Monday 4th January, 2016, the first working day of the year heralded the arrival of Ms Christine Lagarde, the Managing Director of the International Monetary Fund ( IMF) to the Nigerian shore.
On a hot afternoon, her private jet with registration number ZS PNP landed at the ever busy Nnamdi Azikwe International Airport, Abuja to the warm embrace of the Minister of Finance, Mrs Kemi Adeosun and the Central Bank of Nigeria governor, Mr Godwin Emefiele, along with the top officials of the Federal Ministry of Finance and the apex bank.
That would not be the first time the IMF boss would be coming to Nigeria since her ascent to the IMF board. In 2011, Ms Lagarde came to Nigeria first before going to any other African nation during her maiden visit to Africa, however, at that time Nigeria was just coming out of commodity price collapse and the banking sector crisis. Today, the situation has changed, Nigeria has not only emerged as the largest economy in the whole of Africa but it is at the same time managing the crises arising from the dip in the price of crude oil at the global level and the decision of the United States of America to lift its 40-year ban on exporting crude oil.
During her four-day visit to Nigeria, the IMF boss held consultations with President Mohammadu Buhari, the CBN and banking community, the National Assembly members and a host of others critical for the development of Nigerian economy. Her speeches at the various meetings were all geared towards making the Nigerian economy stronger in spite of the challenges.
Speaking at the National Assembly, Lagarde identified key developments that had taken place in Nigeria since her last visit. She said, “today, I would like to offer my perspective on your story and punctuate it with three R’s: Resolve, Resilience and Restraint.”
Global economic transitions and implications for Nigeria and the region
According to Lagarde, for more than a decade, growth in Sub-Saharan Africa was driven by an extraordinary combination of improved policies, stronger institutions, high commodity prices and high capital inflows, disclosing that the region 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 5 per cent in 2014 to about 3.8 per cent last year, with only a modest recovery expected in 2016.
“There is a similar picture at the global level—modest growth last year, with only a slight acceleration expected in 2016. Emerging markets, which propelled global growth after the 2008 global financial crisis, have slowed; advanced economies are still recovering from the impact of that crisis; and financial markets remain volatile,” she stressed.
At the regional and global level, she said, growth is affected by three major economic transitions which include China’s move to a new growth model, the prospect of commodity prices remaining lower for longer and the increasing divergence in monetary policy in major economies, especially since the recent rise in U.S. interest rates.
Over the medium term, the IMF boss said oil prices are likely to remain much lower than the 2010-13 average of more than $100 a barrel because of the huge oversupply in global oil markets.
“Think of the shale oil boom in the United States 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,” she stressed.
Dwindling oil prices and Nigerian economy
According to her, 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.
She said private sector investment will also be affected as investor confidence about the outlook remained weak while financing is likely to become more difficult and more costly for everyone
More broadly, she disclosed that “Sub-Saharan Africa is also facing spillovers from geopolitical factors, including the fight against Boko Haram. The threat of terrorism is very real and never far from our minds. Having been in Paris during the November attacks, I know firsthand, the sorrow that so many Nigerians carry in their hearts.
“In this region, terrorism not only takes a human toll but it also makes public finances more fragile. How? By widening budget deficits. Revenues are lower, including from lower growth and spending needs higher, including for security and for supporting those impacted by the violence. One immediate downside is higher financing needs that can crowd out other essential public spending.”
How policy makers can manage the near-term vulnerabilities:
Identifying the progress made in recent years, she said Nigerians have created a large and diversified economy that has grown by about 7 per cent a year over the last decade. However, she said the outlook remained gloomy as only a modest growth is expected in 2016 over the very low 3.2 per cent recorded in 2015
“For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms.” she stated.
On top of the slowdown, Ms Lagarde said vulnerabilities had increased while the ability to manage shocks is restricted by low fiscal savings and reserves, pointing out further that the weakening oil sector could stress balance sheets and put pressure on the banking system.
“Reduced confidence and lower capital spending also impact the non-oil corporate sector. 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,” she observed.
What can policymakers do?
Ms Lagarde, who demanded a fundamental change in the way government operates as immediate priority, stated that the new reality of low oil prices and low oil revenues meant 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.
“This means that hard decisions will need to be taken on revenue, expenditure, debt and investment going forward. My policy refrain is this:
“Act with resolve—by stepping up revenue mobilization. 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—so some increase should be considered.
“Build resilience—by making careful decisions on borrowing. Nigeria’s debt is relatively low at about 12 per cent 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.”
Expatiating further, she said on capital expenditure, the focus must be on high-impact and high value-added projects like power, integrated transport (roads, rail, air, and ports) and housing.
On recurrent expenditure, she said efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments.
She said, “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.”
Fuel subsidy must go
Ms Lagarde said fuel subsidies are hard to defend as it not only harm the planet, but rarely help the poor.
According to her, 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 she said, “the experience in Nigeria of administering fuel subsidies suggested 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.”
Challenges facing Nigeria’s state and local government
According to Lagarde, these sub-national governments which account for the bulk of social spending have only limited tools to manage the impact of declining oil revenues
To mitigate the challenges, she recommended better management of the smaller purse, while building capacity to increase internally generated revenue.
The IMF, she disclosed can help in that regard by providing technical assistance on public financial management. Citing the Kaduna State Government as example, she said “We can explore how to support states’ efforts to undertake budget reform.”
Strengthening Nigeria’s external position:
Ms Lagarde saw the strengthening of Nigeria’s external position as another immediate policy priority given the structure of the economy. According to her, the massive fall in oil prices which is expected to continue has changed the medium term foundations for economic resilience.
To be clear, she said the goal of achieving external competitiveness requires a package of policies including business-friendly monetary policy, 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,” she said.
How policy makers can achieve more inclusive and sustainable growth
Lagarde noted that Nigeria is already, in many ways, a 21st-century economy due to the boom in mobile communications “in a country where more than 140 million cell phones are in use, the vibrant, home-grown film industry that has become the world’s second-largest by output and the growing number of innovative startups—from fashion to software development—that are promoting Brand Nigeria.”
However, she said huge structural challenges remained despite the many initiatives that are ongoing as poverty and inequality still remain high, especially in some parts of the country.
“Women account for about 42 per cent of the total labor force which is comparatively low and their literacy rates are well below that of men. Maternal mortality is relatively high because of limited access to health care. Many women and children are dying every day simply because they cannot get to medical facilities fast enough,” she observed.
What are the key policy priorities for Nigeria?
She said the government must invest in quality infrastructure, make the banks work, and improve governance.
According to her, the investment in quality infrastructure will significantly improve transportation networks and power delivery (i.e., generation, transmission, and distribution).
“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.” she stressed.
Likewise, she said 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.
The second priority, which is making the banks work will, according to her, build resilience by fostering a sound banking system and help channel more savings into productive investments, especially in quality infrastructure.
To be sure, she said Nigeria’s banks are generally well-capitalized and more resilient than during the downturn of 2008-09. However, she stressed further that they are beginning to feel the impact of the growing vulnerabilities in the corporate sector with the result being rising non-performing loans, which will need to be carefully monitored and managed.
Ms Lagarde said the call for improved governance would boost the fight against corruption which not only corrodes public trust but 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 5 per cent of world GDP, with over US$ 1 trillion paid in bribes each year,” she stated.
Highlighting ways policymakers in Nigeria can manage the near-term vulnerabilities, Lagarde said the government must act with resolve by stepping up revenue mobilization.
The first step, she said is in broadening the tax base and reducing leakages by improving compliance and enhancing collection efficiency, stressing that public finances can be bolstered further to meet the huge expenditure needs.
The doubting Thomases
Encouraging as the development recipe of Ms Lagarde for the Nigerian economy seems to be, many Nigerians still doubted the sincerity of the Bretton Wood institution in Nigeria.
One of these prominent Nigerians is the Group Managing Director, Energy Group, Jimoh Ibrahim, who wasted no time in calling on President Muhammadu Buhari to be wary of the IMF chief’s visit to Nigeria.
Jimoh, who described the IMF visit as an economic bait that would not pay off for the country urged the Nigerian President to learn from the mistakes of Nigeria’s former Military President, Ibrahim Badamasi Babagida, when he literally handed over the economy to IMF by taking specific loans which eventually turned out not to be in the interest of the Nigerian economy.
A don and Head of Department of Economics, University of Benin, Prof. Anthony Monye-Elmina, is in the same league with Dr. Ibrahim. According to him, IMF’s visit to any country had an undisclosed factor, which could be detrimental as he urged the government and Nigerians not to be carried away by the IMF’s explanations that it was not in the country to negotiate aids.
Also, Dr Celestine Agoziem of the Department of History and International Studies, Lagos State University, Ojo, who observed that in diplomacy a lot of decisions are taken underground, disclosed that Bretton Woods institutions were in the habit of entering into agreements that were self-centered, to the detriment of the other party.
Agoziem, who said the IMF has no policy that will make its counterpart self-reliant, stated that “They always come with the notion that their host doesn’t need loan, but in the long run they will need it. It is either loan or devaluations.”
Does Nigeria need IMF?
Christine Lagarde, at the meeting with President Buhari, disclosed that “A team of economists from the IMF would be engaging the financial authority in Nigeria to review the economic policies.”
The big question is does Nigeria need IMF to move forward? Analysts are of the opinion that Nigeria indeed does not require the services of the Fund.
IMF not in Nigeria to negotiate loans
Christine Lagarde, while expressing confidence in the way the Buhari administration is running the Nigerian economy pointed out that the Fund is not in Nigeria to negotiate any loan with the government
She said: “First, let me make it clear that I’m not here, nor is my team, in this country to negotiate a loan with conditionalities. We are not into programme negotiations.”
Noting that what Nigeria needs most is fiscal discipline, implementation and good leadership to serve the country well for sustainability, Ms Lagarde said her team had excellent discussions with President Buhari on the challenges emanating from oil price reduction, the necessity to apply fiscal discipline and responding to the population’s needs.
Although President Buhari had pointedly told the IMF team that Nigeria would look inwards to overcome her economic challenges, the question is can we believe Lagarde in her insistence that she was not in Nigeria to negotiate loan if we take a second look at the assertion of Dr Celestine Agoziem who observed that in diplomacy, a lot of decisions were taken underground.
Are Nigerians being told the whole truth about the IMF’s visit to Nigeria? Has the issue of IMF loan been addressed diplomatically? The only person that can answer these questions now is the President and Commander – In -Chief of the Armed Forces, Mohammadu Buhari. Whether the answers are in the affirmative or not, one thing the present administration should know is that
Nigerians both at home and in Diaspora are vehemently opposed to any bitter pill that is christened IMF loan.
