LAGARDE: It’s Time For Nigeria To Broaden Revenue Base

Ms Christine Lagarde is the managing director of the International Monetary Fund (IMF). She is scheduled to be in the country tomorrow. On the heels of this visit, she spoke with The Guardian’s KAMAL TAYO OROPO on why she is coming and how her visit would be mutually beneficial to both the Fund and Nigeria.

What brings you to Nigeria and what is your message to the country?
LET me start by saying howpleased I am to be having this interview with The Guardian. Nigeria was the first African country I visited as International Monetary Fund (IMF) Managing Director in 2011. I am delighted to be back now and see firsthand the progress that Nigeria is making and to focus on the challenges ahead. I look forward to engaging with your policymakers and with business leaders, prominent women, and representatives of civil society. I want to share the Fund’s views, but first and foremost, I am here to listen.

There are several important issues. How can Nigeria face the current transitions in the global economy –– low oil prices, slower growth in emerging markets, and changes in monetary policy in advanced economies? How can it address domestic issues such as poverty, income inequality, security, and corruption? The risks stemming from the horrific attacks of Boko Haram are not only causing widespread suffering and loss of lives; they are also weighing on economic activity. Sadly, many countries are now faced with such threats.

Nigeria is a vibrant and diverse economy; it has experienced a decade of strong growth, averaging 6.8 percent a year. However, it is now being affected from the three transitions that I mentioned earlier and growth has slowed markedly. We estimated that it would be below 3.5 percent in 2015, with a projected recovery to 4.3 percent in 2016. The challenge is to secure the progress made in recent years while pushing for more inclusive and sustainable growth

My message of support is this: Nigeria can continue to grow and improve the lives of its citizens – but it needs to address these challenges while handling the impact of low oil prices – a reality that could be with us for some time. Remember, you are not alone. The Fund will be there to support you in any way we can.

What is your outlook for the global economy and the ECOWAS bloc?
Global real GDP grew at 3.1 percent in 2015, and it is expected to rebound to 3.6 percent in 2016. Overall, global growth remains moderate, reflecting a further slowdown in emerging economies and a modest recovery in advanced economies. It is too weak to effectively address the predicament of the 200 million jobless worldwide. It is also uneven, with growth rates differing considerably across and within different regions. It reflects a world economy that is at the intersection of three powerful forces. These include the economic rebalancing in China, the fall in commodity prices, and the impact of the increase in U.S. interest rates. These transitions are also affecting Africa. Even if growth is still stronger in Africa than in many regions, economic activity in several countries has weakened markedly in recent months.

Within the Economic Community of West African States, there are some considerable variations. The growth rates of oil and metals exporters such as Nigeria, Guinea and Sierra Leone are expected to be affected by the fall in commodity prices and the related fiscal adjustments. Recent political unrest, in Burkina Faso, for example, and insecurity in parts of Niger, Nigeria, Cameroon, and Chad, is also straining government budgets and diminishing the prospects for investment.

In the short term, our staff recommend fiscal adjustments in these countries and, where possible, allowing currency depreciations to help absorb the shocks. However, these changes must be coupled with longer-term efforts focused on investing in productivity-enhancing infrastructure, maintaining sustainable debt levels, and promoting trade –– which includes removing trade barriers.

How would you assess Nigeria’s growth prospects for 2015/16 in the midst of challenges such as inequality and corporate governance issues?
Nigeria is a vibrant and diverse economy; it has experienced a decade of strong growth, averaging 6.8 percent a year. However, it is now being affected from the three transitions that I mentioned earlier and growth has slowed markedly. We estimated that it would be below 3.5 percent in 2015, with a projected recovery to 4.3 percent in 2016. The challenge is to secure the progress made in recent years while pushing for more inclusive and sustainable growth. It is very important to improve the business environment, promote opportunities for growth in the private sector, strengthen social cohesion, and ensure an orderly adjustment to lower oil receipts at federal and sub-national levels of government. These are all areas where the government has an important role to play.

We welcome the government’s efforts to address corruption and promote transparency. In addition, strengthening the rule of law will be crucial in reducing the constraints to growth. Indeed, poverty and unemployment are still too high and social indicators in health and education are well below the average for Sub-Saharan Africa. Again, the huge cost of security—including support for displaced persons—is using up much needed resources and this is another factor weighing on investment.

What can a country like Nigeria do in order to address the negative impact of low oil prices?
Low oil prices have sharply reduced Nigeria’s export earnings and government revenues, and contributions from oil will remain low for the next several years. It is important to note that the non-oil sector — a key growth engine — is also severely affected. The corporate sector now looks less resilient than during the downturn of 2008-09 and restrictions on access to foreign exchange have affected economic activity. Moving forward, there is a need to broaden the revenue base to offset the impact of lower oil prices and reduce vulnerability to large swings in oil prices. Nigeria still has the potential to tap into its huge tax base in order to continue to finance its infrastructure and development needs, while containing the increase in public debt.

Why is the IMF — an international financial institution — looking at ways to help countries deal with the negative effects of climate change?
First, let me tell you how heartened I am by the recent Paris Agreement –– a critical step forward for addressing the challenge of global climate change in the 21st century. Governments must now put words into actions, in particular by implementing policies that make effective progress on the mitigation pledges they have made. What can we do, within our mandate, to support these efforts? Well, our job is to promote global economic stability. I think that climate change and the harmful environmental side effects—the impact on agriculture, higher risks of natural disasters, rising sea levels, risks of extreme climate scenarios—have macroeconomic implications and thus fall within the IMF’s mandate.

In our view, fiscal policies like carbon taxes should be front and center in efforts to reduce greenhouse gas emissions. The IMF has been emphasizing the large fiscal and environmental benefits from removing harmful fuel subsidies for many years, so it is only natural—given our expertise on tax design and administration—to go one step further and offer advice to the global community on how energy tax systems can be designed to ensure energy prices fully reflect adverse environmental impacts.

The reform gains from eliminating such subsidies are huge. Most important here is the reduced negative impact on health from exposure to air pollution. Related fiscal gains can also be used to support badly needed investments in education, health, and infrastructure. We are talking about reform of the tax system — shifting some of the tax burden off labour and capital and onto fossil fuel energy. The Fund has considerable expertise on how to do these reforms. Tax it smart, price it right, and do it now.