By Omololu Ogunmade and James Emejo
Abuja — The Managing Director of the International Monetary Fund (IMF), Ms. Christine Lagarde wednesday expressed concern over Nigeria’s debt profile, saying it weighs heavily on the nation’s treasury with 35 kobo of every naira collected used for debt service, and advocated for the broadening of the country’s revenue base by increasing the value added tax (VAT) paid for goods and services.
She advised Nigeria to increase its VAT, noting that its VAT rate was not only among the lowest in the world, but also well below VAT rates in other countries of the Economic Community of West African States (ECOWAS).
Lagarde’s comment on the five per cent VAT paid for goods and services in Nigeria was in line with the recommendation made by several leading economists such as Dr. Ayo Teriba, CEO of Economic Associates, who have advocated for an increase in the VAT rate in line with Nigeria’s peers on the African continent.
Relative to Egypt, Morocco, South Africa and Kenya, Nigeria’s 5 per cent levy as VAT is considered one of the lowest in the continent. Lagarde, who is on a four-day working visit to Nigeria, made this remark when she paid a courtesy visit to Senate President Bukola Saraki at the National Assembly, Abuja.
While advising the Nigerian government to exercise caution in borrowing, Lagarde however observed that Nigeria’s debt profile was very low at 12 per cent of its gross domestic product (GDP).
She also urged the federal government to shore up its revenue drive by broadening the nation’s tax base and simultaneously reduce leakages by promoting compliance and enhance the efficiency of revenue collection.
She urged Nigeria to embrace the 3Rs in its bid drive to boost its economy. The 3Rs are resolve, resilience and restraint. “Act with resolve by stepping up revenue mobilisation. The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency.
“At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members countries, so some increase should be considered.
“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.
“Exercise restraint by focusing on the quality and efficiency of every naira spent. 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.”
Lagarde also canvassed the need for Nigeria to eliminate the fuel subsidy, explaining that the subsidy regime was not only harmful to the planet but also not in the interest of the poor.
According to her, research conducted by the IMF revealed that subsidy schemes in developing countries favoured only 20 per cent of the richest households while only seven per cent of the poorest 20 per cent benefit from the scheme.
She said: “Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but 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 seven 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.
“Let me start by underscoring the progress made in recent years: Nigerians have created a large and diversified economy that has grown by about 7 per cent a year over the last decade. This has been a remarkable achievement, a testament to Nigeria’s immense potential,” she said.
While analysing the current state of the Nigerian economy, Lagarde said the nation’s economic growth of 3.2 per cent in 2015 was the lowest since 1999, observing that it has the potential to record only a modest recovery in 2016.
Noting that Nigeria has been globally acknowledged as the largest economy in Africa, Largade added that its political system was also maturing, especially with its smooth transition in 2015.
She also observed that in the face of the drastic fall in global oil prices, Nigeria still has the responsibility of addressing its apparent infrastructural deficit.
“The outlook, however, has weakened. Growth in 2015 is estimated at about 3.2 percent-its slowest pace since 1999-and 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.
“Since that visit (four years ago), Nigeria has been acknowledged as the largest economy in Africa-with a maturing political system. We saw a peaceful general election last year in which, for the first time in Nigeria’s history, there was a democratic transition between two civilian governments. It was a strong sign of Nigeria’s commitment to democracy, to a new Nigeria.
“At the same time, the external environment has changed. 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.
“So 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,” she said.
Observing that Nigeria’s banks are well capitalised and more resilient than they were during the downturn of 2008 and 2009, Lagarde said the banks were “now 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”.
She advised the Nigerian government to act with the resolve to significantly improve transportation networks as well as power generation, transmission and distribution, adding that Nigeria can be exporting tomato paste on a large scale, even as she lamented that instead of fostering export of commodities, Nigeria imports about half of its needs.
“This is why Nigeria needs to build more roads and better rail networks so that more farmers can bring their crops to market,” she added.
Lagarde also urged the country to be firm in the fight against corruption, recalling that President Muhammadu Buhari, in his first public speech after the election, described corruption as a “form of evil that is even worse than terrorism”.
The IMF chief listed three issues, which she said had affected economic growth at both the local and regional levels, observing that these factors have had adverse effects on exports of nations including Nigeria.
She however dropped a bombshell for those who are still hopeful that the price of oil will rise in 2016, saying that crude prices will continue to head south and advised the federal government to boost its economy by diversifying its dependence on oil.
She attributed continuing fall in oil prices to increased oil production by more countries while demand for the product has continued to drop.
“In fact, both at the regional and global level, growth is affected by three major economic transitions: they include China’s move to a new growth model, the prospect of commodity prices remaining lower for longer, and the increasing divergence in monetary policies in major economies, especially since the recent rise in U.S. interest rates.
“Understandably, policymakers in this region are concerned-because these transitions can create spillovers through trade, exchange rates, asset markets, and capital flows.
“For example, spillovers are now affecting oil-exporting countries, which generate about half of this region’s GDP. These economies, including Nigeria, are facing massive pressures and challenging prospects.
“Over the medium term, 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.
“Think of the shale oil boom in the U.S., and some historically large producers such as Iraq and Iran coming back to the market. Other factors include OPEC’s strategic behavior and the drop in global demand for oil, especially in emerging economies.
“Nigeria also has a large regional footprint, and its fortunes affect that of its neighbors, especially through trade. For example, it is estimated that a one per cent reduction in Nigeria’s growth causes a 0.3 per cent reduction in Benin’s growth,” she explained.
To ensure inclusive growth, Lagarde advised Nigeria to exploit the boom in mobile communications with more than 140 million cell phones under usage and the home-grown film industry, Nollywood, which she described as the world’s second largest, employing about one million people as well as the growing number of innovations from fashion to software development “that are promoting Brand Nigeria”.
She added: “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.”
Earlier, Saraki while welcoming Lagarde and her team to Nigeria, said the country was determined to move away from the impunity of the past and reposition critical sectors of the economy such as petroleum for greater efficiency, adding that the nation was committed to diversifying the economy.
He also urged the IMF to support Nigeria’s economic policies and help to spread the message to the international community that the new government in the country was committed to fiscal discipline.
Saraki said the new government also has a supportive legislature which is devoted to enacting legislations that will create a conducive atmosphere for businesses to thrive.
He said at this critical period when the economy is affected by low oil prices, what Nigeria requires from international institutions like the IMF is solid backing for its policies aimed at diversifying and modernising the economy, creating more jobs, rebuilding the national infrastructure, and attracting foreign direct investment.
He assured the IMF team that there is a bi-partisan commitment of all members of the federal legislature on the need to “work closely with the executive arm in addressing the challenges facing the economy particularly the need to partner with the executive to give confidence to investors that the era of policy uncertainty is gone”.
The Senate President added: “That is why the focus of our legislative agenda is to give priority to laws that will provide a more conducive business environment, reduce the cost of doing business, make dispute resolution very easy, end impunity, and reduce corruption in the system.”
He assured the visitors that part of the support the legislature aimed to give to the economic recovery effort of the present administration was to make laws that will block identified legal loopholes that have resulted in revenue leakages; expand the tax base; improve oversight systems; expose corruption and provide better legal frameworks to entrench the rule of law and end impunity.
Saraki also called on the Central Bank of Nigeria (CBN) to ensure that in reacting to recent developments in the economy, it does not devalue the naira for the mere sake of devaluation.
However, he called on the central bank to introduce a more flexible foreign exchange regime and reduce the present restrictions on the autonomous market which do not allow businessmen to bring in foreign exchange or utilise what they have in their accounts.
“The IMF should support our CBN to bring in low interest loans to SMEs. We need to encourage entrepreneurs and make most of our new graduates job creators rather than job seekers. This is an area where we need the financial support and technical assistance of the IMF,” he said.
Also, during Lagarde’s meeting with officials of the CBN and chief executives of banks in Abuja yesterday, she affirmed that the Nigerian financial sector remained “strong and solid” and commended the central bank’s efforts to stabilise the economy.
She particularly endorsed the CBN’s push to encourage Nigerian banks to increase lending to support the real sector of the economy, especially small and medium enterprises.
The IMF boss said loans to the real sector should be at concessionary rates in order to stimulate economic growth.
Speaking briefly to journalists after the meeting, she said: “We had a chance to debate together, how the financial sector can better contribute to financing the economy and supporting businesses and development of growth in Nigeria.
“From my perspective, it was a very objective meeting, very open, we had the chance to really exchange and consider how the system can improve further.
“The financial sector of Nigeria is strong, solid and needs to continue to be so but it also needs to lend to the real economy.”
In his remarks, the Governor of the CBN, Mr. Godwin Emefiele described the meeting with Largade as fruitful, stressing that the banks had also committed to further boost lending to the real sector.
He said: “I would like to thank the MD of the IMF for visiting Nigeria and the Central Bank of Nigeria this morning where we had very fruitful discussions and indeed she gave support to the efforts of the CBN by trying to encourage Nigerian banks to continue to support the real sector, especially the small scale enterprises in Nigeria.
“She indeed also advised that we should try as much as possible to undertake lending activities at very concessionary pricing, just like we are doing, and indeed, the banks themselves have given their word that they will do their best notwithstanding the fiscal risks, as well as some of the challenges we have in the environment.”
Later, Lagarde visited the St. Theresa’s Motherless Children’s Home in Gwarimpa, where she made a donation of $7,500 on behalf on the IMF to the orphanage. She urged the management to put the money to good use to cater for the children.
Accompanied by the CBN Deputy Governor, Economic Policy, Dr. Sarah Alade and the Permanent Secretary of the Minister of Finance, Mr. Mahmoud Dutse, the IMF boss, after a presentation by the children, said nothing was as “heart-touching” as the visit to the orphanage and commended its founder, Mrs. Bolanle Dare for the initiative to give hope to the motherless children.
Announcing her donation, Lagade said the fund cares about the youth and poor as well as the orphaned and attaches great importance to investment in education and children who are the future generation and tomorrow’s leaders.
Expressing her gratitude to the visitors, Mrs. Dare appealed to other donors to emulate them by helping the orphanage.
She said she has a voluntary target to develop two hectares of land to enable her cater for 250 children and give them quality education.
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