Niger: Staff Report for the 2016 Article IV Consultation and Request for a Three-Year Arrangement under the Extended Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
24 Feb 2017
eISBN:
9781475582871
Language:
English
Keywords:
ISCR; CR; government; reform agenda; outlay; net; debt-to-export ratio; public debt-to-GDP; GDP growth path; debt-to-exports ratio; uranium price; Public and publicly-guaranteed external debt; Debt sustainability analysis; Fiscal stance; sustainability framework
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Economic growth is estimated to have increased to 4.6 percent in 2016 from 3.5 percent in 2015, helped by a strong 2016-17 crop year and despite continued weakness in the oil and mining sectors, adverse spillovers from the economic downturn in Nigeria and continued elevated security threats. Inflation remains subdued. Notwithstanding recent macroeconomic gains, Niger still ranks last on the UN's Human Development Index with growth barely above the estimated rate of population growth (4.1 percent a year). President Issoufou secured a second term in the presidential and legislative elections held in February-March 2016, with the new administration reaffirming a focus on reinvigorating growth to create more employment opportunities, including by addressing infrastructure gaps, while strengthening food security.

Abstract

Economic growth is estimated to have increased to 4.6 percent in 2016 from 3.5 percent in 2015, helped by a strong 2016-17 crop year and despite continued weakness in the oil and mining sectors, adverse spillovers from the economic downturn in Nigeria and continued elevated security threats. Inflation remains subdued. Notwithstanding recent macroeconomic gains, Niger still ranks last on the UN's Human Development Index with growth barely above the estimated rate of population growth (4.1 percent a year). President Issoufou secured a second term in the presidential and legislative elections held in February-March 2016, with the new administration reaffirming a focus on reinvigorating growth to create more employment opportunities, including by addressing infrastructure gaps, while strengthening food security.

Background

1. This joint International Monetary Fund (IMF) and World Bank (WB) DSA, updates the DSA conducted in 2015 for the sixth and seventh reviews under the ECF. The DSA is based on end-2015 data and the baseline scenario of the 2016 Article IV consultation and the new arrangement under the Extended Credit Facility. It uses 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 government arrears, debt to the regional central bank (Banque Centrale des Etats de l’Afrique de l’Ouest-BCEAO) resulting from statutory advances, Niger’s Special Drawing Rights (SDR) allocation, government issued securities, and government public-private-partnership contracts (PPP) to finance capital projects.

2. The previous DSA assessed Niger’s risk of debt distress as moderate, largely on account of government debts contracted to support the development of the natural resource sector and to finance large infrastructure projects. The ratio of nominal external debt to GDP declined from around 54 percent in 2005 to 23 percent in 2010. Niger reached the completion point under the Enhanced Highly Indebted Poor Countries (HIPC) Initiative in April 2004 and in 2006 benefited from Multilateral Debt Relief Initiative (MDRI) assistance from the African Development Fund, the International Development Association (IDA), and the International Monetary Fund (IMF). Niger’s public external debt has increased significantly since 2010, as Niger has participated in developing natural resource projects1 and launched an ambitious public investment program largely financed by borrowing from multilaterals and domestic resources. Public external debt has since reached 30.4 percent of GDP in 2015 and is projected to reach 34 percent of GDP in 2016, partly due to government financing of public infrastructure. The composition of debt has also started to shift with the share of external debt declining slightly to 73 percent of total public debt in 2015, from about 76 percent in 2010, but with a significant increase in the share of obligations to multilateral creditors and a decline in the share of the government guarantee extended to the refinery.

3. Large issuance of securities has increased public domestic debt which had declined in 2013 after arrears were cleared in the context of the previous ECF (Text Table 1). The domestic-debt-to-GDP ratio had declined from 7.4 percent in 2010 to 4.5 percent in 2013, but leapt to 11.5 percent in 2015 as the government issued CFAF 119.8 billion in regional bonds (CFAF 18.2 billion taken by local banks) and CFAF 38.8 billion (entirely issued to local banks) to repay domestic arears.2 Consequently, the stock of government securities on the regional market has increased from 1.3 percent of GDP to 8.3 percent of GDP between 2010 and 2015. Domestic debt is expected to rise further over the medium-term reflecting the expected signing with domestic resident investors, of public-private-partnership contracts (PPP) amounting to around 6.5 percent of GDP mainly in the area of road construction to be implemented in the next 4 years.

Text Table 1.

Niger: Public Debt Composition, 2005–15

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Sources: Country authorities; and IMF staff calculations.

Niger reaches the HIPC completion in April 2004 and benefitted from the MDRI in 2006.

4. Debt management still faces low capacity, but efforts are being made to improve its framework. A June 18, 2015 Prime-Ministerial decree elevates the profile of the Inter-Ministerial Debt Management Committee, which is now chaired by the Prime Minister and also, oversees overall budget support. The committee is supported by a permanent secretary which ensures the coordination of debt management across ministries and that contracted debts are in line with fiscal and debt sustainability. In addition, a quarterly report on debt management is now regularly published, along with the three year borrowing plan that defines the debt strategy and identifies the investment projects and the sources of financing.

5. Niger is rated a medium policy performer for the purpose of determining the debt burden thresholds under the DSA framework. Niger’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) is 3.4 making it a medium policy performer. Accordingly, the external public debt burden thresholds are as shown in Text Table 2.

Text Table 2..

Niger: External Debt Burden Thresholds

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Source: DSA template.The remittances are low in Niger; therefore, the analysis will not consider the scenario with remittance.

Underlying DSA Assumptions

6. The medium-and long-term projections were updated to take into account recent developments. In addition to the financing under the proposed successor ECF program, these developments include lower oil prices, the impact of the regional security situation, delays in the implementation of major natural resource projects, and the economic slowdown in Nigeria. The aforementioned shocks materialized during the current ECF (2012–16) program, and contributed to recurrent fiscal slippages. The proposed successor ECF 2017–19 program comes with a maximum access of 75 percent of quota. In the framework for the proposed program, the fiscal situation is expected to improve only gradually in the medium-term as, relative to the previous DSA, revenue projections have been revised down reflecting the delay in completing the large natural resource projects and with a slightly higher expenditure envelope (on top of the already anticipated elevated spending of 2016) to preserve room for development spending despite the anticipated continued elevated security spending (including assistance to refugees). The increase in resource revenue is projected only in 2020 because of delays in the implementation of the crude oil export project which is expected to be operational in 2020, while the completion date for the Imouraren uranium project is still kept at 2021. The basic fiscal balance will gradually improve during the course of the new program, turning to a surplus when revenue from crude oil exports becomes significant.3

7. Growth and exports will be mainly affected by developments in the resource sector and spillovers from the economic downturn in Nigeria. The GDP growth path has been revised downward to reflect the slightly weaker than expected growth outcomes and the delay in implementing the resource projects; but longer-term growth is expected to be marginally higher once those projects come on stream. The DSA assumes a more conservative growth in export of goods and services compared to the previous DSA, reflecting the economic difficulties in Nigeria, Niger’s main regional trading partner; and low commodity prices that are adversely affecting the resources sector mainly uranium exports. This scenario results into a lower export-to-GDP ratio throughout the medium and long-term. However, public investment in agriculture and infrastructure are expected to help promote export-oriented growth and efficiency gains that could ultimately improve exports (Text Table 2).

8. Reliance on external grants and loans to finance the current account deficit is projected to decline gradually as natural resource revenues increase. Besides debt-creating flows and Foreign Direct Investment (FDI), the current account deficit is expected to be financed by substantial inflows of project grants and private capital.

Text Table 3.

Niger: Key Macroeconomic Assumptions

(DSA 2016 vs. DSA 2015)1

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Sources: Niger authorities; and IMF staff calculations.

See Box 1 for details on baseline scenario assumptions. The DSA 2015 forecasting period stops in 2035.

Total revenue excluding grants.

9. The macroeconomic outlook remains subject to numerous risks mostly tilted to the downside. The country remains vulnerable to the effects of exogenous shocks, including political tensions, fluctuations in commodity prices, and frequent weather-related shocks (drought and flooding) on economic activity and on food security. The continued low oil and uranium prices may cause further delays in implementing the natural resource projects. Also, the persistence or intensification of violent conflicts could divert resources from social needs and development projects. On the upside, a rebound in uranium and oil prices, and recovery in the Nigerian economy would substantially increase Niger’s exports, and also improve fiscal space.

External DSA

Baseline

10. The baseline scenario assumes that the US$1 billion credit line from EximBank of China4 will be disbursed progressively over the period of 2020-27, when the export of crude oil starts. The baseline scenario assumes that US$50 million of the Chinese master facility is disbursed in 2020, US$100 million in 2021 and the same amount in 2022, and the disbursement of the remaining US$750 million will be spread over the following years.5

11. In the baseline scenario, external debt ratios remain below their policy-dependent thresholds throughout the projection period (2016−36). The present values (PV) of debt-to-GDP, debt-to-exports and debt-to-revenue ratios are expected to remain below the relevant thresholds over the medium term. Those ratios will slightly increase in the next 3 years, should the government borrow to finance its infrastructure investment plans. The debt-to-export and debt-to-revenue ratios will decline starting 2020 when the export of crude oil is expected to start, boosting both exports and growth (Figure 1). However, further delay in the resource projects could lead the debt-to-exports ratio to breach the threshold putting significant pressures on debt and fiscal sustainability. As the baseline debt-to-exports ratio increases to less than 5 percent of breaching the threshold, the probability approach was applied, which highlighted all debt ratios remain well below their relevant thresholds during the entire projection period (Figure 3).

Figure 1.
Figure 1.

Niger: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2016–36

Citation: IMF Staff Country Reports 2017, 059; 10.5089/9781475582871.002.A003

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 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Alternative Scenarios and Stress Tests

12. Under the most extreme shock scenarios, only the present values (PV) of debt-to-export ratio breach the relevant thresholds; the other debt ratios and the debt service ratios remain under their relevant thresholds (Figure 1). Under the historical scenario, which sets key macroeconomic parameters at their historical values, the debt ratios increase in the long term leading the debt-to-GDP ratio to breach the threshold in 2032 and the debt-to-export ratio to breach the threshold in 2028 and stays above the threshold. The stress tests’ results suggest:

  • The most extreme shock that affects the PV of external debt-to-GDP ratio (Figure 1, Table 1b) is a 30 percent depreciation of the national currency in 2017. Under that shock, the ratio of debt-to-GDP will rise to almost reach the policy dependent threshold of 40 percent in 2014-25 before declining progressively to 31.7 percent at the end of the projection period.

  • The most extreme shock that affects the PV of external debt-to-export ratio (Figure 1, Table 1c) is an export shock−that assumes export values grow at their historical average minus one standard deviation in 2017 and 2018, stemming from disruption in the oil industry, low uranium and oil prices, and severe drought, lowering the country’s exports. In this case, the ratio breaches the threshold in 2017 and increases to a maximum of 230.5 in 2018 before starting to decline as crude oil exports boost aggregate exports. The debt-to-export ratio breaches also the threshold in case of: (i) a shock on non-debt creating flows; (ii) a combined shock on growth and non-debt creating flows; and (iii) a tightening of new borrowing terms.

  • Finally, under the most extreme shocks, the PV of external debt-to-revenue and the debt service ratios6 remain under their policy relevant thresholds. (Figure 1, Table 1d, 1e, and 1f).

Table 1a.

Niger: External Debt Sustainability Framework, Baseline Scenario, 2013–36

(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, 2013–36

(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.

13. Based on Niger’s high vulnerability to shocks, staff developed two alternative scenarios. The scenarios simulate security and terms of trade shocks.7 In both scenarios, staff assume also a one-year delay of the crude oil export project completion. The simulation results show a significant macroeconomic impact, with GDP growth declining by 0.3 to 0.8 percentage points, and the current account widening by 0.8 to 1.7 percent of GDP, causing reserves to fall. The fiscal stance would also deteriorate as revenue would fall and security spending expand. From a DSA perspective, while under the security shock the debt ratios would remain under their respective thresholds, the large impact of the terms of trade shock on exports would cause the debt-to-export ratio to exceed the threshold by 15.4 percent in 2017 (Figure 4).

Figure 2.
Figure 2.

Niger: Indicators of Public Debt Under Alternative Scenarios, 2016–36

Citation: IMF Staff Country Reports 2017, 059; 10.5089/9781475582871.002.A003

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 2026.2/ Revenues are defined inclusive of grants.
Figure 3.
Figure 3.

Niger: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2016-2036 1/

Citation: IMF Staff Country Reports 2017, 059; 10.5089/9781475582871.002.A003

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 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure 4.
Figure 4.

Niger: Indicators of Public and Publicly Guaranteed External Debt Under a Terms of Trade Shock, 2016–36

Citation: IMF Staff Country Reports 2017, 059; 10.5089/9781475582871.002.A003

Sources: Country authorities; and staff estimates and projections.

Public DSA

Baseline

14. The baseline scenario assumes that the government will continue to rollover the outstanding stock of treasury bills, issuing on annual average CFAF 130 million in treasury bonds over the medium term and around CFAF 70 billion in the long-term, as revenue collection improves. Niger’s domestic debt, 11.5 percent of GDP in 2015, is projected to peak at 15.9 percent of GDP in 2018 as the government implements the 6.5 percent of GDP of PPP contracts. The 2016 budget includes a planned bond issuance of CFAF 170 billion of which CFAF 40 billion to be issued to local banks to repay domestic arears. However, due to delays in making the arrangement with the banks, the CFAF 40 billion security issuance will only be completed in 2017. The domestic public debt-to-GDP ratio is projected to fall over the long-term, reaching 1.7 percent of GDP in 2036. However, this rapid buildup in domestic borrowing, expected to generate debt service equivalent to 4.7 percent of GDP in 2017, could engender significant risks to the government’s financial position if regional liquidity conditions deteriorate.

15. The inclusion of Niger’s domestic public debt in the analysis highlights the vulnerability of the baseline scenario, as the public debt-to-GDP ratio exceeds the benchmark under the extreme shock scenario. Under the extreme shock with the primary balance set at the historical average minus one standard deviation in 2017-18, the public debt to GDP ratio will exceed the benchmark between 2018 and 2021 and decline in the long term. Also with an assumption of no improvement in the fiscal situation—the primary fiscal balance remaining at the 2016 level, a deficit of 5.3 percent of GDP—public debt will rise continuously. Consequently, the PV of debt-to-GDP ratio will exceed the benchmark in 2025 and reach 79.6 percent in 2036, significantly above the threshold of 56 percent of GDP (Figure 2, Table 2b).

Table 2a.

Niger: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016–36

(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.

Table 2b..

Niger: Sensitivity Analysis for Key Indicators of Public Debt 2016–36

(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.