People & Money

World Bank’s New Chief Economist Says Nigeria is in a “Terrible Shape”, Oil Income Falls by 80%

As much as 96% of Nigeria’s revenue is set to be consumed by debt repayments if Africa’s leading oil exporter is unable to negotiate partial forgiveness or rescheduling of payments with debtors”.

One of Harvard University’s high-profile economist professors, Carmen Reinhart, has this week been announced as the World Bank’s Chief Economist. Reinhart, whose career has taken in stints at the International Monetary Fund (IMF), investment banking and academia, said in a media interview last week that Nigeria, together with South Africa, Turkey, Argentina and Ecuador is in “a terrible state.” Argentina and Ecuador have already defaulted on repayments of debt obligations to international lenders which will see them locked out of international debt markets and their economies throttled as external financing dries up at a time when revenues from commodity exports such as oil have almost disappeared.

As much as 96% of Nigeria’s revenue is set to be consumed by debt repayments if Africa’s leading oil exporter is unable to negotiate partial forgiveness or rescheduling of payments with debtors. This would create serious external financing problems i.e. difficulty in paying for the imported inputs which the economy needs to run and on which many jobs depend. Nigeria, like other emerging markets oil exporters, is suffering a twin shock i.e. the contraction of economic activities arising from the lockdown to curtail the coronavirus infection and the drastic fall in oil prices triggered by the collapse of demand for oil as millions of cars and airplanes are parked all over the world. Nigeria is projected to lose as much as 80% of its 2019 revenue from oil export. The low oil price is a much-needed relief to economies that import rather than export oil.

The 64 year-old Carmen Reinhart was born in Havana, Cuba on 7 October, 1955 to the Castellanos family. At ten years old, she left Havana for California, USA with her Cuban parents.  She studied at Columbia University where she obtained a B.A in Economics in 1975 at the age of 20 and a PhD in 1988 at the age of 33. Professor Reinhart has served on the editorial boards of leading economics journals such as The American Economic Review, International Journal of Central Banking and the Journal of International Economics. According to David Malpass, the President of the World Bank, Professor Reinhart’s career has focused on understanding how advanced and developing countries overcome disruptive financial crises in order to resume economic growth and attain higher living standards. Ms Reinhart attracted controversy in 2013 when she argued in a paper, co-written with fellow Harvard Professor and IMF former Chief Economist, Kenneth Rogoff, that economic growth is stunted in countries with a debt burden that is above 90% of the size of their economy or GDP (the current value of all the goods and services an economy is able to produce in a year). Their paper was found to contain errors which suggest that countries may still be able to grow with debts in excess of 90% of GDP. Nigeria’s debt is currently 34.8% of GDP but the country has a very low tax-to-GDP ratio of 5.7% which suggests that the country’s debt-to-GDP ratio is not a true reflection of Nigeria’s ability to afford or repay debt. The average debt-to-GDP ratio for 26 African countries is 17.2%.

In an interview with Bloomberg, Ms Reinhart commented that “The hit to emerging markets is just very broad”, concluding that it is going to be “enormously costly” for the World Bank and other multilateral public lenders to assist countries like Nigeria. She called on China, which through its vast provision of billions of dollars in loans for infrastructure, had become “the largest official creditor by far” to join institutions like the World Bank in granting debt relief. Nigeria has borrowed $6.5 billion from China since 2002; debts to China represents 8.5% of the country’s external debt. An urgent brief for Ms Reinhart will be leading the coordination of debt relief and restoring economic growth in low-income countries hit by the economic consequences of the coronavirus pandemic. If China doesn’t participate in meaningful debt relief, countries like Nigeria would have to hand over the funds saved through debt restructuring deals with western-led institutions to China to fulfill debt payments obligations, a situation Ms Reinhart says would be a “tragedy”.

Ms Reinhart is taking the Chief Economist position from another woman, Penny Goldberg, who spent only 15 months in the position before deciding to return to teaching at Yale University. It is significant, given the poor representation of women at the top echelon of the economics profession, that Chief Economist of the World Bank and the International Monetary Fund, Gita Gopinath as well as the President of the IMF, Kristalina Georgina are all women.

Ms. Reinhart is married to 62 year-old Vincent Reinhart, the Chief Economist of BNY Mellon Asset Management who was a classmate at Columbia University.

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