sector investment and avoiding over-reliance on concessional funding, said Nigeria’s finance minister Wale Edun at an IMF discussion on liquidity challenges on Wednesday.
Concessional money from the IMF and World Bank has been vital to helping emerging market governments avoid debt distress in the past two years.
But there is no substitute for prudent policy, Edun said, to ensure debt remains at — or returns to — sustainable levels.
“When you have heightened debt and debt repayments in front of you, the answer for countries like Nigeria is dramatic macroeconomic reform,” said Edun. The country has removed costly fuel subsidies and moved to a market-based exchange rate.
“If you do the right things, you can have dramatic results,” said Edun. “We see a way out, a way off the treadmill. Concessional financing, all the help you can get, is important. But while you wait for that to come you have to look inwards and it starts with key macroeconomic reforms. When you stop haemorrhaging money, confidence fills up.”
He admitted Nigeria had some “low-hanging fruit” in its reform agenda.
Major policy shifts do not come without hardship. Riots in Kenya in June forced the government to abandon a bill that would have raised taxes.
Communication is vital, said Edun. “We know the political and general risk in implementing such deep-seated reforms,” he said. “It is important to put in place immediately the most robust safety nets you can muster to protect the poor and most vulnerable when key reforms are implemented, so the usual cost of living is ameliorated and you keep society more onside.”
Concessional funding is vital. It is long term and affordable, when many EM governments have very expensive or no access to international capital markets. But countries should not become over-reliant on it, said Carmen Reinhart, professor of the international finance system at the Harvard Kennedy School.
“Over-reliance on official lenders is a problem,” she said. “The debt cannot be written off and you can go from one programme to another. Domestic reforms are essential.”
Edun said: “At the end of the day, the purpose of macroeconomic reforms is to put the economy in a place where the private sector can come. Either through direct investment or the financial markets.”
Nigeria has not issued an international bond since early 2022, but it did raise $900m with a dollar bond in the domestic market in September.
“Our first stop was to say to Nigerians holding foreign currency abroad that there is an instrument on the domestic market that gives you competitive terms,” said Edun. “Come and back our reforms by bringing back your funds from abroad.”