The IMF published their Article IV consultation report with Nigeria over the last week. I know many Nigerian tend to get emotions somewhere between angry and nervous whenever the IMF is mentioned with regards to Nigeria but please relax. This was just a regular exercise that goes on every year to get an unbiased sense of what the Nigerian economy looks like and what risks there are. It is particularly useful because of the access they have to government officials and the data they are usually able to pull together. The report contains a lot but there are a few things which stood out for me.
First, the federal government may really be broke. The federal government budget projections for 2018 assumed revenues of over N7tn or 5.6 percent of GDP but actual revenues were only about half of that. Which left a big gap. If you recall, the 2018 budget like those from 2017 and 2016, proposed big spending increases and near-record deficits combined with very loft revenue projections. It does not look like the expected revenues materialized. Despite the revenue shortfalls most of the spending went on as planned coming in at roughly N8.7tn. So, the federal government ended up with revenues of roughly N3.6tn but spent N8.7tn or thereabouts. Some of this deficit spending was financed by debt as the approved deficit in the 2018 budget was N1.9tn but who financed the rest? The report doesn’t say but we know, from the CBNs reports that it extended roughly N2.2tn in new overdraft facilities to the federal government in 2018. I’ve written a lot on the dangers of that kind of back door financing, so I won’t re-hash it again.
The fiscal distress of the federal government is apparent. The sad truth is that the federal government actually doesn’t spend that much relative to other countries. Its spending in 2018 was only 6.8 percent of GDP which really isn’t that high. The key disappointment is with revenues. I have argued that crunch time for reforming the tax structure is here. This is yet another indicator for that. A few things like the removal of fuel subsidies and scrapping the official exchange rate can bring immediate revenue boosts but those will really only be temporary reprieves.
On a similar note, the deficit in 2018 ended up at four percent of GDP which is higher than what is stipulated in the fiscal responsibility act. The act stipulates a maximum deficit of three percent of GDP. We’ve broken that for the second straight year now.Something to note for the members of the national assembly currently debating the 2019 budget which again has the same lofty revenue expectations.
The second major highlight was the lack of optimism about Nigeria’s growth prospects. We all have the numbers from the NBS, and we all know that GDP per capita growth has been negative since 2016. We officially recovered from recession but the growth outlook going forward is not great. The IMF projects GDP growth of 2.1 percent in 2019 and 2.5 percent in 2020, both of which are slower than our reported population growth rate of 2.6 percent. What this means is, even before you talk about inequality, average incomes of Nigerian may not grow over the next two years. At least if the IMF projections are to be believed. Given the level of poverty this is not something to ignore. The story of the years of fast growth after the return to democracy in 1999 were about fast but non-inclusive growth. Now there is no growth at all.
The IMF also points to risks which may make the already bad situation worse. We have done that thing we like to do where we set ourselves up such that any small shock leads to problems. A dip in the oil price or disruptions to oil production could throw federal government finances into even more disarray. The excess crude account is basically empty so there are no fiscal buffers. The CBN has also returned to
its exchange rate inflexibility way which means any shock to foreign exchange inflow either from oil prices or from reversal of capital flows is likely to lead to foreign exchange problems and another round of “demand management”. We all know how well that worked last time around. And so,we stay hoping that nothing goes wrong but what if it does? Any one in government heard of Murphy’s law?
There’s a lot more in the report from banking sector challenges to the potential impact of Dangote refinery coming on stream and the CBNs monetary policy. There is a lot to digest but the report is certainly worth the read if you have the time.
Dr. Obikili is chief economist at BusinessDay