How Nigeria can get out of economic crisis – IMF boss
By Henry Umoru, Michael Eboh & Joseph Erunke
ABUJA – MANAGING Director, International Monetary Fund, IMF, Christine Lagarde has asked Nigeria and Nigerians to brace up for harder times, following the massive fall in the price of oil globally, just as she said that the country since inception recorded the slowest pace of growth in the year 2015.
Lagarde, who called for increase in Value Added Tax (VAT), stressed that it has become imperative for the federal government to broaden the country’s tax base against the backdrop that Nigeria has the lowest VAT rate in the African continent. According to her, “the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.”
Although the IMF Managing Director was careful not to endorse the devaluation of naira against major international currencies, she, however, urged the federal government to adopt a flexible monetary policy that will better serve the interest of Nigerians.
Speaking, yesterday, at the National Assembly complex in Abuja during a meeting with Senate President Bukola Saraki and other senators, the IMF boss who called on the federal government to reduce cost of governance, said that the contentious fuel subsidy must be removed to allow government spend on infrastructure, housing, education, health, among others.
She, however, cautioned Nigeria against obtaining loans, noting that it was at the moment affecting the country and subsequent borrowing could hurt the nation’s economy in the long run.
She said: “On recurrent expenditure, efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments. Transfers and tax expenditures should also be addressed. For example, continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programmes for the most needy.”
Fuel subsidies hard to defend
She continued: “Indeed fuel subsidies are hard to defend.“Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.
“The move by the government to remove fuel subsidy is good. Those people who need the subsidy can receive cash transfer. Fuel subsidies are hard to defend. Subsidies are no longer good. But I hear that it will hurt the poor. Forty per cent of fuel subsidies in rich countries go to rich families. The people do not really need the subsidy. Look at the number of people who stay in stations trying to buy fuel.
“There is a small acceleration expected in 2016. Growth in the last 10 years has slowed down in Sub-Saharan African countries. Oil prices will remain low and low for a long time. Oil producing countries must factor this in and model their economic policies towards this direction. Nigeria is facing mounting pressure. There will continue to be abundant supply of oil, but low demands. It is very unlikely that we will see any rise anytime soon.
“Private sector investments will be affected. Higher interest rate will continue to rise. Sub-Saharan African countries are facing immense pressure as a result of this. I can feel the hardship and pains as a result of activities of Boko Haram. The resources spent in trying to fight insurgency are supposed to be spent on infrastructure.
“Whatever happens in Nigeria will affect our neighbours because of the trading relationship. There must be a fundamental change in the way government operates. It is not about how to divide proceeds from oil wealth. It is about how to deliver to Nigerians the basic services they deserve. Hard decisions must be made. As the National Assembly considers the 2016 budget, these are the issues they consider.
“Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change—think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas (fuel) so that they can go about their everyday business.
“At the same time, we should not forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments—which account for the bulk of social spending—have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue.”
Nigeria and West Africa
Lagarde then urged Nigeria as a country to build regional cooperation among West African countries because whatever affects Nigeria directly or indirectly affects other countries within the sub region. According to her, “This is always a moment I cherish. My first visit to Nigeria was in late 2011. At that time, Nigeria was emerging from the global economic crisis. Nigeria is the prime destination in Africa. Nigeria has gone through democratic transition which is a good thing. When investors know that transitions can happen successfully, they have more confidence.
“The richness of Nigeria has to do with the population. Nigeria is a huge market and people who are prepared to put their money here look at the population. Oil prices have fallen sharply. The geopolitical tensions have increased. These things are happening at a time the country needed to lift the standard of living of Nigerians. Nigerians are known for their courage and doggedness. Nigeria cannot waste time. There is no time at all.
“Government must step up revenue mobilization and reduce leakages. Every 50 kobo collected from 30 per cent of the country’s revenue goes into the servicing of local and foreign debts. The government must focus on power, transportation and housing. These three areas will create wealth.
They are critically important. Efforts should be made to reduce the cost of governance.
“As I am told, Nollywood currently employs over one million Nigerians. Poverty and inequality still remain high in many parts of the country. Mortality rate is still high.”
Speaking on the need to strengthen institutions of government empowered to tackle corruption-related issues, Ms Lagarde revealed that over $1 trillion was given and received as bribes globally every year. She equally revealed that corruption makes up five per cent of global Gross Domestic Product (GDP).
The IMF boss who urged the National Assembly to come up with laws that will address corruption and block leakages in the system, said: “Corruption is touted to be five per cent of the global GDP and over $1 trillion is said to be given as bribes globally every year. Today, Nigeria is looking ahead. The future is greater than the past in Nigeria. But the sooner the government delivers, the better it will be for Nigeria and Nigerians.”
Nigerian financial sector’s strong, solid, but needs to support real economy
Meanwhile, speaking earlier during a meeting with officials of the Central Bank of Nigeria (CBN) and chief executives of financial institutions in Abuja, Lagarde emphasized the need for the financial sector to support the real sector and also contribute to the growth and development of the Nigerian economy.
She said: “We had a productive meeting with representatives of the banking industry and we had the chance to discuss the stability and the sustainability of that particular sector. We also had the chance to debate together how the financial sector can better contribute to financing the economy and supporting the business and the development of growth in Nigeria.
“From my perspective, it was a very productive meeting, very open; we had the chance to really exchange and consider how the system can improve further.
“The financial sector of Nigeria is strong, solid and needs to continue to be so, but it also needs to lend to the real economy and to provide good terms of business.”
Also, Governor of the CBN, Mr. Godwin Emefiele, stated that banks in the country promised to increase their support of the real sector and also play a major role in Nigeria’s economic development.
He said: “On behalf of the people of Nigeria and the bankers, I would like to thank the IMF and Lagarde. We had very fruitful discussions and she gave support to the efforts of the CBN by also trying to encourage Nigerian banks to continue to support the real sector, support SME in Nigeria and indeed, also try as much as possible to boost lending at very concessionary pricing, just as we are doing.
“And the banks themselves have given their words that they would do their best to support, notwithstanding the risk as well as some of the challenges we had witnessed in the past.”
After the meeting at the CBN, Lagarde, who was accompanied by her husband, Xavier Giocanti, also visited Mother Theresa Children Home, Gwarimpa, Abuja, where she made a donation of $7,500, about N1.5 million, to the orphanage on behalf of the IMF.
Speaking at the orphanage, Lagarde congratulated the management of the orphanage for their efforts at caring for the children.
She said this was her second visit to Nigeria as IMF president, but nothing was as touching as whenever she visits orphanage of the likes of Mother Theresa Children Home.
She said: “This is my second visit to Nigeria as head of the IMF and on every occasion I have visited, presidents, governor of the CBN and legislators, but nothing is as touching as a visit like this one.
“And as you say, the future of Nigeria is bigger than its past. But the future is built investing in youth and education. And that future is built one child at a time; and that is what this orphanage demonstrates. No child is left behind and you care about those who are left by the society. And for that, I really want to thank you.
“Nigeria is a country with oil, energy, entrepreneurship, resilience, but it should come to the reach of the youth as well. So please, keep doing what you are doing and we at the IMF, we care about the youths, poor and about those who are left at the side of the road.”
Lagarde’s speech NASS
Lagarde’s speech at the National Assembly which was was titled, “Nigeria—Act with Resolve, Build Resilience, and Exercise Restraint”, read in part:
“I would like to thank you for the gracious introduction, and Members of Parliament and the people of Nigeria for their incredible hospitality.
I have been looking forward to starting my new year here in Nigeria—and I am grateful for the special privilege to speak before this parliament.
“My first visit to Africa as IMF Managing Director was in late 2011, and the first country on my itinerary was Nigeria. At that time, Nigeria was emerging from the 2008-09 commodity price collapse and the banking crisis that followed.
“Since that visit, Nigeria has been acknowledged as the largest economy in Africa—with a maturing political system. We saw a peaceful general election last year in which, for the first time in Nigeria’s history, there was a democratic transition between two civilian governments. It was a strong sign of Nigeria’s commitment to democracy, to a new Nigeria.
“At the same time, the external environment has changed. Oil prices have fallen sharply; global financial conditions have tightened; growth in emerging and developing economies has slowed; and geopolitical tensions have increased.
All this has come at a time when Nigeria is facing an urgent need to address a massive infrastructure deficit and high levels of poverty and inequality.
“So, Nigeria faces some tough choices going forward. Nigerians, however, are well known for their resilience and strong belief in their ability to improve their nation and lead others by example. I firmly believe that Nigeria will rise to the challenge and make the decisions that will propel the country to greater prosperity.
As the great Nigerian novelist Chinua Achebe once said: “If you don’t like someone’s story, write your own.” This is exactly what you are doing right now.
And let me assure you that, as you go forward, as you develop your story, the IMF will support your efforts.
“Today, I would like to offer my perspective—on your story and punctuate it with three R’s: resolve, resilience, and restraint. I will first identify the global economic transitions that are affecting Nigeria and the region. I will then turn to the importance of managing the near-term vulnerabilities facing Nigeria’s economy. And, finally, share my thoughts on what might help to achieve more inclusive and sustainable growth.
- Global economic transitions and implications for Nigeria and the region
“So let me start with the big picture. For more than a decade, growth in Sub-Saharan Africa was driven by an extraordinary combination of improved policies, stronger institutions, high commodity prices, and high capital inflows.
“The region has now entered a different phase, where commodity prices and capital flows are far less supportive. We are in the process of updating our forecasts, but broadly the IMF staff estimates that regional economic growth dropped from 5 per cent in 2014 to about 3.8 percent last year, with only a modest recovery expected in 2016.
“There is a similar picture at the global level—modest growth last year, with only a slight acceleration expected in 2016. Emerging markets, which propelled global growth after the 2008 global financial crisis, have slowed; advanced economies are still recovering from the impact of that crisis; and financial markets remain volatile.
In fact, both at the regional and global level, growth is affected by three major economic transitions. They include China’s move to a new growth model, the prospect of commodity prices remaining lower for longer, and the increasing divergence in monetary policy in major economies, especially since the recent rise in U.S. interest rates.
“Understandably, policymakers in this region are concerned—because these transitions can create spillovers through trade, exchange rates, asset markets, and capital flows.
“For example, spillovers are now affecting oil-exporting countries, which generate about half of this region’s GDP. These economies, including Nigeria, are facing massive pressures and challenging prospects.
Over the medium term, oil prices are likely to remain much lowerthan the 2010-13 average of more than $100 a barrel. Why? Because of the huge oversupply in global oil markets. Think of the shale oil boom in the United States, and some historically large producers such as Iraq and Iran coming back to the market. Other factors include OPEC’s strategic behavior and the drop in global demand for oil, especially in emerging economies.
“Already, lower oil prices have sharply reduced Nigeria’s export earnings and government revenues. Both are likely to remain at depressed levels, reducing the space for policy interventions to address Nigeria’s social and infrastructure needs.
“Private sector investment will also be affected. Investor confidence about the outlook has remained weak, and financing is likely to become more difficult and more costly for everyone. With U.S. interest rates expected to continue to rise, albeit slowly, the likelihood of capital outflows will increase, and exchange rate pressures could mount as investors re-assess their appetite for risk.
“More broadly, Sub-Saharan Africa is also facing spillovers from geopolitical factors, including the fight against Boko Haram. The threat of terrorism is very real and never far from our minds. Having been in Paris during the November attacks, I know firsthand the sorrow that so many Nigerians carry in their hearts.
In this region, terrorism not only takes a human toll but it also makes public finances more fragile. How? By widening budget deficits. Revenues are lower, including from lower growth, and spending needs higher, including for security and for supporting those impacted by the violence. One immediate downside is higher financing needs that can crowd out other essential public spending.
“This brings me to my second topic—how can policymakers manage these near-term vulnerabilities?
- Managing near-term vulnerabilities
Let me start by underscoring the progress made in recent years. Nigerians have created a large and diversified economy that has grown by about 7 per cent a year over the last decade. This has been a remarkable achievement, a testament to Nigeria’s immense potential.
The outlook, however, has weakened. Growth in 2015 is estimated at about 3.2 per cent—its slowest pace since 1999—and only a modest recovery is expected in 2016.
For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms. On top of the slowdown, vulnerabilities have increased. The ability to manage shocks is restricted by low fiscal savings and reserves. And the weakening oil sector could stress balance sheets and put pressure on the banking system.
“Reduced confidence and lower capital spending also impact the non-oil corporate sector. Unfortunately, this sector looks less resilient today than during the downturn of 2008-09. Companies that have increased their leverage and US-dollar debt in recent years may now come under pressure as they face rising interest rates and a stronger dollar.
“Nigeria also has a large regional footprint, and its fortunes affect that of its neighbors, especially through trade. For example, it is estimated that a one per cent reduction in Nigeria’s growth causes a 0.3 percent reduction in Benin’s growth.
So what can policymakers do?
I see an immediate priority—a fundamental change in the way government operates. What do I mean by that? The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve—be it in education, health or infrastructure.
“This means that hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward. My policy refrain is this:
Act with resolve—by stepping up revenue mobilization. The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.
Build resilience—by making careful decisions on borrowing. Nigeria’s debt is relatively low at about 12 percent of GDP. But it weighs heavily on the public purse…”
Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt.
Exercise restraint—by focusing on the quality and efficiency of every naira spent. This is critically important. As more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.
Let me give you examples of what I mean:
“On capital expenditure, the focus must be on high-impact and high value-added projects. This is why the government is focusing on power, integrated transport (roads, rail, air, and ports), and housing. These can help connect centers of activity across the country and drive growth prospects.
“On recurrent expenditure, efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments. Transfers and tax expenditures should also be addressed. For example, continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programs for the most needy.
Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.
Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change—think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas so that they can go about their everyday business.
“At the same time, we should not forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments—which account for the bulk of social spending—have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue.
The IMF can help in that regard by providing technical assistance on public financial management. We did so for the Kaduna State Government. We can explore how to support states’ efforts to undertake budget reform.
I see another immediate policy priority—strengthen Nigeria’s external position. The essential fact is that, given the structure of the economy, the massive fall in oil prices—which is expected to continue—has changed the medium term foundations for economic resilience. To be clear, the goal of achieving external competitiveness requires a package of policies including business-friendly monetary, flexible exchange rate and disciplined fiscal policies, as well as implementing structural reforms. Additional exchange rate flexibility—both up or down—can help soften the impact of external shocks, make output and employment less volatile, and help build external reserves. It can also help avoid the need for costly foreign exchange restrictions – which should, in any case, remain temporary. And going forward, improved competitiveness from improved exchange rate flexibility and other reforms will facilitate the needed diversification of the exports base and, ultimately, growth.
This brings me to my final topic—how can policymakers achieve more inclusive and sustainable growth?
- Achieving inclusive and sustainable growth
The good news is that Nigeria is already, in many ways, a 21st-century economy.
• Think of the boom in mobile communications in a country where more than 140 million cell phones are in use, nearly one for each Nigerian.
- Think of the vibrant, home-grown film industry that has become the world’s second-largest by output. Nollywood employs about one million people who create films that are winning audiences across the continent and beyond.
- Think of the growing number of innovative startups—from fashion to software development—that are promoting Brand Nigeria. Indeed, the growth in services to about half of Nigeria’s output is a testament to the transformation that has begun, and which needs to continue.
But we all know that huge structural challenges remain, despite the many initiatives that are ongoing. Let me highlight the conditional cash transfer scheme in Kano, where poor households receive financial assistance linked to girls’ enrolment in schools. Overall, however, poverty and inequality still remain high, especially in some parts of the country.
Women account for about 42 percent of the total labor force—which is comparatively low—and their literacy rates are well below that of men. Maternal mortality is relatively high because of limited access to health care. Many women and children are dying every day simply because they cannot get to medical facilities fast enough.
With that in mind, what are the key policy priorities? Invest in quality infrastructure, make the banks work, and improve governance. Let me take each in turn:
The first—act with resolve to significantly improve transportation networks and power delivery [i.e., generation, transmission, and distribution]. For example, Nigeria could be exporting tomato paste—a staple of Nigerian cuisine—on a large scale, but it imports about half of what it needs. This is why Nigeria needs to build more roads and better rail networks, so that more farmers can bring their crops to market.
Likewise, more investment is needed in energy infrastructure in a country where too many businesses and households regard their backup generators as their main power source.
The second priority—build resilience by fostering a sound banking system. This will help channel more savings into productive investments, especially in quality infrastructure.
“To be sure, Nigeria’s banks are generally well-capitalized and more resilient than during the downturn of 2008-09. But they are beginning to feel the impact of the growing vulnerabilities in the corporate sector. This means rising non-performing loans, which will need to be carefully monitored and managed.
The third priority—act with resolve in fighting against corruption. In his first public speech after the election, President Buhari singled out corruption as a “form of evil that is even worse than terrorism.”
“Corruption not only corrodes public trust, but it also destroys confidence and diminishes the potential for strong economic growth.
At the global level, it is estimated that the cost of corruption is equivalent to more than 5 percent of world GDP1, with over US$ 1 trillion paid in bribes each year2.
Here in Nigeria, important initiatives to discourage graft are underway and should be applauded. Let me highlight the publication of monthly data on the finances and operations of the Nigerian National Petroleum Corporation. This provides information on a key sector, building confidence in transparency, and improving accountability of oil revenues, for the benefit of all Nigerians.
Much more can—and needs to be—done. Fighting corruption is a multi-year, multi-generational struggle that must be won.
“So let me conclude: today your nation has embarked on a new journey. Nigeria is looking ahead, while drawing strength from its assets—the richness and diversity of its culture, the ingenuity of its people, and the belief in a better future.
Today policymakers have the opportunity to address near-term vulnerabilities and medium-term challenges—with resolve, resilience, and restraint. Today the “Giant of Africa” is walking with a spring in her step—inspiring others in the region and across the world.
As the great Nigerian poet Ben Okri once said: “Our future is greater than our past”.
Earlier in his remarks, Senate President, Bukola Saraki disclosed that the National Assembly was willing to partner with the global financial body to come up with policies that would benefit Nigeria and Nigerians, adding that there was the need to review the Forex policy by the Central Bank of Nigeria as that would ease restriction on foreign currency and would in the long run, encourage both local and foreign investments.