SAM DIALA examines the recent report of the International Monetary Fund (IMF) and highlights five takeaways from the Article IV Consultation with Nigeria.
Salient issues critical to Nigeria’s sustainable macroeconomic development have been raised in the recent report of the International Monetary Fund (IMF) surveillance visit to the country. The visit, called Article IV Consultation, is aimed at identifying weaknesses that could result to economic or financial instability of the country and, by extension, derail the overall developmental objectives of the IMF.
The annual visit is called “Article IV Consultation” because member countries are required by Article IV of the IMF Articles of Agreement to subject their economic and financial policies for scrutiny of the international community. This process of regular monitoring of economies and associated provision of policy advice is referred to as “surveillance”.
Key focus areas include policy initiatives considered conducive to orderly economic growth, reasonable price stability and check against manipulating exchange rates for unfair competitive advantage. Sufficient data must be presented to the visiting IMF representatives to show that the economy is being driven in the right direction; while the Fund identifies areas of improvement opportunity with measurable goals.
Leadership capacity of the country to effect adequate, sustainable and appropriate policies and regulations at national, cascading into subnational and organisational levels determines the success or otherwise of the country’s economic development. Election and law-making processes, education, security, investment, manufacturing, agriculture, financial services, employment and other fundamentals are considered critical to this process.
The IMF report noted that Nigeria had exited the 15-month painful recession that began in the second quarter of 2016, but warned that the economy remains vulnerable. It commended the Economic Recovery and Growth Plan (ERGP) initiative launched in March 2017, which could help in solving the lingering power challenge and sustain the tempo for enhanced business environment. The Fund observed that macroeconomic and structural reforms were urgently required to contain vulnerability and support sustainable private sector led growth.
It noted that economic recovery remained challenged amid sluggish growth. It said that gross domestic product (GDP) expansion of 1.4 per cent, year-on-year, recorded in the third quarter of 2017 was largely oil-induced though agriculture played a role. The vulnerability of the economy, despite the positive development, can be ascertained from the receding growth in the non-oil-non-agriculture sector which represents about 65 per cent of the economy.
It added, “Difficulties in accessing financing and high inflation continued to weigh on companies’ performance and consumer demand”. While inflation rate continued to decline (15.9 per cent by end-November), it remained high and far from the target single-digit inflation.
The Fund acknowledged measures adopted in addressing the macroeconomic imbalances and structural impediments. These include the ERGP and Ease of Doing Business launched earlier in 2017. Foreign exchange reform that gave birth to the Investor and Exporter (I&E) foreign exchange (forex) window has boosted forex supply. The effect reflects in the improved foreign reserves that hit a four-year high of $46 billion as forex parallel market premium is on a decline. It welcomed steps taken to improve power supply and fight corruption.
“However, in the absence of new policies, the near-term outlook remains challenging. Growth is expected to continue to pick up in 2018 to 2.1 percent, helped by the full year impact of greater availability of foreign exchange and higher oil production, but to stay relatively flat in the medium term. Risks to the outlook include lower oil prices, tighter external market conditions, heightened security issues, and delayed policy responses”, the IMF said in the report.
The international financial institution noted that the challenge in tackling the various macroeconomic imbalances to achieve growth that impacts on the life of the people is enormous. It also welcomed the tax reform launched by the Nigerian government under the Voluntary Asset and Income Declaration Scheme (VAID), but advised that the Value Added Tax (VAT) be raised and more taxable avenues created to boost revenue for infrastructure and other priority investments.
According to the Fund, “Containing vulnerabilities and achieving growth rates that can make a significant dent in reducing poverty and unemployment requires a comprehensive set of policy measures. However, with oil prices expected to remain lower than in the past, upfront actions to mobilize non-oil revenues, including through reforming the VAT and removing exemptions, are needed while safeguarding priority expenditures, including scaling up social safety nets and infrastructure investment.”
The IMF pointed out that strong fiscal condition requires tight monetary policy measures to tackle inflation and general vulnerability. According to the Fund, Nigeria should pursue unified foreign exchange policy to boost confidence in the economy and reduce potential risks from capital flow reversals. It advocates a diversified private sector-led economy, adding “Strengthening governance and transparency initiatives, and lowering gender inequality and fostering financial inclusion would also be important.”
· Little to Celebrate
A worrisome aspect of the post-recession growth is its oil-induced nature. Analysts express concern over the return of oil as major driver of the economy. At an Economic Summit organised by a Lagos-based media enterprise last February, experts noted that the return of oil as key revenue generating force of government underscored the fact that nothing had changed. The vulnerability is still there and the growth in the economy cannot be called ‘growth’ in the real sense of it.
“Even though we are out of recession and still growing, over 20 economic activities are still in the negative territory. Economies run in a boom and bust cycle, but the speed at which economies get into the bust is always high.
“Recovery in oil exports has strengthened the country’s balance of trade. This has helped in the country’s growth in reserves. Though we have exited recession, economic growth is still fragile. Unemployment remains high”, Yemi Kale, Statistician-General of the Federation/CEO of National Bureau of Statistics (NBS), said at the February Economic Summit in Lagos.
Amid oil-induced rebounding of the economy, Nigeria’s unemployment rate has worsened. From 14.2 per cent in fourth quarter (Q4) 2016 hitting 16.2 per cent in Q2 2017, unemployment jumped to 18.8 per cent as at Q3 2017. Furthermore, about 70 per cent of Nigeria’s over 190 million people live in abject poverty — less than $1 or N305 per day. “This is abstract growth; it has not impacted on the lives of the people”, Kayode Sodipo, a Labour Economist, told Leadership Sunday.
“It is not yet ‘uhuru’. Real GDP growth rate, though now in the positive territory, remains weak and fragile, driven chiefly by the oil sector. Critical growth sectors such as manufacturing, construction, transportation are still in the negative territory. Ditto for vital social sectors such as Education and Health.
“The much talked about diversification of the productive base is still a far cry. GDP growth rate is still below population growth rate and so the impact is hardly felt by the ordinary Nigerian”, Joe Uche Uwaleke, Associate Professor and Head, Banking & Finance Department Nasarawa State University, Keffi, Nasarawa State, told Leadership Sunday by e-mail.
Commenting further on the economic paradox, Kale said: “Oil got us into recession and oil largely took us out of recession”. He pointed out that in a situation whereby high vulnerable oil sector accounts for 80 per cent of government revenues, a consumption-driven non-oil sector, including manufacturing, real estate, public administration, trade, finance – all depend largely on the fortunes of the oil sector to thrive, is a pointer to the vulnerability of the post-recession growth being celebrated. “There is nothing to celebrate yet’, said Sodipo. Nigeria must reduce oil revenue dependence and create space for the private sector.
•Private Sector Quagmire
The IMF expressed concern over the overall negative effect on the private sector:
“Revenues declined marginally, as higher oil receipts were offset by shortfalls in FG independent revenue (80 percent relative to budget). Higher financing requirements—albeit some of it increasingly met through external sources towards yearend—and increased banks’ risk aversion have crowded out private sector lending (-3.3 percent year-on-year).”
Deposit money banks are reaping bountifully from fixed-income investment. The lenders maintain that tight monetary policy, high operating cost, infrastructure deficit and hostile operating environment, among others, justify their priorities for treading the path of lesser risks by looking the way of fixed-income against traditional lending to the private sector. It is not likely that the private sector will be greatly relieved of the financing pressure that has remained a critical operating challenge, as the banks intensify survival measures.
According to Uwaleke: “Granted inflation rate is beating a retreat but remains high at over 13 per cent, well above the CBN upper regulatory band of 9 per cent. Consequently, policy rate has remained high at 14 per cent and so have lending rates by Deposit Money Banks. So SMEs get starved of loanable funds. Infrastructural gaps especially with regard to power remain a big challenge. Incessant fuel scarcity has equally not helped matters in recent times.”
While government has maintained its stand to improve the people’s standard of living by providing the necessary infrastructure, create an enabling environment, roll out policies that facilitate the Ease of Doing Business implementation and engage in job creation, these cannot be free – at no cost to the people.
Government may bow to the pressure of increasing VAT rate and expanding the scope of VATable items. Notwithstanding the lingering challenge in the power sector whereby electricity consumers have paid astronomically high tariff without corresponding improvement in electricity supply, the distribution companies (DISCOs) maintain that only “appropriate tariff” can guarantee stable power supply.
The paradox of petroleum product subsidy amid fixed pump price of 145 per litre of petrol, does not seem sustainable. While Nigerian National Petroleum Corporation (NNPC) subsidises petroleum products to the tune of N774 million per day, over 82 per cent of Nigerians still buy petrol at an average of N199 per litre according to NBS. Misery index has increased to 55 per cent.
Recent report by the NBS showed improved internally generated revenue (IGR) status of the states, suggesting that more aggressive measures are being taken towards non-oil revenue mobilisation. Unavoidably, the people bear the brunt of multiple taxation administered with cruelty and impunity at the sub-national level.
The IMF report stated: “In addition to ongoing efforts to improve tax administration, Directors underlined the need for more ambitious tax policy measures, including through reforming the value-added tax, increasing excises, and rationalizing tax incentives.
“The implementation of an automatic fuel price-setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets should support the adjustment.”
•Year of Two Halves
As activities gear up in 2018 for the 2019 general elections, it is observed that the dividend of the post-recession growth will have to wait for the next one year, at least, after the elections. Experts have described 2018 as a year of two halves. “The first half of positive growth while rising uncertainties surrounding pre-election year, which will see economic agents take a more cautious position on the economy in the second half of the year”, said speakers at the Lagos Economic Summit meant to deliberate on the impact of government policies on the people as the economy navigates from recovery to growth.
According to IMF, “The outlook has improved but remains challenging. Higher oil prices would support a recovery in 2018 but a “muddle-through” outlook is projected for the medium term under current policies, with fiscal dominance and structural constraints leading to continuing falls in real GDP per capita. Key risks to the outlook include additional delays in policy and reform implementation in a pre-election year, increasing security tensions, and a fall in oil prices, which could trigger a capital flow reversal.”
•Structural Adjustment Imperatives
The Nigerian government is being urged to embark on (tougher) reforms to eliminate waste, corruption, and free resources for infrastructure and human capital investment. As a rule, economic benefits come at a cost; Nigerians should be prepared to make the necessary sacrifice while government navigates the tough route of economic recovery and sustainable growth. It is obvious that the people cannot have their cake and eat it.
Nigeria is public-sector driven; virtually every bit of development is tied to government – employment, infrastructure, policy, education and the likes. Private sector contribution to national development is minimal. The three factors that ICE economic development – Investment, Consumption and Export, are lagging or virtually non-existent. Because, government is the largest employer of labour, productivity is extremely low and the private sector which drives development in advanced economies is comatose here.
Nigeria has debt profile of N21.7 trillion as at December 31, 2017. Servicing the debt and maintaining strong fundamentals for sustainable growth is a huge challenge. The infrastructure to pull the economy out of oil will take some time to materialize. In the meantime, the factors of production to support the ambitious non-oil revenue projection of 2018 will be actualized in future, depending on how things play out in the 2019 election. Irrespective of the “improvements” noticed in the economy, the proposed 2018 budget will deliver; but certainly not in 2018. Meanwhile, the pains of adjustment will remain.