Niger: Staff Report for the 2014 Article IV Consultation and Fourth and Fifth Reviews Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria—Debt Sustainability Analysis

December 3, 2014

Abstract

December 3, 2014

December 3, 2014

Approved By

David Robinson and Peter Allum (IMF) and John Panzer (IDA)

Prepared by the Staffs of the International Monetary Fund and the International Development Association.

The previous Debt Sustainability Analysis was conducted at the time of the First Review under the Three-Year Arrangement under the Extended Credit Facility (Country Report No. 13/104, April 2013). The medium-term economic framework underpinning the analysis has been updated to reflect recent developments, consistent with the baseline scenario in the 2014 Article IV and Fourth and Fifth Reviews Under the Extended Credit Facility Arrangement. The large additional oil revenues that are expected after 2017 will significantly strengthen the fiscal and external accounts. As a result, the various debt measures remain below the relevant thresholds in the baseline scenario, but the present value (PV) of the debt-to-export and the PV of debt-to-GDP ratios breach the threshold under the most extreme stress test. On this basis, Niger’s risk of debt distress continues to be considered as moderate.1

Background

1. This joint IMF-World Bank debt sustainability analysis (DSA) updates the DSA of the external and total public debt of Niger completed at the time of the first review under the ECF. It is based on preliminary end-2013 data, using the standard debt dynamics template for low-income countries. The debt data cover external and domestic debt of the central government, debt of public enterprises and parastatals, state guarantees and private external debts. Domestic debt includes arrears, debt to the central bank (Banque Centrale des Etats de l’Afrique de l’Ouest-BCEAO) resulting from statutory advances and the special drawing rights (SDR) allocation and government securities.

2. The previous DSA assessed Niger’s risk of debt distress to be at a moderate level, largely on account of the government’s debt contracts to support the development of the natural resource sector. Niger reached the completion point under the Enhanced HIPC Initiative in April 2004 and in 2006 benefited from MDRI assistance from the African Development Fund, International Development Association (IDA), and the International Monetary Fund (IMF). The debt relief contributed to a reduction of nominal external debt from over 90 percent of GDP at end-2000 to about 17 percent of GDP at end-2010. Niger’s public external debt exposure has increased significantly after 2010, up to 22.8 percent of GDP at end-2013, as a result of government’s involvement in the financing of projects in natural resources.1

Underlying DSA Assumptions

3. Staff has updated the medium- and long-term projections for Niger. Revenue projections have been revised upward to reflect new developments in the petroleum sector and ongoing improvements in revenue collection. The higher oil revenue is expected after 2017 when the new crude oil project will come on stream. The increased revenues will enable an expansion in public investment, while current expenditures should be gradually contained.2 The average GDP growth projection is revised downward in the short-term and stabilizes to its steady state growth rate at 5.5 percent, lower than projected in the 2013 DSA. The 2014 DSA assumes conservative growth of exports of goods and services in particular for non-resource export compared with the 2013 DSA. However, public investments in agriculture and infrastructure are expected to help promote export-oriented growth and efficiency gains in the long-run.

4. External public grants and loans are projected to decline gradually as natural resource revenues increase. Besides debt creating flows and FDI, the current account deficit is expected to be financed by significant flows of project grants, and private capital flows.

Text Table 1.

Niger: Key Macroeconomic Assumptions

(DSA 2014 vs. DSA 2014)

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Sources: Nigerien authorities; and IMF staff estimate.

DSA 2013 covers the period until 2032. See Box 1 for details on baseline scenario assumptions.

Total revenue, excluding grants.

5. The macroeconomic outlook remains subject to various risks. The country is very vulnerable to exogenous shocks, including frequent weather-related food crises and fluctuations in commodity prices. The deteriorating security situation in the region is another factor adding fiscal costs and economic vulnerability to Niger.

External DSA

6. Niger’s debt exposure has increased significantly since 2009 as a result of government involvement in the financing of projects in the natural resources sectors. The refinancing loan for the construction of the SORAZ refinery (in amount of CFAF 437.4 billion), if approved by the Chinese authorities in 2014, would replace the existing private non-concessional funding of the refinery (which was 40 percent guaranteed by the State), as a result, the stock of external public debt (including guarantees) will increase from 22.8 percent of GDP at end-2013 to a projected 32.7 percent of GDP at end-2014. Total external debt (including private debt) will increase from 49.5 percent of GDP at end-2013 to 53.7 percent of GDP at end-2014. The rate of external public debt accumulation is expected to remain broadly stable but then decline gradually in the outer years after the new natural resource projects are operational and planned key infrastructure investments are completed (Figure 1).

Figure 1.
Figure 1.

Niger: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios. 2014-34 1/

Citation: IMF Staff Country Reports 2015, 063; 10.5089/9781475586800.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d. to a Non-debt flows shock; in e. to a Growth shock and in figure f. to a Growth shock

7. In the baseline scenario, the external debt ratios remain below their policy-dependent thresholds throughout the projection period (2014–34). The present values (PV) of debt-to-GDP, debt-to-exports and debt-to-revenue ratios are expected to remain at levels below the relevant thresholds over the medium term.3 As in the previous DSA, upon the approval of the refinancing loan for the SORAZ, the existing non-concessional loan with a 40 percent state guarantee will be terminated, causing a one-off spike in the debt service ratio in 2014. After 2014, debt service indicators would remain well below their thresholds for the entire projection period. The stress test under the historical scenario also shows sustainable trends of external debt ratios (Figure 1).

8. The baseline scenario assumes that the US$1 billion credit line from EximBank of China4 will be disbursed in the period of 2015-22. US$50million of the Chinese master facility is assumed to be disbursed in 2015, US$100 million in 2016, US$100 million in 2017, and the rest of US$750 million is assumed to be equally disbursed in the following years. Given that the credit line is fully used by 2022, the PV of public external debt to export ratio will approach the threshold in the medium-term.

9. Under the most extreme scenario, the debt-to-export and the debt-to-GDP ratios breach the relevant thresholds. (Figure 1). For both indicators, the most extreme stress test assumes lower level of non-debt capital flows (FDI) in 2015 and 2016, kept at historical average minus one standard deviation, which results in higher debt indicators relative to the baseline. However, even in this scenario, the debt burden indicators are expected to stabilize at sustainable levels over the medium term.

10. In the alternative and customized scenarios, the external debt ratios mostly remain below the threshold level although a fast accumulation of less concessional external debt could elevate the level of debt distress. Two alternative scenarios are performed (Table 2a). Under historical scenario (A1 key variables are fixed at their historical averages throughout the projection period), the debt indicators remain at the level far below the relevant thresholds. Another scenario assuming fast accumulation of less concessional external debt (A2), could elevate the risk of external debt distress, which calls for the authorities’ action in limiting the accumulation of non-concessional external debt. In light of the uncertainties about prospects for crude oil production and exports, a customized scenario with lower crude oil production and exports was also added, which demonstrates that external debt indicators will remain at sustainable level under the lower oil export scenario.5

Table 1a.

Niger: External Debt Sustainability Framework, Baseline Scenario, 2011-34 1/

(In percent of GDP, unless otherwise indicated)

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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, 2011-34

(In percent of GDP, unless otherwise indicated)

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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, 2014-34

(In percent)

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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.

Public DSA

11. The increase in bond financing from the regional market would raise domestic debt stock in the short-term. Niger’s domestic debt is currently at a low level (3.5 percent of GDP at end-2013, see Table 1b) which is projected to rise in 2014 to 5 percent of GDP due to the new issuance of regional bonds in the amount of CFAF 93.3 billion.6 The baseline scenario assumes that the authorities continue to cover fiscal financing needs through the issuance of government securities on similar terms as the 2014 regional bonds, but with lower amounts issued annually in the medium-term. Consequently, domestic public debt is projected to fall over the medium term. In 2013, the bulk of domestic debt is comprised of non-interest bearing arrears, which are projected to be fully repaid by 2017, so that the average nominal interest rate on domestic debt is low.

12. Public debt ratios remain below the relevant threshold level, but can approach the policy-dependent threshold level under alternative scenarios with higher primary fiscal deficit and lower GDP growth. Under the extreme case with no improvement in fiscal situation, the primary fiscal balance remains at the 2014 level of -4.8 percent of GDP, which leads to the accumulation of public debt. Consequently, the PV of debt-to-GDP ratio would approach the policy-dependent threshold level of 56 percent (Figure 2, Table 2b). When the permanently lower GDP growth shock is assumed, the PV of debt to GDP will reach 58 percent. The PV of public debt-to-GDP ratio and the PV of public debt-to-revenue ratios will stabilize to sustainable levels under baseline and other stress tests including the one with 30 percent real depreciation of exchange rate (i.e., the most extreme shock scenario).

Figure 2.
Figure 2.

Niger: Indicators of Public Debt Under Alternative Scenarios, 2014-34 1/

Citation: IMF Staff Country Reports 2015, 063; 10.5089/9781475586800.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.2/ Revenues are defined inclusive of grants.
Table 2b.

Niger: Sensitivity Analysis for Key Indicators of Public Debt 2014-34

(In percent)

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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.

Private External Debt Dynamics

13. The current DSA includes identified private debt flows, linked to the large natural resource projects. The main private debt flows are related to the large oil and uranium projects. It incorporates the contracts of a loan by the refinery SORAZ (60 percent privately owned) and a loan of about 1.4 billion euro to finance the new uranium mine Imouraren. Including this debt, the stock of external private debt is 26.7 percent of GDP in 2013 (amortization of this loan is projected to start from 2017).

Conclusion

14. On the basis of the updated DSA, Niger remains subject to a moderate risk of debt distress. In comparison with the previous DSA, the large oil project is expected to generate net revenue and lead to an improvement in the fiscal and external accounts. In the baseline scenario, the external and public debt indicators remain below their policy-dependent thresholds throughout the projection period. However, the expected refinancing loan to SORAZ refinery, individual loans contracted under the Chinese master facility, and the uptick in borrowing from regional market would increase the public debt stock. Consequently, the PV of debt-to-export and debt-to-GDP ratios could breach the threshold level under the most extreme scenario. The country’s level of external debt keep Niger vulnerable to adverse shocks, as demonstrated by the deterioration of the debt indicators in the most extreme scenario.

15. Niger’s continued risk of debt distress calls for the authorities’ continued commitment to strengthen debt management. The Inter-Ministerial Committee, which was created by order of the prime minister in December 2013, must play an active role in preventing the recurrence of non-concessional borrowing and in limiting the accumulation or external and public debt to maintain fiscal and debt sustainability. Any loans contracted under the Chinese master facility agreement should be used for high-yield infrastructure projects that will generate sufficient government revenue to cover debt service related to the projects. Implicit earmarking of specific project fiscal revenues, however, should not justify exception in contracting loans, because it is not guaranteed that such revenues will necessarily contribute to improving spending allocations or reducing debt ratios. The authorities also need to build buffers to cope with exogenous shocks, and strengthen revenue administration and expenditure prioritization to align with short-term and long-term spending needs.

16. The Nigerian authorities have indicated their agreement with the conclusions reached in this DSA. They provided inputs on the disbursement profile of the master facility; this information has been incorporated. The authorities have also stated that the result of moderate debt distress level, as well as staff recommendation in strengthening debt management, are consistent with their regular debt sustainability analysis conducted by the Inter-Ministerial Debt Committee.

Baseline Scenario Assumptions

The baseline macroeconomic scenario for 2013–34 is based on the following assumptions:

  • - Real GDP growth will increase to an average of 7.8 percent a year in 2016-19, higher than assumed in the 2013 DSA, reflecting production developments in oil sector. The growth rate remains at an average of 5 percent a year in 2020-34, reflecting higher non-resource GDP growth, as Niger continues public investment and makes progress in improving the business climate. Inflation is projected to remain stable at about 2 percent over the projection period, as own agricultural and oil production will keep inflationary pressures in check. The export price of crude oil is assumed to be 85 percent of the international oil price that follows declining price trend during 2017-19 as assumed in the World Economic Outlook (October 2014), followed by gradual price increase afterwards.

  • - Total revenue-to-GDP ratio will rise from about 17.2 percent in 2013 to 22.1 percent in 2034, higher than assumed in the 2013 DSA, reflecting rising revenue from natural resources, ongoing improvements in the revenue collection effort, and higher custom revenues from export-oriented growth.

  • - Primary fiscal expenditure (excluding interest payments) is expected to reach about 31 percent of GDP in 2019, driven by large spending needs for security expenditure and expenditure in priority sectors such as food security, infrastructure, and education. While current expenditure is expected to be gradually contained from about 15 percent of GDP in 2014 to 13 percent of GDP in 2034, capital expenditure is expected to remain at high level due to an increase in infrastructure spending, and as a result, primary fiscal expenditure will be at 29.5 percent of GDP in 2034. The basic balance (the fiscal balance net of grants and externally-financed capital expenditure) will gradually converge to zero (complying with the WAEMU regional convergence criterion). The overall fiscal deficit (cash basis) will also decline from 11.6 percent of GDP in 2013 to 7.6 percent of GDP in 2034.

  • - The non-interest current account deficit is projected to gradually decline to 8.5 percent at the end of the projection period. Export volume would increase, mainly driven by much larger export volume growth of crude oil (after oil production comes on stream in 2017) than was assumed in the 2013 DSA. The export volume of non-resource products is also expected to grow as a result of the expected impact of gradual economic diversification. Imports would slow down initially, in line with the decline of FDI-related imports, before rebounding as imports increase with higher GDP per capita. An improvement in overall fiscal balance and higher private saving contributes to the decline in current account deficit.

  • - Net FDI is projected to increase from about 9 percent of GDP in 2013 to about 14 percent of GDP in 2016 for the construction of new oil pipeline. As assumed in the 2013 DSA, it is expected to decrease over the medium-term as large investment projects come to completion, and the newly-established natural resource companies reimburse FDI loans received from their parent companies; these payments lead to an FDI outflow.

  • - The average interest rate on external debt is projected be around 2 percent. Total external financing is expected to decrease during the high growth period of 2017-19 due to the reduction in borrowing needs and the expected increase in per capita GDP. Total external financing needs are expected to decline to 9 percent of GDP in the medium term reflecting higher domestic revenues. The analysis assumes continuous inflow of grants and loans from donors of about 5 percent and 4 percent of GDP on average, respectively. Grants represent about 60 percent of total external financing amount over the period. The discount rate is 5 percent, a higher rate compared to the previous DSA rate of 3 percent.

  • - The domestic debt profile assumes that the outstanding stock of domestic arrears is paid off by 2017 and that there is no new accumulation of arrears. It includes the issuance of regional bonds in April 2014 in an amount of CFAF 93.3 billion followed by further issuance of new bonds under same terms (i.e., 6.25 percent interest rate, 5 years maturity and 1 year grace period).

1

Niger’s three-year average CPIA (2011-13) is estimated at 3.4, which is in the average performance category.

1

In 2011, the government contracted a Yuan 650 million loan for the financing of its share in the construction of the new Azelik uranium mine, followed by a state guarantee of 40 percent of a US$880 million loan to the SORAZ refinery.

2

This expenditure rationalization objective requires stepping up efforts in the reform of public financial management (PFM) as suggested in the latest PEFA assessment (March 2013) and in IMF technical assistance reports on PFM. The authorities approved the law on fiscal transparency in March 2014 and efforts are underway to strengthen institutional coordination between the Ministry of Planning and the Ministry of Finance to improve the flow of information and to enhance expenditure monitoring. The ECF program also envisages improvements in expenditure controls by limiting resort to the use of exceptional procedures for authorizing spending, accelerating the pace of budget execution, and developing quarterly cash and commitment plans as the structural benchmark to strengthen the capacity in budget planning and execution.

3

See IMF (2013) “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework:” for details on relevant debt thresholds and benchmarks.

4

This line of credit, considered as a facility in total of US$1 billion, was signed in September 2013 and several loan agreements could be negotiated under the facility between the government of Niger and China. Under the master facility agreement, individual loans are subject to 2 percent interest rate, 25 years maturity, and 5 years grace period. Any contracts under the facility are tied to the Chinese supplier and are earmarked for infrastructure projects with higher economic rate of return. Any potential projects need the preliminary approval of Eximbank of China about their eligibility.

5

The assumptions are that the value of oil exports would increase by 80 percent (about a half of the baseline growth rate of 165 percent) in 2017 and then would increase by 8.3 percent in 2018 and 4 percent in 2019; crude oil production is adjusted accordingly. This has also been done for the public DSA.

6

The terms of the regional bonds are a 6.25 percent interest rate, 5 years maturity and 1 year grace period. By August 2014, CFAF 93.3 billion was already issued, among which CFAF 19 billion was taken up by domestic banks and CFAF 74.3 billion was taken up by banks in the West African Economic and Monetary Union (UEMOA). The authorities intend to additionally issue new regional bonds (CFAF 121 billion and CFAF 61.3 billion of bonds are expected in 2015 and 2016, followed by continuous issuance of bonds over the medium-term to diversify the financing sources) which is also captured in the baseline scenario.

Niger: Staff Report for the 2014 Article IV Consultation and Fourth and Fifth Reviews Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria
Author: International Monetary Fund. African Dept.