Despite its economic challenges, Nigeria’s delegation to the just concluded International Monetary Fund/World Bank annual meetings were confident that by faithfully implementing the strategy to transform the country from a consumption-driven one to an investment-driven model, the economy would rebound, even as they rebuffed a lifeline dangled at the country by the IMF, write Chika Amanze-Nwachuku and Obinna Chima
With the uptick in the level of uncertainties in the global economy, there have been concerns of further weakness in the level of economic activities in some low income as well as commodity-depended countries such as Nigeria.
The latest global financial stability report 2016 also talks about the uptick of uncertainties and vulnerabilities and the potential risks that the global economic system faces.
That was why the International Monetary Fund (IMF) announced that it would be offering zero interest rate on its concessional lending facility from 2016 to 2018 to Nigeria and others that are in dire need of financial support to boost their economies and overcome challenges in their respective economies.
Nigeria, Africa’s top oil exporter has been hit by low oil prices and depleted foreign reserves that have plunged the country into recession. The National Bureau of Statistics (NBS) recently revealed that the country’s GDP contracted by 2.06 per cent in the second quarter of 2016, compared to the negative growth of 0.36 per cent recorded in the first quarter. The country recently got a lifeline from the African Development Bank (AfDB), with the bank stating that it would support the country with the sum of $1 billion to help it address the N2.2 trillion deficit in the 2016 budget.
It is also in talks with the World Bank to plug its budget deficit, just as it is getting set to issue a $1 billion Eurobond.
But despite the concession being dangled by the IMF, Nigeria’s government officials have indicated that the country is not interested in borrowing from the fund because of the conditionalities that are usually associated with its loans.
Also, Nigeria’s Minister of Finance, Mrs. Kemi Adeosun, pointed out that the country does not need have a balance of payment problem to warrant such support from the IMF, saying that the Nigerian economy is only faced with an issue of budget deficit. Adeosun also informed multilateral donor institutions and investors that Nigeria is hungry for infrastructure that can trigger growth, not iPhones and pricey suits that will drive consumption.
Adeosun, who spoke at the just concluded IMF/World Bank annual meetings in Washington D.C, United States said investors must start to realise that western economies are matured and offer lower returns, while Africa with its infrastructure gap offers greater returns.
The IMF Offer
The Managing Director of the IMF, Ms. Christine Lagarde, said the zero interest rate policy was expected to help countries that are members of the donor institution absorb future shocks and continue their efforts to achieve deeper and more sustainable economic growth in line with sustainable development.
Continuing, Lagarde said the IMF board took the decision on the zero interest rate, which is in alignment with most developed economies, in view of the challenges facing some low income countries.
“If we must improve the inequality issue, we must have a strong international safety net. In this context, I am pleased to reveal that our board recently approved the extension of zero interest rate on all concessional facilities from 2016 to 2018, and thereafter, if there is need for extension.
“That is really important for low-income countries to be able to actually absorb the shocks without necessarily going to the international markets or relying on bilateral lending capacity of close to a trillion dollars by extending access to bilateral borrowing agreements.
“The new agreements that are being signed this week will run at least through the end of 2019, and will continue to serve as a third line of defence.
“As you know, the first line of defence is the quota, second line are new arrangements to borrow, and the third line of defence will be those bilateral loans.
“We have so far received pledges of $344 billion from 26 members. We look forward to others joining this effort. We will provide more details shortly and there will be some signing sessions organised in the course of the next two days,” she explained.
According to Lagarde, the outlook for advanced economies remained subdued, while the outlook for developing economies provide some guarded optimism with great diversities within the various economies.
“We also believe that each country has something to offer. My hope is that at the end of these meetings, each finance minister, each governor of central banks will go back home thinking of what to fuel growth.
“For example, when the monetary policy has been over-stretched, fiscal policy can step up. This will also put in place the structural reforms that are much needed, which have been sorted out in some countries, but which are still lacking in other places,” she added.
Also speaking at a separate media briefing, the President of the World Bank Group, Jim Yong Kim, noted that a lot of developing countries continue to struggle amidst a sluggish global economy. He stressed that a lot of countries had been hit by falling commodity prices and stagnating global trade.
He pointed out that “we now have the highest number of developing countries in recession since 2009”, adding that the World Bank had been working to meet rising demand for assistance to help countries manage the global challenges.
Furthermore, Kim said the World Bank was playing a strong counter-cyclical role in the global economy.
“But multiple risks threaten hard-fought gains in many countries and can hamper progress on our goals of ending extreme poverty by 2030 and boosting shared prosperity.
“Our research shows that inequality is still far too high, both globally and within countries, constraining growth and breeding instability.
“We need to focus on growth and continue to reduce inequality – and we have to make growth more equitable, and more sustainable. Because of the multiple, overlapping global shocks – including climate change, forced displacement, and pandemics – we have to scale up our efforts dramatically,” he said.
Path to Economic Recovery
Nonetheless, Adeosun further stressed that Nigeria has started a journey, which would take its economy from being dependent on oil as a primary commodity, to a more productive economy.
She maintained that the fundamentals of the Nigerian economy were strong, explaining that the current situation was short-term. “We will get back to growth,’” she emphasised.
Adeosun added: “It seems very simple, in terms of what needs to be done. We are quite excited about negative interest rates. We like that you’re not earning any money.
“We are happy to take your money and give you very small positive interest rate. We think that the time has come, everyone is thinking out of the West, but there is nothing left in the West, everybody has to now come to Africa.
“But we don’t want investors to come to Africa to sell us iPhones and many expensive suits.
“We want to become productive, so we want this investment to come into infrastructure that will enable us to compete and really enable Africans to stay in Africa.”
Adeosun said the economy had moved from spending 90 per cent of its budget on recurrent items and only 10 per cent on capital expenditure, to 70 per cent on recurrent expenditure and 30 per cent on capital expenditure.
“From the numbers that we have done, the infrastructure gap that we face, even if we devote our budget for the next three years, it is not enough, so we’ve got to look for creative ways to mobilise additional capital.
“We started of course with spending our own money (pension funds) because we think, of course, that the first thing we have to do is to re-establish some benchmarks, some ability to deliver on roads, on rails, on basic infrastructure,” she said.
According to her, Nigeria’s long-term plan is to mobilise private capital. “We think the narrative around who pays for infrastructure is a very important one in Africa. I say that because at the moment, if you don’t have infrastructure, you are going to pay anyway. If you spend six hours on a journey that should take you an hour, you’ve paid.
“So how do we convert that payment, which is currently informal and very painful, into a formal payment and therefore turn to a revenue stream that could attract investors, That is the challenge that we are working on now.
“As I have said, we are leading with our own money. We are looking at a regulatory framework that would enable investors to come in. We know it’s a new market and we are going to de-risk it.
“So what we are starting with are just infrastructure bonds that we guarantee, and then hopefully, when investors get an appetite for what the Nigerian infrastructure framework can provide them in terms of returns, we believe, we’d be able to remove some of the safeguards needed at the moment.
“We are hungry for infrastructure. We’ve got 170 million people who don’t have power in sufficient quantities, we don’t have a rail system, we don’t have a road structure, we believe that if we solve these infrastructure challenges, the entire productivity chain — agriculture, solid minerals, manufacturing, our unemployment problems — could all be solved.
“Our population is young; we have to provide a standard of living that keeps young vibrant Africans in Africa, because we think that is very important for eliminating poverty,” the minister stated.
In addition, Adeosun explained that the plan put in place to get the economy out of recession and getting it back to growth included more capital expenditure, overhead cost-cutting and getting out of the inefficient cash calls in the oil industry.
On the Eurobond, Adeosun said an open competitive tender, evaluation was going on and there were very strong commitments to raise the $1 billion sought, assuring that Nigeria had a sensible debt strategy.
“The money will go into infrastructure, specifically roads, which will help to stimulate the economy and boost growth,” she reiterated.
Support from Monetary Policy
Also, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele reiterated that the global growth remained subdued at about 3. 1 per cent 2016, pointed out that the weak growth from Africa, was majorly as a result of the drag from countries such as Nigeria, South Africa and Angola.
He said there was need for Nigeria to continue to put in place policies that would diversify the economy and reduce the dependence on commodity as its major revenue earner. But Emefiele disclosed that what also come out of the meeting was the fact that for emerging markets and developing countries, that there is no one solution that fits all and “that we should all go back and think of what kind of policies that we think can be put in place to help our economies.”
Emefiele also said meetings were held with delegations from central banks from different countries to see how the CBN could also collaborate with them on the bilateral currencies transactions.
“We held meetings with some group of foreign investors who have shown interest in coming in to Nigeria but that they had few issues with some our policies and they want us to address them. They like the fact that we adopted the flexible exchange rate regime, but some areas they want us to change. Like I always said, these policies are not cast in stones , we can always go back and look at them.
“But what is most important in our mind is that as we try to look into these policies, we will make sure that they are policies where that they have been done into the interest of Nigeria as well as Nigerians because that is what is important. So at this stage the important thing is how do we protect Nigerians what do we do to ensure that we reduce the level of unemployment what do we do to ensure that manufacturers continue to improve their industrial capacities, how do we make it possible them to get foreign exchange for them to run their factories so that prices can be moderated at the level that the purchasing power of our people don’t look totally eroded,” Emefiele added.
Also worried by economic crisis across many countries of the world, the International Monetary and Financial Committee (IMFC) of the IMF advised Nigeria and other countries hard-hit by persistent decline in their terms of trade to proceed with policy adjustment in order to correct the imbalance. The chair of the committee/Governor of the Bank of Mexico, Mr. Agustín Carstens, also noted that excessive volatility and disorderly movements in exchange rates could have adverse implications for economic and financial stability
Besides, Carstens noted that the IMFC reinforced the commitment of member states to strong, sustainable, inclusive, job-rich, and more balanced growth. According to him, the IMFC would use all policy tools—structural reforms, fiscal and monetary policies—both individually and collectively, to tackle the wave of soft economic growth across the globe.
“We are strengthening policies to bolster confidence and resilience, safeguard financial stability, and ensure that all members of society have the opportunity to benefit from globalisation and technological change. We will refrain from competitive devaluations and will not target our exchange rates for competitive purposes.
“We reaffirm our commitment to communicate policy stances clearly and resist all forms of protectionism. We will also redouble our commitment to maintain economic openness and reinvigorate global trade as a critical means to boost global growth,” he added.
Carstens explained that Nigeria and other economies facing challenges should use fiscal policy flexibly and make tax policy and public expenditure more growth-friendly, including by prioritising high-quality investment, while enhancing resilience and ensuring public debt as a share of GDP should be on a sustainable path.
He stressed that appropriate and credible fiscal policies along these lines would support growth, job creation, and confidence. “Well-designed tax structures, as well as income policies where appropriate, can promote stronger growth, protect the vulnerable, and reduce inequality.”
Furthermore, the committee wanted the IMF to continue efforts, in cooperation with other relevant international organisations, to help countries meet the 2030 Sustainable Development Goals and to integrate deliverables under the post-2015 development agenda into the IMF’s work.
According to him, work on low income countries (LICs) should focus on continued efforts to support growth and boost resilience in fragile states, and on helping countries hardest-hit by commodity price shocks, including by designing a consistent set of policies that support growth.
“We call on the IMF to support LICs in their efforts to address investment needs, and provide advice on striking the appropriate balance between financing development needs and preserving debt sustainability. In this context, we support the work in progress to review the debt sustainability framework for LICs.
“We look forward to discussions on how to enhance countries’ access to precautionary financial support and reviewing current practices in regard to blending resources between the General Resources Account and the Poverty Reduction and Growth Trust (PRGT) under IMF programs. We look forward to the findings of the forthcoming review of social objectives in PRGT-supported programs.
“We welcome the extension of zero interest rates on all IMF concessional lending facilities for at least the next two years, through end-2018. We welcome the support received so far, including by new contributors, to mobilize additional loan resources for the PRGT, and call on members’ further support to the successful conclusion of these efforts,” the IMFC added.
Need for Contingency Plan
To a former CBN Governor, Prof. Chukwuma Soludo, in view of the uncertainties in the global economy, there is need for central banks and policy makers in Nigeria and other parts of the world to be on their guard.
“There is a whole lot of uncertainties and risks everywhere. It just takes one major crisis in some place and it will snowball inpatient another crisis. So, what are the contingency plans that countries are putting in place? Otherwise, what you find is that people are going to be perennially reacting to the shocks as if they were not anticipated,” he added.
Furthermore, he said there was need for some countries facing economic challenges to also rethink some of their policy instruments, saying that some of them have fixed or quasi-fixed exchange rate systems, which according to him have not been helpful to their situation.