The International Monetary Fund and financial experts in Nigeria have stressed the need for the monetary and fiscal authorities in the country to improve their collaboration in a bid to tackle mounting economic headwinds.
This is necessary for taming soaring inflation and rescuing the falling naira, they said during a session at the Nigeria Economic Summit (NES#28) in Abuja, amid what is being seen as complicated economic circumstances of surging inflation, high debt levels and low revenue to GDP.
Zainab Ahmed, minister of finance, budget and national planning, had said on Monday that she wished Value Added Tax, now at 7.5 percent, was raised to 10 percent as incomes thin, but there have been concerns that many of the rich do not even pay appropriate taxes.
At the session, themed ‘monetary policy management in challenging times’, Ari Aisen, IMF’s resident representative to Nigeria, said what Nigeria needs now is deliberate fiscal and monetary policy coordination and that it would be difficult for the latter to single-handedly tackle the present inflation and foreign exchange problems bedevilling the country.
He emphasised the need for the government to get serious about mobilising revenues, saying a situation where the Central Bank of Nigeria (CBN) has already expended over N22 trillion through its Ways and Means Advances, exceeding the 5 percent threshold, is not sustainable.
“The modus operandi where the CBN is financing deficits is going to complicate monetary policy targets,” the IMF boss said.
Aisen advised the CBN to focus on targeting the objective of monetary policy towards price and exchange rate stability, saying: “Other objectives should be supported by fiscal policy.”
He noted that the recent 400 basis point interest rate by the CBN in trying to control inflation is an important tool as expected, but that the problem is that “if you do these things, and also on the other hand, take up other objectives, like agriculture, support growth values, quasi fiscal operations, as we call it, they tend to create a dichotomy whereby liquidity increases and it may not be very simple to mop up.”
Demonstrating the relationship between fiscal and monetary policies and the importance of revenue mobilisation to achieve macroeconomic stability and keeping inflation in check, he said: “If you want to pay civil servants on time like every country wants to, you need revenues. If you want to provide services, health, education and others, you need funding. And the funding comes with mobilisation of revenues.”
Aisen said: “If you do not have the revenues, you need to get into debt. If debt markets are not available to finance everything that you need, you need to go to the central bank. If you go to the central bank, the debt is monetised meaning printing money to finance the difference that you are not able to raise elsewhere.
“If you cannot mop up that extra liquidity that the central bank injected, that is inflationary.”
Read also: Naira trims losses as dollar supply rises
On policy options that would be appropriate for Nigeria’s situation at the moment, he said it is left for the citizens to decide what they want.
He said: “If you are going for a fixed exchange rate, you should be able to defend that exchange rate with a strong level of reserves. And if you do not, and inflation continues to go up, the competitiveness of the country starts reducing in terms of exchange rates which creates a mismatch between supply and demand of foreign exchange that tends to create scarcity and since not everyone wants exchange rate at that particular rate, they look for markets to fund themselves for imports or other exchange rate commitments they have.
“The country therefore has to decide based on their own preferences of accepting more volatility, or building up enough buffers and reserves to sustain a bag that could be useful to anchor inflation.”
Mike Obadan, a professor of economics at the University of Benin, cited the current difficulty in effectively managing monetary policy across the globe, especially due to exogenous shocks from ongoing Russia Ukraine war.
He attributed Nigeria’s situation to many legacy internal factors, including fiscal policy of the government, which, according to him, “has not helped.”
“Fiscal policy tends to be weak in revenue generation which has left the CBN to finance the deficit,” he said. “The fiscal authority will have to complement the monetary policy of the central bank – build a fiscal base which would help tackle inflation and manage exchange rate.”
Oluseye Olusoga, founder of I-invest and group managing director of Parthian Partners, said the central bank lending has helped government finances and kept the economy from collapse.
He said: “You have a situation where those ways and means were extremely important. For me, it has helped pay salaries, keep the country stable because without security and stability, there will be no business, so it’s a difficult one.
“And whilst I do not think that’s the perfect thing to do, I think that the government needs to do a lot more in terms of sensitization and explaining to people why it is taking those extraordinary decisions.”
Mansur Ahmed, group executive director, government and strategic relations at Dangote Group, said policies are not enough since there are many other factors at play in the Nigerian economy.
Ahmed, who is the immediate past president of Manufacturers’ Association of Nigeria, said some of the well-intentioned monetary policies of the central bank have not delivered required impacts, partly because of so many other things that would need to be looked at.
He said: “To a large extent, what we have seen is that this lack of understanding of the critical actors in the system may have undermined the policies, no matter the intention of the policies.
“You just need to take into account the likely conduct of the various actors involved in the application of a policy and then have adequate consultations.”
Saratu Umar, executive secretary/CEO of Nigerian Investment Promotion Commission, said there was a need to promote the non-oil sector to drive exports, bring in foreign exchange into the economy and drive import substitution.
