When a country joins the International Monetary Fund (IMF), it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, and to provide the IMF with data about its economy.
The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability, and culminates in regular (usually annual) comprehensive consultations with individual member countries.
The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.
During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.
Recently, on March 27, 2019, the Executive Board of the IMF concluded the Article IV consultation with Nigeria.
So what is the state of the Nigerian economy today and progress if any, made on reforms?
- Medium-term outlook for economy remains subdued, with downside risks.
The Nigerian economy might have exited recession, (real GDP increased by 1.9 percent in 2018, up from 0.8 percent in 2017), however growth is still too weak as a result of persisting structural challenges.
These include a large infrastructure gap, low revenue mobilization, governance and institutional weaknesses, and banking sector vulnerabilities which according to the IMF, are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production.
Current economic expansion is below where it needs to be to reduce poverty and improve, human development indices, such as healthcare and education.
The IMF fingers policy choices such as continued foreign exchange restrictions, and petrol subsidies as the major culprits, and notes that over the medium term, absent strong reforms, growth would hover around 2½ percent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock.
- Debt burden won’t lighten anytime soon
Interest payments by the Federal Government on its outstanding debt will remain elevated at unsustainable levels of 63 percent of FGN revenues for 2019, and falling slightly to 50 percent of FGN revenues by 2020.
Total FGN debt will also rise to 26.8 percent of GDP in 2019, and 27.7 percent of GDP by 2020. It goes without saying that even at micro household levels if a family makes N1.2 million per annum (or N100,000/month), and spends N720,000 (63%) as interest payments on credit cards, even as total due continues to rise, then the family might have to declare bankruptcy soon.
- FX Reserves buoyed by short term flows
Record inflows into mostly short-term local debt and a current account surplus have lifted gross international reserves to their recent highs of $44.6 billion as at April 3rd, 2019.
Also the thrice oversubscribed November 2018 Eurobond helped to cushion the impact of outflows late last year.
However offshore ‘carry traders’ investing in one year Treasury Bills in Emerging Markets are notoriously fickle and are no substitutes for sound policies that attract more sticky types of capital.
- Major reforms needed to grow FG revenues
Nigeria should strengthen domestic revenue mobilization, through additional excise taxes, a comprehensive VAT reform, and elimination of tax incentives, according to the IMF.
Securing oil revenues through reforms of state owned enterprises and measures to improve the governance of the oil sector will also be crucial.
This will help to lower the ratio of FG interest payments to revenue and make room for priority expenditure.
- it’s time to end fuel subsidies
Nigeria spent an estimated N623 billion ($1.7 billion) on fuel subsidies last year, a dubious expense line it clearly cannot afford.
Phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional funding for health and education.
Nigeria fixes the price of gasoline at N145 per litre ($0.40, or $1.51 a gallon), among the 10 cheapest levels worldwide, according to GlobalPetrolPrices.com.
- Return CBN to its more orthodox role, improve transparency
At the last count the Central Bank of Nigeria (CBN), had at least 18 Development Finance Operations across various sectors of the Nigerian economy.
These include the Agricultural Credit Guarantee Scheme (ACGS), Interest Drawback Programme (IDP), Commercial Agriculture Credit Scheme (CACS), Paddy Aggregation Scheme (PAS), Micro, Small and Medium Enterprises Development Fund (MSMEDF), Anchor Borrowers’ Programme (ABP), Presidential Fertilizer Initiative (PFI), National Food Security Programme (NFSP), National Collateral Registry (NCR), SME Credit Guarantee Scheme (SMECGS), Small and Medium Enterprises Restructuring and Refinancing Facility (SMERRF), Real Sector Support Facility (RSSF), Textile Sector Intervention Fund (TSIF), Power and Airline Intervention Fund (PAIF), Nigeria Electricity Market Stabilisation Facility (NEMSF), Nigeria Bulk Electricity Trading Payment Assurance Facility (NBET-PAF), Non-oil Export Stimulation Facility (NESF), and Export Development Facility (EDF).
Sadly the problem with these myriad schemes goes beyond the funny names and weird acronyms.
There are issues around the stress this imposes on the CBN balance sheet and distortions to the wider economy.
The IMF urged ending direct CBN intervention in the economy to allow focus on the central bank’s price stability mandate. They also encouraged the authorities to enhance transparency and communication and to improve the monetary policy framework, including by using more traditional methods.
- Flexible, unified FX rate to support inflation targeting
The IMF commended the authorities’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows. They noted that a unified market based exchange rate and a more flexible exchange rate regime would support inflation targeting.
Inflation targeting is a monetary policy regime in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public.
The fund also stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification.
- Growth in private sector credit still lackluster
Credit to the private sector (CPS), is still growing sluggishly a sign that the recovery is far from robust. Year on year growth in CPS was negative 6.7 percent in 2018, and is forecast by the IMF to expand by 3.9 percent in 2019, and 2.3 percent in 2020.
High FG financing costs, on the back of little fiscal adjustment, would continue to constrain private sector credit due to the crowing out effect.
- Recapitalize weak banks, end AMCON `
Nigerian Banks have seen a decline in their nonperforming loans and have improved prudential banking ratios but the restructured loans and some undercapitalized banks continue to weigh on financial sector performance.
The IMF suggests strengthening capital buffers and risk based supervision, conducting an asset quality review, avoiding regulatory forbearance, and revamping the banking resolution framework. The fund also recommends establishing a credible time bound recapitalization plan for weak banks and a timeline for phasing out the state backed asset management company AMCON.
- Reforms, reforms, reforms
The IMF urged the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals. They pointed to the importance of improving the business environment, implementing the power sector recovery program, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities. Directors also emphasized the need to strengthen governance, transparency, and anti-corruption initiatives, including by enhancing Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) and improving accountability in the public sector.
PATRICK ATUANYA
