Nigerian govt’s N18.1tr debt exposes banks to high risk – IMF

The International Monetary Fund (IMF) said on Monday that banks in Nigeria and other emerging markets are exposed to high risk due to rising governments’ debt owed to the lenders.

Governments look to domestic banks for loans to support their budget deficit, and according to the Bretton Wood institution, government debt amounts to a quarter of bank assets in some emerging economies.

In Nigeria, the government’s debt to banks currently stood at N18.1 trillion, against the N648.26 billion in June 2015.

In 2021 alone, a year after the COVID-19 outbreak, the government borrowed N4.34 trillion, and has borrowed N704 billion as of January this year.

In a statement Monday, IMF said governments across the world have spent aggressively to help households and employers weather the economic impact of the pandemic.

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It said: “Average ratio of public debt to gross domestic product—a key measure of a country’s fiscal health—rose to a record 67 percent last year in emerging market countries.

The rise in government bank debt, according to the IMF, is also tied to the creditors using government bonds as an investment that they can use as collateral for securing funding from the central bank.

The institution said rising debt could cut banks’ lending to companies and households if the government finances come under pressure, adding that the development could slow down the economic activity, and weigh down on the economy.

“The debt exposes banks to losses if government finances come under pressure and the market value of government debt declines.

“That could force banks—especially those with less capital—to curtail lending to companies and households, weighing on economic activity. As the economy slows and tax revenues shrivel, government finances could come under even more pressure, further squeezing banks,” IMF added.