There’s no consensus within the Nigerian government on the economic reforms the country will undertake as part of promises made to the International Monetary Fund (IMF) to revive an economy reeling from lower oil prices and the Covid-19 pandemic, according to sources familiar with the matter.
In a letter to intent requesting for the $3.4 financial assistance under IMF’s rapid financing instrument, the federal government made promises to rid the economy of fuel, foreign exchange and electricity subsidies as well as boost non-oil revenue, resolve debt sustainability challenges and improve public sector transparency.
“There is still significant opposition to the economic reforms contained in the letter of intent to the IMF and while the finance minister may be supportive of the reforms, she needs pillars of support to overcome some factions who oppose her,” a source who did not want to be quoted said.
“Those who oppose reform are working hard to present reformers as agents of foreign governments without the interest of Nigeria at heart,” another source familiar with the matter said.
While the government seems to have already embarked on some of these reform promises made to the IMF, enough hasn’t been done to put other reforms beyond reasonable doubt.
For instance, the move to end petrol subsidies has been well publicised by the government since the collapse in crude oil prices presented a long awaited opportunity to ditch the wasteful practice.
At a meeting on March 18, the federal executive council agreed that it would begin moves to deregulate the downstream oil sector by adjusting petrol retail price to any development in the global oil market.
However, analysts are not convinced the era of subsidies would not return if oil prices turned the corner. Instead they are calling for a legislation that legally abolishes the practice and dissolves some agencies that would be rendered irrelevant and redundant in a fully liberalised market.
The government has revealed no plans to back up its claim to end fuel subsidies with any legislation.
The government also promised the IMF to create specific budget lines to facilitate the tracking and reporting of emergency response expenditures and reporting funds released and expenditures incurred monthly on a transparency portal. This unprecedented level of transparency in Nigeria is supposed to ensure the funds are used for what the purpose for which they were disbursed.
The government also promised it will not introduce measures or policies that would exacerbate the current balance-of-payments difficulties like imposing new or intensify existing restrictions on the making of payments and transfers for current international transactions or trade restrictions.
This runs counter with what is currently obtainable where there are restrictions on international transactions and the country’s land borders remain shut.
Regarding the promise made to force a convergence of the multiple exchange rates in Nigeria, there is some momentum building that it may happen even though it will face stiff resistance from within government.
The CBN already adjusted its official exchange rate to N360/$ from the N306/$ level it has been for more than three years. There’s some belief within government circles that the multiple rates are expected to converge at the more market-reflective Investors and Exporters window rate which is closer to N400/$.
Nigeria’s power reforms were also underway until the Covid-19 halted plans to adopt a market-reflective tariff starting April 1.
Nigeria is getting technical assistance and financial support from the World Bank to implement far reaching power reforms that would boost the country’s power generation capacity and capping tariff shortfalls this year to N380 billion while moving to full cost-reflective tariffs in 2021.
The government’s revenue drive through raising non-oil taxes is also on-going. In February, the government raised its Value Added Tax (VAT) rate by 50 percent to 7.5 percent from 5 percent. The impact was immediate when revenue from VAT was up 30 percent to N120 billion in February 2020 from N92 billion collected in February 2019.
In the letter of intent to the IMF, the government said it planned to raise its tax to GDP ratio to 15 percent through further VAT reforms, rise in excises, and removal of tax exemptions— once the crisis passes. In 2019, Nigeria’s tax to GDP ratio was 7 percent, well below the frontier market average of 15 percent and South Africa’s 25 percent.
In line with the Fiscal Responsibility Act, the government has also promised the IMF that it will reduce the Federal Government deficit to under 3 percent of GDP and eliminate recourse to central bank financing by 2025.
The existing stock of overdrafts held at the CBN will also be securitized, the government said in its letter to the IMF.
The plan to securitise CBN’s overdrafts to the government has long been in place before the IMF loan was sought.
