I must confess to having looked forward to the publication of details of the IMF’s 2017 Article IV Consultation with Nigeria. For a variety of reasons, really. The fourth article of the Fund’s Articles of Agreement provides for an annual visit to member countries by Fund staff to collect “economic and financial information” and discuss with officials of the country they visit its “economic developments and policies”. Thus, there was a sense in which the Fund’s perspective on where our economy is headed would have added clarity to the muddled domestic conversation on this matter.
In addition, giving the apparent desire by the current managers of the country to have the Fund’s imprimatur on their plan for the economy, the Fund’s reading of the problems with the domestic economy, and its suggestions for their solution should double as a primer for the Buhari administration in its search of an exit strategy from the cul-de-sac that the economy currently is in.
Thursday, last week, the Fund duly obliged, releasing details of its Executive Board’s appraisal of the Nigerian economy. However, not much was new in the 1-page release. Falling oil prices pushed the economy into recession last year; and the consolidated fiscal deficit further into negative territory. Inflation is in territory that should have government concerned about how the fabled (near-mythical, more like it) “poor and vulnerable” segments of our population are “managing”. The Fund confirmed worries over the way the central bank has managed the foreign exchange (FX) market. And is persuaded that with policies remaining as they are, the outlook for the economy will be “challenging”.
The Fund believes the main pressure points will be: “Policy uncertainty, crowding out, and FX market distortions would be expected to drag activity. Accommodative monetary policy would keep inflation in double digits. Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the Federal Government’s already high debt service burden. A continued policy of prioritizing exchange rate stability would lead to an increasingly overvalued exchange rate, leading to a deterioration in the non-oil trade balance and gross reserves below adequate levels.”
On the back of this concerns, the Fund counsels the implementation of “stronger macroeconomic policies”, the front-loading of revenue-based fiscal consolidation, to start this year, reduction in the federal government’s “interest payments-to-revenue ratio to sustainable levels”, “increasing non-oil revenue, including through raising VAT and excise rates, strengthening compliance, and closing loopholes and exemptions”, eliminating fuel subsidies, “strengthening public financial management, and developing a well-targeted social safety net”, keeping in check the “fiscal deficit of state and local governments, including through improved transparency and monitoring”, etc.
None of which is contentious, if indeed we are honest when we declare our commitment to a private sector-led economy based on market principles.
This latter point, though, makes the case against the Buhari government’s appetite for debt? I have argued that a more market friendly, and private sector-focussed approach towards re-jigging the economy, boosting domestic productivity, and diversifying its revenue base, would have concentrated on reducing existing impediments to doing business in the country in a way that allows the private sector to pick up the economy’s investment slack.
Against what the Fund describes as “significant under-execution in capital spending”, we ought to worry not so much about the economy’s access to financing; but its absorptive capacity. As currently architectured, how much of any new infusions of money into this economy will earn more than it costs? If there are structural reasons why we cannot efficiently put the annual budgets for capital spending to work, then we ought to worry about our public sector raising so much money. Worse, though, than the fear that the public sector may not optimise additional debt issues is the Fund’s claim that last year, the federal government’s interest payments-to-revenue ratio doubled to 66%.
Now, that’s a big cause for concern, if ever we needed more. We cannot be spending 66 kobo of every naira we earn servicing debt, and still hope to grow a normal economy any time soon.