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IMF Recommends Policy Continuity, Subsidy Removal For Nigeria

By Kamal Tayo Oropo (who was in Washington DC)
26 April 2015   |   4:26 am
ONE of the major hindrances to economic advancement of many African countries is policy summersault, especially as occasioned by regime change. This became more pronounced in the case of Nigeria, where each new government would prefer to begin on a clean slate.
International Monetary Fund Managing Director, Christine Lagarde

International Monetary Fund Managing Director, Christine Lagarde

ONE of the major hindrances to economic advancement of many African countries is policy summersault, especially as occasioned by regime change. This became more pronounced in the case of Nigeria, where each new government would prefer to begin on a clean slate.

But the Managing Director of IMF, Ms. Christine Lagarde, specifically called on the President-elect, Muhammadu Buhari to ensure continuation of economic policies of his predecessor, while fine-tuning gray areas.

That may have resonated with the incoming government. President-elect, Muhammadu Buhari has given some assurance to the international economic community that his government would support the candidature of current minister of Agriculture and Rural Development, Dr. Akinwunmi Adeshina, at the African Development Bank (AfDB). That is one assurance that good things done by the outgoing government could endure.

During one of the side events at the recent World Bank-IMF Spring Meetings in Washington DC, the IMF boss told The Guardian that in view of the country’s reliance on oil as major source of revenue, policy continuation is recommended.

According to her, “What we have observed, the last one year in particular, is that a good fiscal policy, with some tightening no doubt, a good exchange rate in order to adapt to the external shocks and some use of reserves buffer, has been fairly exceptional. In a nutshell, policies that have been adopted by the Nigerian authority have been positive.

“Our senses is that some of these policies need to be continued; some fiscal consolidation needs to take place and we very much hope that the next budget would reflect the good policies that have been put in place in order to resist the external shocks that Nigeria has received, like the other seven African countries that produce oil, as a result of decline in price.”

But despite apparent discomfort many Nigerians feel when government cuts down on public spending, especially regarding removal of oil subsidy, they may have to endure the unavoidable hardship. For the Nigerian economy to maintain a favourable grip, the government, according to Lagarde, must as a matter of economic prudency be extremely cautious in its public spending.

Noting that the country is already making efforts in this direction, IMF however, wants the momentum sustained.

The eight African countries that are oil exporters, of which Nigeria is a leading member, actually benefit as a result of dollar appreciation in value –– you get dollar pricing for the oil you export and sometimes this helps to cushion the decline in oil pricing. But the point must also be made that some of these countries also acquire loans, which are dollar denominated. IMF warns that they must try to be cautious with public spending.

“We will still recommend that any subsidy that is being paid out on physical resources be phased out to the possible maximum extent. This is already happening in Nigeria, but more still need to be done, as quickly as possible, especially if this is not being engaged in sectors of the economy where they are essential.”

Sensing the discomfort of many Nigerian with IMF prognosis to economic issues in the country, the IMF first deputy managing director, Mr. David Lipton, likened the criticisms of the IMF intervention to a patient and doctor relationship.

According to him, “The situation is like a patient being angry at the doctor because he or she does not like the prescribed drug; because the drug is better. But the truth is that the prognoses are a lot less severe than what would eventually happen if we had not intervened.”

The major goal of this year’s meeting is intense focus on one of the goals of the World Bank as captured in ending poverty by 2030. The world, according to the body, has had great success in the last 25 years in lifting people out of poverty; an astounding two-thirds reduction in the percentages. Currently, fewer than 1 billion people live in extreme poverty, “and we must now re-examine our strategies to lift the final billion out of poverty and into the modern world,” said the World Bank president, Mr. Jim Yong Kim.

Some of the policies, programmes and directives of IMF over the years had, however, come under scrutiny. They sometime seem to end up promoting poverty rather than alleviating it.

But Minister of Finance, Dr. Ngozi Okonjo-Iweala, speaking at one of the side events, pointed out that “While the low oil prices could boost growth, especially in advanced economies, the uncertainties surrounding the future oil price path remains a major concern, particularly for the emerging market economies and oil exporters.

“On the downside, risks related to shifts in sentiments in global financial markets and bouts of volatility associated largely with anticipated U.S normalisation of monetary policy and surprises of activities in major economies are still elevated.”

She urged the incoming administration to focus on making policies that would build up macro economic stability.

Listing key areas she expected the administration to look at, Okonjo-Iweala stressed the need for the new administration to focus on diversification of the economy, rebuilding buffers and blocking of leakages.

The Minister, however, said that the policies, if well implemented, would address the shortfall in the revenue gotten from crude oil sales and in the long term, end poverty in Nigeria.

Some have interpreted the IMF’s current effort as attempt at re-positioning itself as an economic adviser organisation to the incoming government or protecting the images of its Nigerian friends, serving in the outgoing administration, within international financial supermarkets.

IMF has also been accused of offering loans based on strict conditions. Its policies may have reduced the level of social safety and worsened labour and environmental standards in a number of developing countries.

On the other hand is the issue of Nigeria’s voting shares in the IMF, which is expected to increase when the body implement reforms in December 2015. Against the backdrop of recent rebasing of the Nigerian economy, the country is now the biggest in the continent, after overtaking South Africa.

Despite gradual depletion of its GDP from an all time high of 10.0 percent in 2010 to the projected 4.8 percent low in 2015, the Nigerian economy has grown in volume. The IMF has little choice, but to consider an upward review of the quota allotted to Nigeria when it completes the review of the current quota by December 15, 2015 – the deadline under the Article of Agreement.

A comprehensive review of the quota formula was completed in January 2013, when the Executive Board submitted its report to the Board of Governors. The outcome of this review is expected to form the basis for the Executive Board to agree on a new quota formula as part of the 15th Review. However, work on the 15th Review has been delayed, pending implementation of the 2010 Reforms, chiefly as a result of the misgivings by the United States of America, which holds the largest voting share of the Fund.

In February 2015, the Board of Governors adopted a resolution calling for the completion of the 15th Review by December 15, 2015; agree on a new quota formula as part of the 15th Review.

While recent growth in Nigeria has not been inclusive, the focus, according to Senior Resident Representative/Mission Chief for Nigeria, African Department of the IMF, Mr. Gene Leon, now needs to be on enhancing the quality and sustainability of growth through addressing structural imbalances that have slowed the diversification of the economy and impeded the emergence of a private-sector oriented, investment-driven, efficient and export-competitive economy. “This will require clear strategic vision and a sustained effort to develop core infrastructure and human capital, implement key structural reforms to reduce costs of doing business and implement productivity-enhancing reforms, strengthen accountability and transparency, and improve efficiency in the use of available resources. Further, encouraging high value-chain sectors, improving access to finance, and promoting employment of youth and female populations, are all key steps for not only raising growth, but also making it more inclusive,” he said.

Global growth prospects, according to the IMF in its World Economic Outlook survey, are uneven across major economies. In advanced economies, growth is projected to strengthen in 2015 relative to 2014, but in emerging market and developing economies, such as Nigeria, it is expected to be weaker.

Overall, global growth forecasts at 3.5 percent in 2015 and 3.8 percent in 2016, broadly the same as last year. But this aggregate number masks the diverse developments.

“A number of complex forces are shaping the prospects around the world,” says IMF Economic Counselor and Director of Research, Mr. Olivier Blanchard. “Legacies of both the financial and the euro area crises –– weak banks and high levels of public, corporate, and household debt –– are still weighing on spending and growth in some countries. Low growth in turn makes deleveraging a slow process.”

Blanchard also noted that the combination of population aging, lower investment, and sluggish advances in productivity will lead to significantly lower potential growth both in advanced and emerging market economies. “More subdued growth prospects lead, in turn, to lower spending and lower growth today,” he said.

On the part of Nigeria, Leon warned that decisive actions are needed to reduce vulnerabilities. According to him, “The lower level of oil prices implies significantly lower fiscal revenues, constraining policy space and, as a result, growth is expected to slow to 4 3/4 percent in 2015 (down from 6.3 percent in 2014). It is, therefore, important that the authorities mobilise non-oil tax revenue to creating more space for developmental expenditure and reduce the exposure to volatility in oil receipts. The government has to also prioritise expenditure in the near-term by optimising outcomes –– given fiscal constraints. It should allow the exchange rate to adjust, helping to manage the external shock, and closely monitor banks’ exposure to the oil and gas sector, by minimising systemic financial sector risk.”

In the medium to long-term, the country needs to address its development challenges –– inadequate infrastructure, high rates of poverty, and income inequality. According to Leon, “Nigeria has achieved several years of strong growth from an expanding non-oil sector, but still lags peers in critical infrastructure, poor social indicators (up to half of the population in the Northeast lives in poverty), and less-than-competitive in quality of export competitiveness. It is vital that Nigeria continues with structural reform agenda to achieve these competitiveness gains that will be key to achieving sustainable growth and creating job opportunities. Mobilising additional non-oil revenue, increasing skills base, promoting non-oil export diversification, and fostering efficient and high-productivity entrepreneurship can help position the economy to achieving its potential.”

Also, and bearing in mind that the most important constraint to raising productive capacity in Nigeria is poor infrastructure, unreliable power supply, poor roads, red tape and so on, the IMF chief stressed that there is no overnight solution to relieving these constraints. Nigeria, according to Leon, needs a strong track record of policy implementation.