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Will Nigeria heed IMF warning?

Anytime these two global financial institutions- the International Monetary Fund and the World Bank convene their annual meetings- it’s always like receiving lectures on contemporary financial/economic matters. They hand down advice and warning to policymakers in both developed and emerging market economies such as Nigeria. However, such advisory is not binding on member- countries. But the economies of countries do benefit immensely if the policymakers heed the warning. They can as well ignore it albeit at their own perils.

Therefore, there are so many takeaways from the just concluded IMF/World Bank Spring meetings in Washington DC, USA.

First, a caveat: The Buhari administration should not take all the credit for the bright picture in the skylines of the Nigerian economy. Why?, you may ask. It’s because, as the IMF noted last week, by a lot of measures, these are “good times” for the global economy, not Nigeria’s alone. Almost every region of the world is currently enjoying solid growth and prosperity simultaneously for the first time in a decade. Whether this has translated into the well-being of the people, is entirely a different matter.

Take Nigeria’s case as an example. From the last quarter of last year, to the first quarter (Q1) of this year, key macroeconomic indicators suggest that our economy is off to its best start since 2015.Global oil prices and local production levels have been encouraging. Foreign reserve is at it best in four years, inflation has been on a downward trend for over a year, though still at double digits. The All Share Index of the Nigerian Stock Exchange (NSE) and other financial assets are still priced at levels that suggest that growth may continue apace for sometime to come. In addition, the Purchasing Managers Index (PMI), a leading indicator of economic activities and business confidence, is also on its best run in about four years. The strong correlation between the PMI and the Gross Domestic Product (GDP) also implies that our economy is faring better than we have had in three years.

And you may conclude by asking: Isn’t Buhari a lucky President? Well, Yes, and No. Yes, if his policymakers will leverage on the present “good times” and utilise the opportunities created by the rising crude prices in the international market to reform our economy. This is because, as the IMF Chief Economist, Maurice Obstfeld warned Nigeria and other oil exporting countries when he unveiled the latest World Economic Outlook in Washington DC, Nigeria and other oil producing nations may not be twice lucky if crude prices plunge again. Last week, it peaked at $75 per barrel, before dipping $70 early this week after US President had described the high oil prices in recent weeks as “artificial”. Could this be a bad signal? Perhaps, not yet time to press the panic buttons. But, it could foretell an urgent need for caution and to do something for the ‘rainy day’. As the IMF Managing Director, Christine Lagarde succinctly warned, “the current global picture is bright, but we can see darker clouds looming”.

What lessons do the looming darker clouds hold for Nigeria? First, there’s the risk of rising public debts, which can constitute profound, direct risks to our financial stability. This is because, the debts that the federal government has accumulated in recent times could pose serious financial stability in future. Although, Finance Minister, Mrs. Kemi Adeosun remains optimistic that Nigeria is saved from debt overhang because our debt to GDP ratio is less than 20 percent, such borrowing without sustainability strategy can harm the economy, if not now, in the future. Not long ago, Fitch, a global ratings agency, observed that the Federal Government’s debt had hit a staggering 320 percent of our annual revenue. This is arguably one of the highest in the world. If this is true, it’s well above the median of 196 percent for countries in Africa and the Middle East that were rated by Fitch. Even last year, during the unveiling of the Economic Recovery and Growth Plan (ERGP),the federal government admitted that Nigeria’s public debt could be at risk as a result of declining revenue. Currently, the public debt stands at over $21trn.

We need to remind ourselves that after the 2008 global financial meltdown, there was this market checklist which emerging market economies such as Nigeria were advised to strictly adhered to. The advisory is as follows: Don’t let your current account deficit get too big, preferably not above 3 percent; don’t finance your deficit budget with short-term portfolio capital. Instead, try attract huge Foreign Direct Investment (FDI). Also, don’t let your exchange rate get overvalued. Grow your external reserves and keep inflation rate at manageable level, possibly at single digit. Sadly, Nigeria has broken almost all the rules in the checklist. Our policymakers have not adhered to them.

Yes, to prevent these concerns are within each country’s purview. But, the questions to ask are: Are our policymakers doing much to prevent another recession? Is our budget deficit reducing or expanding? Is our public debt going down or rising? Is the CBN doing enough in its monetary policy? Is interest rate going up or down? The answers are in the opposite. Our policymakers are not effectively using the fiscal and monetary instruments to reduce those imbalances. And this is sad indeed.

As a mid-income country, our economy is still vulnerable and bristle to both internal and external shocks, despite the exit of recession. And this is because of our overdependence on oil revenue, which constitutes about 70 percent of total government receipts. Things are also not looking up yet in the diversification effort. The non-oil revenue, expected to relieve oil as the government’s dominant source of cash, netted in just N1.13trn in the first months of 2017. This represents N22bn or 16 percent less than oil receipts, which stood at N1.35trn in the same period. This is also half the size of a N2.2trn five-month target set by the government for non-oil revenue. Figures for the first quarter (Q1) of 2018 are not yet out. It needs be recalled that before oil prices tumbled in 2014 and 2015,the IMF and the World Bank warned Nigeria’s policymakers to take urgent steps towards diversifying the non-oil sector. Though government has taken some measures to that end, especially in the agricultural subsector, not much is happening in other areas, or maybe, the dividends are not evident yet.

Nonetheless, the problem here is that, should oil prices plunge again, government will have less leeway to deal with it. Therefore, what the IMF and the World Bank are saying is that, should another wave of recession arrive, the fiscal and monetary authorities may find themselves well short of ammunition to fight.

Altogether, heeding the IMF advice will be in the best interest of our country, that’s, reduce our public debt, less dependent on oil resources by focusing on human capital development and local content and diversification. In the long term, the present new tax system should be done in a transparent manner.

At present, Nigeria’s tax to GDP is one of the lowest globally, at 6 percent. This compares abysmally with some of our West African neighbours like Ghana. Doing all of these will prove the litmus test for the ‘Change’ mantra of the All Progressives Congress(APC) administration


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