Reflections on IMF 2017 article IV consultation with Nigeria

Under Article IV of the International Monetary Fund (IMF) Articles of Agreement, the IMF holds bilateral discussions with members usually every year. On March 29 2017, the Executive Board of the Fund concluded the Article IV consultation with Nigeria and came up with a number of recommendations: some of them good; some others not fit-for-purpose.

Among the good ones is the suggestion that the Central Bank Ashould intensify bank monitoring, adopt stronger prudential guidelines as well as ensure that something was done about undercapitalized banks. This advice is timely against the backdrop of declining asset quality of many Deposit Money Banks. Data from the CBN indicate that DMBs in Nigeria had a total loans portfolio of N18.53 trillion as of December 2016 out of which N1.85 trillion (or 10 per cent) were non performing loans- way above the regulatory threshold of 5 per cent.

Another good recommendation is that the government should embark on ‘ambitious structural reform which is key to achieving a competitive, investment-driven economy that is less dependent on oil’.

To this end, priority should be given to improving infrastructure, enhancing the business environment as well as improving access to financing for small enterprises. In view of the fact that the value of Nigeria’s total infrastructural stock (roads, rail, power, airports, water, telecoms and seaports) represents only 35 per cent of GDP and is therefore inadequate for size of economy and lags behind peers, the need to ramp up investment in infrastructure cannot be over stressed.

The Economic Recovery and Growth Plan has a target of improving ease of doing business ranking from 169 to 100 by the year 2020. With the constitution of its Executive Board, the Development Bank of Nigeria is expected to play a major role in ensuring access to financing for small enterprises. The Fund equally stressed the need to contain the fiscal deficit of sub-national governments (state and local governments) through improved transparency and monitoring.

While the above recommendations are consistent with the country’s economic recovery efforts, other suggestions made by the Executive Directors are, at best, inappropriate given the present state of the Nigerian economy. For example, the Fund is advising the government to increase the Value Added Tax rate as a way of shoring up non-oil revenue, as well as administer ‘an independent fuel price-setting mechanism to eliminate fuel subsidies’.

In a period of economic recession and high unemployment, would it be appropriate to increase VAT? Granted, the country’s VAT rate may be low compared to peers, but the living conditions are certainly different- the minimum wage in dollar terms in Nigeria is also one of the lowest.

As recognized by John Keynes, the famous economist, the major cause of recession and unemployment is weak aggregate demand. Any attempt to increase the standard VAT rate from the current 5 per cent will work against the current economic recovery effort. Ditto for fuel subsidy: the National Bureau of Statistics confirms that one of the key drivers of headline inflation in the country is high cost of transport from increasing cost of fuel.

The Fund has also suggested that the CBN should remove all forex restrictions and unify exchange rates followed by tighter monetary policy to anchor inflation expectations. Again, can the country afford the costs of implementing this recommendation? Tighter monetary policy implies, in part, jerking up the benchmark rate from the present level of 14 per cent which is most likely to put additional pressure on banks’ asset quality with commercial banks being compelled to reprice their assets resulting in a further increase in the rate of non-performing loans and undermining financial stability.

The real sectors of the economy will suffer as banks show preference for placing their funds in high yielding government securities. Many small businesses will suffocate under a harsh environment occasioned by the high interest rate regime leading to loss of jobs. The increase in MPR will also spike the cost of servicing the country’s public debt as bond yields go up especially in view of the fact that domestic debt constitutes a significant proportion of the country’s public debt stock. Similarly, the stock market will be impacted negatively as equities become less attractive to portfolio managers as an asset class due to increase in bond yields.

In its March 2017 Communiqué no 112, the Monetary Policy Committee of the CBN rightly noted that while ‘’the reality of sustained pressures on prices (consumer prices and the naira exchange rate) cannot be ignored, tightening at this time would portray the Bank as being insensitive to growth’’.

Therefore, it does not make any economic sense to call for further tightening of monetary policy in an economy that is grappling with recession, high unemployment, high operating costs, high interest rates and shrinking real sector. Data released by the National Bureau of Statistics (NBS) in February 2017 showed that the economy contracted by 1.51 per cent in 2016.

The IMF strongly opines that the country’s economic woes would significantly vanish by removing forex restrictions and unifying exchange rates. This would promote a more rational use of scarce foreign currency, encourage price discovery and eliminate incentives for arbitrage, the argument goes. To understand why this amounts to pipe dream, it is useful to point out that the country’s major challenge lies in its import-dependent nature and over reliance on oil revenue which accounts for about 90 per cent of export proceeds. In the forex market the ‘many buyers and sellers’ condition for a successful free float is not met since the autonomous source is negligible and CBN remains the major supplier of forex.

So, while floating solves the problem of dual pricing and arbitrage it neither addresses the demand pressure nor bridges the supply gap. Fact is: demand may wane initially and supply might increase temporarily but it will be short-lived and before long demand will outstrip supply. The NBS had reported that Nigerian imports in 2016 was valued at N8.8 trillion compared to N6.69 trillion recorded in 2015 despite the forex policy restriction placed on 41 items.

Currency Float was one measure the IMF encouraged Egypt to implement to qualify for a bail out. Others included cutting subsidies for fuel and the introduction of value-added tax. On 3 November, the Central Bank of Egypt caved in and floated the Egyptian pound. Since then, ‘’the centre can no longer hold’’ for the average Egyptian. The value of the Egyptian pound to the dollar has depreciated by more than 50 per cent, which in turn has led to a dramatic increase in the prices for imported goods. FocusEconomics recently noted that ‘’operating conditions among Egyptian business companies have deteriorated throughout February 2017 compared to January, especially with the elevated inflation and subdued internal demand. Firms have also observed a further rise in the cost of imports, which were passed on to consumers in the form of higher output charges,” This leaves the average Egyptian with less to spend as the cost of living soars by the day.

The takeaway from the Egypt experience is that a currency float comes with adverse consequences the severity of which depends on the state of a country’s economy. The relatively diversified economy of Egypt and the IMF support facility is helping to cushion the destabilizing effects. The defective structure of the Nigerian economy and the fact that the country is not seeking any loan from the IMF should make floatation a scary option for the CBN. The IMF should realize that a model that works for Egypt may not find application in Nigeria. The Fund’s one-size-fits-all recipe has often been criticized not least because it is without consideration for local factors. The results have often been damage to the economy rather than recovery. In the words of former Zambian president, Kenneth Kaunda, “The IMF does not care whether you are suffering economic malaria, bilharzia or broken legs.

It will always give you quinine”. Nigeria certainly does not need quinine at this point in time. In a country where poverty rate is 61 per cent and the Gini coefficient (a measure of inequality) is as high as 43 per cent, the cumulative impact of cuts in public spending, subsidy removal, currency float, and increase in VAT rate will be spiralling inflation, rising living costs, increased unemployment and poverty with predictably dire consequences for the average Nigerian.

The IMF made a case for the development of a ‘’well-targeted social safety net’’ but just how this could be brought about is scant in the IMF report and experience to date raises a number of red flags. The recommendations of the Fund are well noted. The government should move speedily to implement only those ones that are consistent with the country’s Economic Recovery and Growth Plan.

•Uwaleke, a chartered banker, stockbroker and Fellow of ICAN, is an Associate Professor of Finance and Deputy Director of Research at Nasarawa State University, Keffi