Aisen: Why Nigeria Must Build Fiscal Buffers

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The International Monetary Fund’s Resident Representative for Nigeria, Mr. Ari Aisen, in this interview with journalists, shed more light on the Fund’s recently released Article IV on Nigeria. He also stressed the need for the country to diversify its economy. Obinna Chima presents the excerpts:

We learnt recently that the IMF has deployed advisors to support the Nigeria Customs Service and the Federal Inland Revenue Service, can you explain how this arrangement works; also considering that crude oil price is now above $60 per barrel, don’t you think the Nigerian economy will recover faster?

We would do quite a bit of technical assistance not only in Customs, but in other areas such as in taxation and financial management in other government agencies. We have a centre that is based in Accra, from where we send experts in Customs and other areas to Abuja, to meet and to train Nigerian officials and provide them with technical assistance in Abuja. We also send experts from the International Monetary Fund’s (IMF) headquarters from Washington to Abuja. Of course, due to the pandemic a lot of these engagements have been holding virtually. But we take capacity development very seriously. It is one of the major pillars of our interactions with our member countries, and we are very glad to be able to support Nigeria in its fiscal reforms in general and particularly in tax reforms, including Customs which is a very important area.

In terms of the question on crude oil prices, it would be difficult to say what level of prices would be enough to allow Nigeria stay afloat. That is simply because oil prices are very volatile; hence, it rises and drops unpredictably sometimes. Thus, we typically advise our authorities to be conservative in terms of oil prices because of this volatility. So, when the budget is being put in place alongside other policies, it is best to consider oil prices at a reasonable low level, based on the short-term variation in oil prices. Having said that, it is undoubtedly very positive for the Nigerian economy that oil prices are on the rise after reaching less than $20 last year, due to the pandemic. Now, it is above $60 and it helps with the Balance of Payment, with some proceeds, it helps with some tax revenue.

What are the risks for Nigerian businesses and opportunities as they battle this pandemic?

Market policies should be supportive of market stability which is the basic element for business activities to thrive. Regarding the private sector, asides market stability there would be the need for conducive infrastructure in the environment that enable them to operate more effectively, hence inflation rate should be low, government policies should support economic growth so that business owners can operate and plan in a more stable economy. The availability of foreign exchange is also very important for businesses to grow and predict market activities in the local environment. The availability of credit from the financial sector, labour market flexibility, efficient judicial system, structural reforms are also crucial towards development and sustainability of businesses.

What level of devaluation does the International Monetary Fund wants to see in Nigeria and how can Nigeria achieve rapid economic recovery?

As we stated in the report, the unification would provide more transparency to the allocation of foreign exchange among potential demanders of foreign exchange in Nigeria. The fact that you observe a parallel market premium over the official exchange rate means some level of shortage of foreign exchange is out there. So what we have been suggesting in our reports and in our conversations with the government is that it would be useful to unify the rates in a one market-driven rate, which would be allowed to fluctuate; so that those who demand foreign exchange would be able to find supply of foreign exchange in that particular market. This is what we have been saying. Of course, the transition to that idea might not be very simple.

There are concerns that the exchange rate may behave in a volatile way by its own nature. It may become a little bit wild in the beginning, which is a natural concern not only to the authorities, but also to the IMF. However, going by the steps the Central Bank of Nigeria has taken in recent depreciation of the naira that we saw in the investors and exporters’ window, which is the most market-oriented window we see a clear understanding of our recommendation and hopefully that can continue so that we can move to the unification of the market pricing for all. Regarding your other question, of course, building strong fundamentals can be very helpful to stimulate growth and investments.

We believe that macro policies can actually play an important role and create space by mobilising more revenues would be important for the fiscal authorities to contribute towards promoting infrastructure spending and then produce a conducive economic environment. All these measures can actually enhance the prospect of growth. And oil prices are a very important indicator for Nigeria if they remain supportive. However, I would state that it is very crucial to promote diversification because as we have been observing the volatility in oil prices creates low productivity. So, for Nigeria to be able to move away from this paradigm of high volatility, it is important to stimulate economic diversification to other sectors of the economy. And for that, you need a conducive environment particularly for the private sector to operate in.

Is Nigeria’s debt ratio portfolio versus its GDP rate sustainable and also what is your take on the recent ban of cryptocurrency transaction in the country?

Speaking on the GDP ratio it has increased quite a bit. I would say the GDP rate at this level is sustainable despite the risks we observed in the last few years. Due to this increase, it is important to pay attention so that the Gross Domestic Products (GDP) doesn’t become too high. Two important aspects I want to discuss are: It is important to make sure whatever proceeds are generated should be allocated and spent appropriately. Another thing that is as important as this is ensuring that the fruits of those spending are going to increase the economic growth of the country. Another aspect that needs to be looked at is access to revenue because it is not high enough. Majority of the nation’s revenue proceeds are used to service debts, and leaving very little space for important social economic and infrastructure spending.

To resolve this issue would be to increase revenue which is one of the lowest in the world in terms of GDP, at about six percent precisely. You can do that by creating a fiscal environment where there is more spending. Regarding the crypto currency ban; the issues with some of these crypto currencies is the monitoring of the activities and transactions that take place. Sometimes, illegal activities such as, money laundering, terrorism, drugs deals are carried out through these platforms. Thus, it is natural for the authorities to be concerned of how best to supervise and strengthen its oversight regarding the use of crypto currencies. I think the central bank is trying to generate the best policies to address these problems and the sustainability of the financial sector.

How is the International Monetary Funds (IMF) going to ensure the judicious utilisation of the $3.4 billion support funds given to Nigeria in order to boost the nation’s economy, and what is your take on some reports stating that the economic recovery of Nigeria depends on oil?

Concerning the transparent and effective use of the funds, there has been commitment on the part of the government regarding this. Specifically, the projects would be adequately developed, supervised and reported. Also, there would be audits of the disbursement and spending of the funds. For us, it is important that those funds impact the millions of lives in the country positively. Also, we have been raising issues regarding access to adequate information on the activities of the projects on publicly accessible platforms. These are work in progress and we understand that the government is also putting in effort to ensure everything goes according to plan. Speaking on the reports, no one is immune to the growth of oil prices in the international market.

Other countries in the world are also affected by the price of oil in the international market. However, the important question is what countries can do to become more resilient towards its impact. In my opinion there are two important factors to tackling this: Firstly, do not depend entirely on one sector so as to increase the options for revenue. It is very important to put in place measures that enable economic diversification, especially looking into Small and Medium Enterprises. We are also hoping there would be more industrial policies that would be more export oriented policies rather than import oriented policies so that Nigeria can compete with other parts of the world based on local content development policies.

Secondly, factors such as government deposit, building international reserves, can enhance economic resilience and enable it stay afloat. There is also need to create buffers so that in good times, savings can be made; so that I bad times, those savings can be deployed to help. Many countries have put together Sovereign Wealth Funds which accumulates in good times, so that when the bad times come, that can actually be deployed to help the economy stay afloat. So, I would say that building buffers and having a more diversified economy can help Nigeria overcome some of the volatilities and macro-issues it is facing.

Is cost reflective tariff the most efficient solution to the challenges facing the power sector?

Cost reflective is an important aspect to it. But, of course, it is important to reduce the leakages in the system so that costs can be brought down. The second point is that when you subsidise power, it doesn’t always get to those that really. So, instead of that, it is better to target social assistance to those in need rather than general subsidies that are costly to the budget and inefficiently targeted.

Do you see the mutation of the coronavirus affecting the economic recovery of the country?

Everyone is concerned with the impact of the coronavirus and the second wave this virus seems to be mutating to. So the health policies and economic policies need to work together. The most important economic policy at the moment is to be able to find appropriate financing and mechanism to provide vaccination for the people in order to generate confidence towards the resumption and sustainability of economic activities. Of course, if there are lockdowns, it would have strong repercussions on the economic recovery and growth. Enforcing social policies such as social distancing, the use of masks in public places and hygiene remain extremely important before vaccination can take place. We believe that the economy would recover steadily if all these are effectively implemented.

With the outbreak of Ebola in some countries, coupled with Covid-19 in some African countries, is there a plan to make sure the IMF intervention funds go to SMEs that are also affected?

When we provided those funds to the authorities the commitment was pandemic related. So providing health facilities would qualify and transfer to households going through difficult times, including SMEs.