Growing Resilience to External Shocks


There is need for policymakers to adopt measures that would guard the Nigerian economy against emerging risks in the global markets, writes Obinna Chima

There is no doubt that risks are building in the global economy increasingly. This is even heightened by the growing trade tension between the United States and China as well as some form of nationalist policies being adopted in some countries.

Indeed, the development has made the International Monetary Fund (IMF) to revise downward its economic forecast for most countries for this year as well as next in its latest World Economic Outlook (WEO).
In fact, the IMF warned in the report that the world is now in an environment where financial conditions could tighten suddenly and sharply, just as it urged countries to advance policies and reforms that extend the momentum and raise medium-term growth for the benefit of all, while building buffers for the next downturn. The fund also raised concern of rising debt level in emerging economies.

This clearly, was why at the just concluded IMF/World Bank annual meetings in Bali, Indonesia, experts stressed the need for Nigeria and other oil exporting nations in dire need of structural reforms not to be tempted to delay the exercise due to the current higher oil prices.

For Nigeria, a major oil producer, while it is good news that oil price has been on the upswing in the past few weeks, with Brent crude hovering around $80 per barrel, they urged policymakers in the country to put in place policies that would place the economy on a sustainable growth path and ensure that it doesn’t slip back into recession.

The IMF estimated that Nigeria would achieve economic growth rate of 1.9 per cent this year, lower than the 2.1 per cent it had predicted previously for the country.
Nigeria’s federal government is seeking approval to issue fresh Eurobond of about $2.8 billion. Already, the nation’s total debt stock (federal, FCT and states) had been put at N22.38 trillion ($73.21 billion) as at June 30, 2018
To the Counsellor and Director of the Research Department, IMF, Maurice Obstfeld, there is need for Nigeria to enhance its non-oil revenue mobilisation.

According to Obstfeld, strengthening of fiscal positions is necessary to reduce debt vulnerabilities in Nigeria and other countries.
“Boosting non-oil revenues and continuing fiscal consolidation plans remain key goals for oil exporters. The focus should be on growth-friendly fiscal adjustment, with a shift in spending toward productive and social outlays accompanied by frontloaded domestic revenue mobilisation, through for example, broadening the tax base and strengthening revenue administration,” he added.

Also, the Head, Emerging Economies Regional Studies Division at the IMF, Anna Ilyina, pointed out that given that the global is still at an early stage of monetary policy normalisation in advanced economies, the global external conditions and external balance conditions would remain challenging going forward.

“So, this is likely to result to protracted period of mobility of capital. In this situation, I will advise that foreign exchange reserves should be used judiciously,” she added.
“In the case of Nigeria, there is one important driver that always affects its economic condition and that is oil. Nigeria being an oil exporter is always very sensitive to changes in oil prices.”

Investment in Human Capital
For the World Bank Group, the level of human capital development in any country is a key determinant of productivity in such a country.

That why the Bank was miffed about the poor level of investment in health, education and technology by the Nigerian government. In fact, the World Bank ranked Nigeria 152 out of 157 countries surveyed in its new Human Capital Index (HCI). The HCI measures the amount of human capital that a child born today can expect to attain by age 18, given the risks of poor health and education that prevail in the country where he or she lives. The index measures each country’s distance to the frontier of complete education and full health for a child born today.

The President of the World Bank, Mr. Jim Yong Kim, said it was unfortunate that Nigeria, one of the most important countries in the world, was ranked 152 out of 157 on the HCI.
He added: “Nigeria is one of the most important countries not only in Africa, but in the world. And so, we feel that it will be extremely important for Nigeria to really go on a different level all together in terms of their commitment to investing in human capital.”
Kim described human capital as a key driver of sustainable, inclusive economic growth, saying, investing in health and education had not gotten the attention it deserved.

Measures to Adopt
To the Managing Director of the IMF, Ms. Christine Lagarde, in order not to be hurt by developments in the global economy, there is need for the Central Bank of Nigeria (CBN) to sustain its current tight monetary policy regime.

She also reiterated the need for government to enhance non oil revenue mobilisation.
“Domestic revenue mobilisation is five per cent of GDP in Nigeria and that is just way too low, relative to where Nigeria should be in order to address the issues of health, education, proper social spending on the people, and particularly the young people of Nigeria.
“And there is need structural reforms, that would probably include really making sure that the refineries and the oil equipment that is available in Nigeria works well and works for the benefit of Nigeria,” Lagarde added.

But CBN Governor, Mr. Godwin Emefiele, explained that due to concerns around ongoing interest rate normalisation in the United States, which was predicted to extend to some other advanced economies in Europe, the CBN would focus on maintaining a stable exchange rate so that businesses can plan and to avoid a problem in the banking system assets.

Emefiele said there was no cause for alarm due to the recent decline in the country’s external reserves.
He, however, argued that even though there was need to build buffers, “unfortunately I must say that we are in a period where it is difficult to talk about building reserve.
“It is a choice we have to make and at this time, the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan and we don’t create problem in the banking system assets.

“Naturally, when this happens, it results in weakening of assets, rising non-performing loans (NPLs), and other wide implications. This is why we will maintain the posture we have and we believe that it is sustainable in the short run,” Emefiele said.

According to him, practically, all emerging markets have suffered, not just by depreciation, but also loss of reserves since the interest rates normalisation commenced.
“India, for example, has depreciated almost 14 per cent, Ghana by almost 12 per cent, New Zealand by about 12 per cent, Indonesia by another 12 per cent, Australia by eight per cent, South Korea – eight per cent; Japan – six per cent; Thailand – six per cent; Philippines and Vietnam have also lost, but Nigeria has lost little or nothing.

“While we are at this meeting, our host country has reported a loss of about $20 billion in foreign exchange reserves and at the same time suffered currency depreciation, which is the same for the rest of the emerging market economies.

“For Nigeria, we have lost only reserves by a margin, in my view and at the same time, we have managed to sustain stability in our foreign exchange market. I think we have done a very good job, not only trying to maintain a stable exchange rate, but trying to avoid depreciating our currency so far in this early days of normalisation.”
On her part, the Minister of Finance, Mrs. Zainab Ahmed, said the country is not anywhere near a debt crisis.

Zainab said: “We don’t have a debt problem because at the ratio of three per cent of Gross Domestic Product (GDP), we have one of the lowest debts, in fact the lowest debt among our comparative countries.”
According to Zainab, “What we have is a revenue problem and we need to work to increase our revenue to ease our debt service obligations.”

She stressed the need for government agencies to enhance domestic revenue mobilisation so as to ease the debt service burden.
“We have a lot of headroom to borrow but we are not rushing to borrow more because we have to consider the foreign debt service that we carry.

“We really are in a situation where we have to consider increasing building fiscal buffers because even though the global economy is going positively upward, there is still a lot of fragilities.
“A lot of countries, including our own, and the next wave of recession that might hit the global economy might not be the one that any country can quickly come out from unless the country has sufficient buffers.

“So as a country, both the federal and the states, we have to look at how to save more and we have to look at how to invest more in critical infrastructure that will yield revenue.”
According to the finance minister, the proposed Eurobond that would be issued this year, if approved by the National Assembly, would be to fund the 2018 budget.

“The budget has approval for us to borrow both locally and internationally and we have a bond issuance within the range of $2.8 billion that we need to raise before this year closes. That will be used to finance the capital projects in the 2018 budget,” she added.

The Minister of Budget and National Planning, Senator Udoma Udo Udoma, disclosed that President Muhammadu Buhari had directed ministers and all members of the economic management team not to be distracted by activities surrounding the 2019 elections. The minister expressed optimism about the growth of the Nigerian economy.

“With respect to the problem of debt-vulnerabilities, I agree with the IMF that it is an issue that requires constant monitoring. Even though Nigeria has one of the lowest debt levels among African peers, we realise that we need to improve our revenues to bring down our debt service to revenue ratios to more comfortable levels.
“Accordingly, we are intensifying efforts on domestic revenue mobilisation and maintaining fiscal discipline. We are broadening our tax base through policy reforms such as the tax amnesty programme ‘VAIDS’.

“This, amongst other measures, has resulted in the number of taxpayers rising from 13 million in 2015 to over 19 million. We are also deploying technology in tax and customs’ collections to automate processes and enhance efficiencies.

“We are also on track to shifting our domestic debt portfolio to longer term maturities. And our external debt is primarily concessional borrowing, representing 54 per cent of our external debt as at June 2018,” he said.

Also, the Director General of the Debt Management Office (DMO), Ms. Patience Oniha, said, “We can’t run from the fact that we need to generate more revenue.”
She added: “Generating more revenue does not mean we should focus only on increasing production in the Niger Delta or praying for oil prices to rise, we have to generate long-term revenue.

“How do you generate that? You have to enforce compliance, which is all about increasing the tax base and making sure that those who are paying are paying the correct amount and not just paying a small amount to escape.”