Niger: First Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for a Waiver of Nonobservance of Performance Criterion—Debt Sustainability Analysis

Economic activity was buoyant in Niger thanks to a new oil project, contributing to a strengthened external account and a rebound in agricultural production. Economic developments, however, remained vulnerable to climatic shocks and the fragile security situation in the region. Fiscal developments were affected by shortfalls in oil and customs revenue credit to the private sector. The government budget has been made with the objective of maintaining macroeconomic stability while advancing development. The implementation of the financial sector development strategy and poverty reduction strategy is required.

Abstract

Economic activity was buoyant in Niger thanks to a new oil project, contributing to a strengthened external account and a rebound in agricultural production. Economic developments, however, remained vulnerable to climatic shocks and the fragile security situation in the region. Fiscal developments were affected by shortfalls in oil and customs revenue credit to the private sector. The government budget has been made with the objective of maintaining macroeconomic stability while advancing development. The implementation of the financial sector development strategy and poverty reduction strategy is required.

Background

1. This debt sustainability analysis (DSA) was jointly prepared by the IMF and the World Bank and updates the 2011 DSA of the external and total public debt of Niger. It uses the standard debt dynamics template for low-income countries and is based on end-2011 data. The debt data cover external and domestic debt of the central government, debt of public enterprises and parastatals, a state guarantee, and private external debt, derived from the projected debt flows linked to large oil and mining projects. Domestic debt includes arrears, debt to the central bank (BCEAO) for statutory advances and the SDR allocation, and government securities.

2. Niger’s debt ratios have been significantly reduced by debt relief, as discussed in the previous DSA. The Enhanced HIPC Initiative, whose completion point was reached in 2004, together with the Multilateral Debt Relief Initiative (MDRI) assistance in 2006 from the African Development Fund, IDA, and the IMF, resulted in a significant decline in public nominal external debt, from more than 80 percent of GDP in 2002 to about 17 percent in 2010. In 2011, the government contracted a 650 million yuan loan for the financing of its share in the construction of the new Azelik uranium mine, and extended a guarantee of 40 percent of a US$880 million loan to the Soraz oil refinery. As a result, the stock of public external debt, including guarantees, moved to 22 percent of GDP at end-2011. Looking ahead, the authorities’ ambitious economic development program includes increased infrastructure spending in the next few years.

Underlying DSA Assumptions

3. Medium- and long-term projections for Niger have been updated since the last DSA in the light of recent developments and discussions with the authorities (Text Table 1). The key differences from the previous analysis stem from the fact that a bad agricultural harvest in 2011, together with important start-up difficulties encountered in the new oil project and a significant shortfall in custom revenues in 2012 led to downward revisions in GDP growth, fiscal revenue and exports for both 2011 and 2012. At the same time, the start of operations of the new Imouraren uranium mine, currently under development and expected to double current uranium production capacity, has been postponed by about two years, resulting in the expected impact of this new project shifting from the medium to the longer term. Macroeconomic assumptions for the long-term in GDP growth, revenue, and exports, remain close to those made in the last DSA.

Text Table 1.

Niger: Key Macroeconomic Assumptions (1)

article image
Sources: Nigerien authorities; and IMF and World Bank staffs estimates

Previous DSA covers the period 2011-31

Total revenue, excluding grants

4. Natural resources are expected to continue playing a key role in GDP growth in the longer term, together with a greater contribution from other sectors of the economy as the economy diversifies. Our assumption remains that higher revenue will be used for productive public investment, which, together with progress in improving the business climate, will allow the economy to diversify. The inflation rate is projected to remain low and stable, averaging 1.9 percent over the projection period.

5. The exports-to-GDP ratio is projected to increase through 2028 as the economy diversifies and develops. A crude oil export project is currently under development, which might have an important impact on revenue and exports, but there is still too much uncertainty at this point in time to include it in the baseline framework.

6. The current account deficit, excluding official transfers, is projected to improve, reflecting the coming onstream of petroleum production. The current account deficit is financed by debt creating flows, foreign direct investment, and capital grants, which account for about 17 percent of exports of goods and services on average over the projection period in Niger.

7. The macroeconomic outlook continues to be subject to various risks. The country remains vulnerable to exogenous shocks, including climatic shocks that frequently result in food crises, commodity price fluctuations including through their impact on the return on public sector investment projects, and the security situation in the region, as demonstrated by the recent flooding and continued arrivals of migrants from neighboring countries.

Public External DSA

8. Niger’s public debt exposure is expected to increase significantly due to the government’s involvement in natural resource projects. In particular, the authorities have reached understandings with EXIM Bank of China on the contracting of a concessional loan of US$880 million (CFAF 435 billion, or 12 percent of GDP). This loan will refinance the existing non-concessional financing of the new refinery, which was initially provided by the Chinese investment partner (CNPC), with 40 percent guaranteed by the state. While the non-concessional 40 percent state guarantee will thus be terminated, causing a one-off spike in debt service ratios in 2013, the government is expected to assume liability for the total amount of the new loan, which will be on-lent to the refinery. As a result, the stock of public external debt is expected to reach about 33.5 percent of GDP in 2013, from 24 percent in 2012. As private external debt is expected to decrease by 60 percent in counterpart, as the previously contracted loan is terminated, the stock of total (public and private) external debt (in nominal terms) is not expected to be affected by this transaction. The rate of external public debt accumulation is subsequently expected to remain broadly stable over time (Figure 1a). While the grant element of the new borrowing in the short term has improved compared to the previous DSA, because the new loan for the refinery is now concessional,1 it is expected to gradually decline over time, as the country develops and thus will have less access to new borrowing on highly concessional terms.

Figure 1.
Figure 1.

Niger: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2012-2032 1/

Citation: IMF Staff Country Reports 2013, 104; 10.5089/9781484342695.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a Terms shock

9. In the baseline scenario the external debt ratios remain below their policy-dependent thresholds throughout the projection period (2012-32), as in the previous DSA. The present value (PV) of debt-to-GDP ratio is projected to increase sharply from 2012 to 2013 and will continue to move upward for the rest of the period. The PV of debt-to-export and debt-to-revenue ratios adopt similar trajectories, with a relatively more benign path for the PV of debt-to-export ratio thanks to the increasing projected exports over the projection period.2 Because of the assumed termination of the 40 percent state guarantee of the SORAZ loan in 2013, the present value of debt service to export and debt service to revenue ratios breach their thresholds in 2013.

10. As in the previous DSA, the historical scenario shows a relative improvement in debt ratios. The scenario underlines that if the current account deficit, FDI inflows, real GDP growth and GDP deflator were at their historical averages, debt ratios would significantly improve. In comparison to the baseline scenario, lower debt ratios in this scenario mainly stem from a higher historical GDP deflator at about 8.5 percent compared to 2 percent in the projection period (Box 1).

11. The debt-to-GDP threshold is breached in the case of a one-time 30 percent depreciation of the CFA franc. Following a one-time 30 percent nominal depreciation relative to the baseline in 2013, the PV of debt-to-GDP ratio would breach its threshold as early as 2016, and remain above it until 2032. The breach of thresholds is large and protracted. In addition to a one-time nominal depreciation, Niger is also vulnerable to a worsening in its financing terms during the projected period, as the PV of debt-to-GDP ratio would also breach its threshold from 2020 onwards.

Public DSA Including Domestic Debt

12. As in the previous DSA, considering public debt does not change the analysis. Domestic debt includes arrears, debt to the central bank (BCEAO) for statutory advances and the SDR allocation, and government securities. The public debt ratios remain relatively low under the different scenarios except for the most extreme shock. The most extreme shock (real GDP growth being set at its historical average minus one standard deviation in 2013-2014) is assumed to negatively affect nominal revenue while keeping the level of government spending the same as in the baseline, consequently leading to an increase in primary deficit and financing needs. This is reflected by the PV of debt-to-GDP and the PV of debt-to-revenue ratios more than doubling during the projection period.

Private Debt Dynamics

13. The current DSA includes preliminary information on private debt provided by the authorities. The main flows related to this category are linked to the large ongoing oil and uranium projects. The estimates incorporate the impact of the contracting of a loan by the refinery Soraz (60 percent privately owned) in 2011, and the expected gradual disbursement and subsequent repayment of a loan of about 1.4 billion euro from a foreign investor to finance the new uranium mine Imouraren. Including this debt, the stock of external debt would reach 56 percent of GDP in 2013. Amortization of this loan is projected to start from 2017 onwards, thus gradually decreasing the stock of private external debt.

Conclusion

14. On the basis of the updated DSA, Niger remains subject to moderate risk of debt distress. Although the grant element of new borrowing is projected to improve compared to the previous DSA in the short run, the stock of public external debt is expected to increase significantly, following the refinancing of the $880 million Soraz loan in 2013. This loan will replace the existing private non-concessional financing of the refinery, which was 40 percent guaranteed by the State, thereby substantially increasing the stock of public debt. The country’s level of debt and the government’s involvement in the financing of natural resources projects keep Niger very much vulnerable to adverse shocks, as demonstrated by the deterioration of the debt indicators in the extreme shock scenarios.

15. Niger’s continued risk of debt distress calls for a limited government involvement in financing natural resource projects. It also underlines the need to remain vigilant in terms of seeking concessional new borrowing. Non-concessional borrowing should only be considered for well-assessed, high-yield commercial and infrastructure projects that will generate sufficient government revenue to cover debt service related to the projects.

16. The Nigerian authorities have indicated their agreement with the conclusions reached in this DSA. In particular, the authorities have stated that the result of moderate debt distress level, as well as staff recommendations in terms of limiting government involvement in financing natural resources projects, are consistent with a debt sustainability analysis the Technical Commission from the National Public Debt Committee conducted in October 2012.

Baseline Scenario Assumptions

The baseline macroeconomic scenario for 2012-32 is based on the following assumptions:

  • Real GDP growth is projected to increase to an average of about 6.2 percent a year during 2013-32, reflecting increasing production developments in the extractive industries and higher non-resource GDP growth as private sector expands and business climate is improved. Inflation is projected to remain stable at 1.8 percent over the projection period; compared to historical values, the lower projected inflation reflects lower expected international food price inflation and the recent average inflation of around 2 percent.1

  • The revenue-to-GDP ratio is projected to rise from 16 percent in 2012 to 21.5 percent in 2032, reflecting revenue generating developments in the extractive industries, further structural reforms aiming at improving revenue collection and a more diversified private sector.

  • Primary Expenditure is expected to increase from 25.3 percentage points of GDP in 2012 to 29.8 percent of GDP in 2032, mostly driven by capital expenditure that is projected to increase from 13.3 percent of GDP in 2012 to stabilize at around 17.2 in 2032. The ambitious government investment program is expected to result in an increase in infrastructure spending, including large transport and irrigation projects in the pipeline. Infrastructure projects that would be financed by non-concessional lending were assumed to be occurring only in the cases where sufficient government revenue can cover debt service related to the projects, but there is still too much uncertainty at this point in time to include it in the present DSA. The basic balance (the fiscal balance net of grants and externally-financed capital expenditure) remains in surplus from 2022 onward (complying with the WAEMU regional convergence criterion).

  • The current account deficit is projected to significantly decline from 17.2 percent of GDP in 2012 to about only 9.5 percent of GDP in 2032. Exports are projected to increase from 25.4 percent of GDP to 34.7 percent in 2032, as oil and uranium exports expand and the economy diversifies. After a brief decline, imports would increase again before stabilizing, in line with foreign direct investment patterns.

  • Following a few years of substantial FDI inflows linked mostly to the oil investment, net FDI is projected to decline from a peak of 17.5 percent of GDP in 2010 as the large investment projects come to completion, and in line with the delay in the large investment project related to Imouraren. A large FDI outlow in 2013 will be recorded due to the reclassification of the Soraz loan in that same year, previously considered an FDI, intra-company inflow now defined as public debt. Assuming the start of repayment of the Imouraren debt-creating FDI, FDI is reduced in 2018.

  • Total external financing is expected to gradually decrease, from 10.7 percent of GDP in 2012 to about 8.8 percent of GDP in 2032. As in the previous DSA, this assumption relates to the reduction in Niger’s borrowing needs and the expected increase in per capita GDP. Grants would represent about 62 percent of total external financing on average during the period. The discount rate is 3 percent, a lower rate compared to the previous DSA rate of 4 percent.

1 The drop in GDP deflator in 2012 results from a depreciation of the exchange rate in that year.
Figure 2.
Figure 2.

Niger: Indicators of Public Debt Under Alternative Scenarios, 2012-2032 1/

Citation: IMF Staff Country Reports 2013, 104; 10.5089/9781484342695.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022.2/ Revenues are defined inclusive of grants.
Table 1a.

Niger: External Debt Sustainability Framework, Baseline Scenario, 2009-2032 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.

Niger: Public Sector Debt Sustainability Framework, Baseline Scenario, 2009-2032

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2a.

Niger: Sensitivity Analysis for Key Indicators of Public- and Publicly-Guaranteed External Debt, 2012-2032

(Percent)

article image
article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels.

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 2b.

Niger: Sensitivity Analysis for Key Indicators of Public Debt 2012-2032

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

The terms are expected to be 1.5 percent interest rate, 20 years maturity and 9 years grace period, compared to a 3 percent interest rate margin over LIBOR, 10 year maturity and one year grace period for the guarantee.

2

As in the previous DSA, the large residuals shown in table 1a and 1b reflect capital grants that the country is projected to receive thanks to the more stable political and economic environment. The large 2013 residuals also result from the amortization of the previously non-concessional contracted debt from CNPC, a, transaction reflected by large FDI outlows in that particular year.

Niger: 2013 First Review Under the Three-Year Arrangement Under the Extended Credit facility and Request for a Waiver of Nonobservance of Performance Criterion-Staff Report; Staff Supplements; and Press Release
Author: International Monetary Fund. African Dept.