By Festus Akanbi
The visiting Managing Director of the International Monetary Fund, (IMF) Christine Lagarde, in a chain of meetings with relevant Nigerian authorities last week, harped on the need to reposition the economy in the face of the sliding revenue through a number of what she called hard decisions. Festus Akanbi captures some of her thoughts
A very topical issue in the business and economic community last week was the symbolic visit of the Managing Director of the International Monetary Fund, Christine Lagarde to Nigeria.
Given the media blitz that heralded the arrival of the IMF chief, it was natural for those following the gradual implementation of the current administration’s economic policy to come up with some conjectures and assumptions on why Lagarde decided to visit Nigeria last week.
First, the visit coincided with the debate on the 2016 budget and government’s resolve to finance the budget through borrowing, both locally and internationally.
Again, the IMF chief executive was also coming amidst the rising criticisms of the Central Bank of Nigeria for its refusal to soften its stance on the foreign exchange market and the failure to reconsider its stance on naira devaluation.
Giving this background, therefore, it was easy for some public affairs commentators to go to town with the speculation that the multilateral institution was sending its officials to discuss debt issues with the Nigerian government.
However, Lagarde, who held meetings with some relevant stakeholders including President Buhari, said her visit to Nigeria was not meant to negotiate loans but rather to promote fiscal discipline and favourable monetary policies.
Lagarde said she had an “excellent discussion” with President Buhari on the challenges facing Nigeria occasioned by the drastic fall in oil price. “Let me make it clear that I’m not here nor is my team in this country to negotiate a loan with conditionality”. “
Beyond Revenue Sharing
However, the IMF chief who addressed the National Assembly on some burning economic issues pertaining to Nigeria said time had come for Nigeria’s policy makers to look beyond the issue of revenue sharing to identifying critical sectors, which can stimulate developments in the country.
She said, “I see an immediate priority-a fundamental change in the way government operates. What do I mean by that? The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve-be it in education, health or infrastructure.”
Taking Hard Decisions
“This means that hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward,” she stated.
She advised the government to act with resolve by stepping up revenue mobilisation. According to her, the first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. She also believed that public finances could be bolstered further to meet the huge expenditure needs. She noted that the nation’s VAT rate is among the lowest in the world and well below the rates in other ECOWAS members, saying some increase should be considered.
In what looked like a subtle support for the government’s borrowing plans, Lagarde enjoined the government to build resilience by making careful decisions on borrowing.
“Nigeria’s debt is relatively low at about 12 percent of GDP. But it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt,” she said.
She also called on the federal government to exercise restraint by focusing on the quality and efficiency of every naira spent, saying this is critically important. “As more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.
“Let me give you examples of what I mean: On capital expenditure, the focus must be on high-impact and high value-added projects. This is why the government is focusing on power, integrated transport (roads, rail, air, and ports), and housing. These can help connect centers of activity across the country and drive growth prospects.
“On recurrent expenditure, efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments. Transfers and tax expenditures should also be addressed. For example, continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programs for the most needy.
“Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but also they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.
“Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change-think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas so that they can go about their everyday business.
“At the same time, we should not forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments-which account for the bulk of social spending-have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue.”
She expressed the readiness of the IMF to help by providing technical assistance on public financial management. “We did so for the Kaduna State Government. We can explore how to support states’ efforts to undertake budget reform,” she stated.
Exchange Rate Flexibilities
The IMF chief also believed there is an urgent need to strengthen Nigeria’s external position. According to her, “The essential fact is that, given the structure of the economy, the massive fall in oil prices-which is expected to continue-has changed the medium term foundations for economic resilience. To be clear, the goal of achieving external competitiveness requires a package of policies including business monetary, flexible exchange rate and disciplined fiscal policies, as well as implementing structural reforms.
Additional exchange rate flexibility-both up or down-can help soften the impact of external shocks, make output and employment less volatile, and help build external reserves. It can also help avoid the need for costly foreign exchange restrictions – which should, in any case, remain temporary. And going forward, improved competitiveness from improved exchange rate flexibility and other reforms will facilitate the needed diversification of the exports base and, ultimately, growth.”
Inclusive, Sustainable Growth
On how to achieve inclusive and sustainable growth, the IMF chief said that the good news is that Nigeria is already, in many ways, a 21st-century economy.
“Think of the boom in mobile communications in a country where more than 140 million cell phones are in use, nearly one for each Nigerian.
“Think of the vibrant, homegrown film industry that has become the world’s second largest by output. Nollywood employs about one million people who create films that are winning audiences across the continent and beyond.
“Think of the growing number of innovative startups-from fashion to software development-that are promoting Brand Nigeria. Indeed, the growth in services to about half of Nigeria’s output is a testament to the transformation that has begun, and which needs to continue,” she said.
Highlighting some of the prevailing structural challenges, Lagarde pointed out that woman account for about 42 percent of the total labor force-which is comparatively low-and their literacy rates are well below that of men. Maternal mortality, according to her, is relatively high because of limited access to health care.
She charged the government to significantly improve transportation networks and power delivery [i.e., generation, transmission, and distribution].
She said, “For example, Nigeria could be exporting tomato paste-a staple of Nigerian cuisine-on a large scale, but it imports about half of what it needs. This is why Nigeria needs to build more roads and better rail networks, so that more farmers can bring their crops to market.
“Likewise, more investment is needed in energy infrastructure in a country where too many businesses and households regard their backup generators as their main power source.”
Admitting the complexities of the new economic scenario, the IMF President noted that the external environment has changed, pointing out “Oil prices have fallen sharply; global financial conditions have tightened; growth in emerging and developing economies has slowed; and geopolitical tensions have increased.
“All this has come at a time when Nigeria is facing an urgent need to address a massive infrastructure deficit and high levels of poverty and inequality.”
The financial expert is convinced that Nigeria has what it takes to surmount the current challenges. She said, “Nigeria faces some tough choices going forward. Nigerians, however, are well known for their resilience and strong belief in their ability to improve their nation and lead others by example. I firmly believe that Nigeria will rise to the challenge and make the decisions that will propel the country to greater prosperity.”
Stressing the determination of the IMF to rally round Nigerian government in formulating an economic position that will address all the segments of the society, Lagarde stated, “And let me assure you that, as you go forward, as you develop your story, the IMF will support your efforts.
“Today, I would like to offer my perspective-on your story and punctuate it with three R’s: resolve, resilience, and restraint.
She said, Africa, which used to bank on commodity prices among other factors to thrive, has now entered a different phase, where commodity prices and capital flows are far less supportive. We are in the process of updating our forecasts, but broadly the IMF staff estimates that regional economic growth dropped from five per cent in 2014 to about 3.8 per cent last year, with only a modest recovery expected in 2016.
She predicted that oil prices are likely to remain much lower than the 2010-13 average of more than $100 a barrel. Why? Because of the huge oversupply in global oil markets.
“Already, lower oil prices have sharply reduced Nigeria’s export earnings and government revenues. Both are likely to remain at depressed levels, reducing the space for policy interventions to address Nigeria’s social and infrastructure needs.
“Private sector investment will also be affected. Investor confidence about the outlook has remained weak, and financing is likely to become more difficult and more costly for everyone. With U.S. interest rates expected to continue to rise, albeit slowly, the likelihood of capital outflows will increase, and exchange rate pressures could mount as investors re-assess their appetite for risk,” she noted.
Managing near-term vulnerabilities
The fact is that Nigeria’s economy, which grew at seven per cent a year over the last decade slowed down to about 3.2 per cent in 2015-its slowest pace since 1999, saying only a modest recovery is expected in 2016.
“For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms. On top of the slowdown, vulnerabilities have increased. The ability to manage shocks is restricted by low fiscal savings and reserves. And the weakening oil sector could stress balance sheets and put pressure on the banking system,” she noted.
Speaking further, Lagarde explained that reduced confidence and lower capital spending also impact the non-oil corporate sector.
She said, “Unfortunately, this sector looks less resilient today than during the downturn of 2008-09. Companies that have increased their leverage and US-dollar debt in recent years may now come under pressure as they face rising interest rates and a stronger dollar.”
Fostering Sound Banking System
The second priority, according to her is to build resilience by fostering a sound banking system. This will help channel more savings into productive investments, especially in quality infrastructure.
“To be sure, Nigeria’s banks are generally well-capitalised and more resilient than during the downturn of 2008-09. But they are beginning to feel the impact of the growing vulnerabilities in the corporate sector. This means rising non-performing loans, which will need to be carefully monitored and managed.
The third priority-act with resolve in fighting against corruption. In his first public speech after the election, President Buhari singled out corruption as a “form of evil that is even worse than terrorism.
“Corruption not only corrodes public trust, but it also destroys confidence and diminishes the potential for strong economic growth.
“At the global level, it is estimated that the cost of corruption is equivalent to more than five per cent of world GDP, with over US$ 1 trillion paid in bribes each year.
“Here in Nigeria, important initiatives to discourage graft are underway and should be applauded. Let me highlight the publication of monthly data on the finances and operations of the Nigerian National Petroleum Corporation. This provides information on a key sector, building confidence in transparency, and improving accountability of oil revenues, for the benefit of all Nigerians,” she concluded.
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