From the IMF’s website:
Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed. The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society.
I know that anytime you guys hear ‘IMF’, your body starts to get hot (Fun Fact: Nigeria has never actually taken an IMF loan before). But when they do these Article IV reports, they are very useful especially for a country like Nigeria where the quality of government investigation into the economy is generally poor. If you scroll down to the Nigeria section on the website, you’ll see the reports going back to 1999.
Anyway, on April 5th, they released the latest report on Nigeria’s economic check-up. For this piece, I’m going to focus on the 57 page report titled Nigeria: Selected Issues. So let’s see what it has to say.
How far?
The first question they tried to answer was simply ‘how far?’. Yes, everyone knows that oil prices have been falling since June 2014 when they hit $114. Yes, everyone knows that Nigeria is dependent on oil for its foreign exchange needs. But even when you know all that, you can still confidently say that ‘we expect the impact of all these negative developments to be so and so on the economy’.
The problem is that after you have taken all these factors into account, the Nigerian did much worse than anyone could have predicted. So how far?
As you can see, that stright line going up from left to right is where the Nigerian economy was expected to be if all was going well. Reality hit in 2014 and you can see that the Nigerian economy turned off at Shagamu instead of continuing to Ibadan on the Lagos-Ibadan expressway. IMF are saying that even the bombing of pipelines by militants in 2016 is not enough to explain all of this terrible economic performance. The sectors of the economy that are not related to oil and should have helped to support the economy also turned off at Shagamu.
They went on to compare Nigeria with 25 other oil exporting countries to see how the oil price crash affected them. Nigeria came 3rd…from behind.
Look at the chart on the left. Since the oil price shock in 2014 was largely a surprise, they are comparing how oil exporting countries performed against the predictions that were made for them at the beginning of 2014.
We can explain Chad — is it even a real country? We can explain Venezuela — Chavez, a mad man, died and power landed in the lap of Maduro, a stupid but dangerous fellow. What is Nigeria doing in that part of the chart? Una dey mad ni? The chart on the right is how much the economy slowed down as a result of the oil price shock. We can also explain Turkmenistan — it was a one party state until 2012. In the last election they did there in February this year, 9 candidates contested and the incumbent still won with 98% of the votes cast. To put it simply, if you are to the left of Colombia, you are doing worse than the average. If you are to the right, you are doing better than your peers.
So, how far?
Parading The Usual Suspects
The obvious next step is to start investigating all the possible reasons why this happened. Broadly speaking they looked at 4 factors.
- Macroeconomic Policy Space — when the oil price shock hit you, how did you react in terms of government policies? Did you carry a gun, point it at your own foot and fired it? Do you hate yourself? Or did you calm down, think carefully and come up with policies to deal with the mess you found yourself in?
- External Factors — Like when someone is minding his business working hard in Lagos and then they are pressing remote control for him from the village. Was this the work of evil spirits that Nigeria has no control over?
- Oil Dependence and Economic Diversification — Of course if you drink oil in the morning, oil in the afternoon and oil in the evening, when they take the oil away, your life is finished. But was Nigeria really drinking so much oil that when the oil price crashed, the economy scattered like this?
- Structural Flexibility — How quickly can your economy react to a sudden and unexpected blow? Do you just sit there feeling sorry for yourself and shouting ‘It’s not fair!’ Or do you pick yourself up and try to re-arrange your life? Just because they say they don’t want to buy your oil for $100 again, are you now going to kill yourself?
Now, those 4 factors can be used to explain pretty much any country. They are not really unique. So to make sure their diagnosis is complete, they then looked at 5 variables — that is, the unique factors in a country, in this case Nigeria, that can contribute to economic higi haga.
- How flexible is the country’s exchange rate regime? Can it adjust quickly enough to a surprise spiritual economic attack?
- If the country is dependent on oil for its forex, how much do non-oil exports contribute to forex? So we can know how we need to adjust.
- Does the country have enough reserves? If forex supply has dropped, how long can you dip into your reserves to maintain your lifestyle of seedless grapes and champagne before they come and take you away to the psychiatric home?
- What has inflation been like in the country in the last 7 years? This is important because if oil prices drop and you have no forex, your currency will naturally lose value. So they checked the last 7 years to see how your economy usually handles inflation.
- Finally, they compare government debt to its revenues. This is important because if revenues drop, debts dont drop. So government will automatically start spending more of its reduced revenues to pay the same amount of debt. (In Nigeria’s case, government is now spending 66% of all its revenues just to service its debt).
So in summary, they check the general economic factors and then add your unique madness and then try to get a proper diagnosis. After comparing Nigeria to other oil exporters, they came up with this obvious conclusion
These results suggest that economic fundamentals entering the oil shock played an important role in mediating its impact. Economic activity was less affected in countries that entered the shock with a more flexible exchange rate regime, a more diversified export base, more adequate international reserves buffers, a history of price stability, and a stronger fiscal position. The other external and structural factors discussed above were not found to play an important role.
Bla bla bla. No one can argue with that. What we are here for is what happened to Nigeria gan gan. The table below is what they found
Why So Unfortunate?
Nigeria’s bad performance was double what they expected. Even compared to other African countries, Nigeria did worse. Ha! Why was the Nigerian economy so unfortunate? Who did you guys offend (at this point I’m no longer a Nigerian with you people)?
We can explain their diagnosis using a simple analogy. Let’s say a guy is walking on the road and he gets hit by an okada. This ends up breaking his leg and he can’t go to work for 3 months. As a result he loses his job and by the 4th month he can no longer pay the rent on his house and has to withdraw his children from private school as well as sell his car. Of course, if he didn’t get hit by the okada, none of these would have happened. But was his rent too high in the first place? Or could he have put his children in a cheaper school? Or drive a cheaper car? What IMF is saying is that yes, the okada accident was a shock but the guy’s circumstances before the accident probably explains some of the impact it had on his life. (A ni ri ogun accident o).
Nigeria was already unfortunate before the oil price crash.
Now look at that table above again. As explained earlier, they looked at 5 variables but the part on Nigeria has 6 different parts. And the biggest part is what they labelled ‘Residual’. What is a ‘residual’? As we can see, apart from this ‘residual’, the biggest culprit is a lack of non-oil exports. Lack of reserves and forex policies each contribute the same amount of impact. So they are saying that that guy’s personal circumstances before he was hit by the okada only explain half of his suffering. Maybe the doctor at the hospital he was rushed to is actually a herbalist and messed up his treatment.
In addition, the impact on Nigeria was more negative than would have been expected solely on the basis of its pre-shock fundamentals. The regression residual for Nigeria, shown in Figure 6, is negative 4.1 percentage points, while the average residuals of other Sub-Saharan African oil exporters and managed float economies were close to zero, on average. This suggests that policies in the wake of the shock, such as the delay in implementing the 2016 budget and the imposition of foreign exchange restrictions, as well as other idiosyncratic developments since the shock, such as the increased occurrence of oil infrastructure sabotage in Nigeria, have also contributed negatively.
They are trying to be polite. Where they say ‘idiosyncratic developments’ what they actually mean is the unique Nigerian madness that can only be explained because this is Nigeria we are talking about.
Foreign Exchange Wahala
So now we know that Nigeria’s situation is not ‘ordinary eye’, we can look into a bit more detail as to how some of these factors affected Nigeria. They produced a nice timeline of events and the impact on forex flows.
‘Flexible FX regime introduced’ indeed. What can one say to this but ‘LOL’? Anyway let’s keep a straight face and play along. In 2013, Nigeria was balling. We were liquid, we were lavish, we were turnt. From July to September 2013, the CBN received forex alerts totalling $12bn i.e $4bn per month. But from April to June 2016, the total alerts received were only $4.5bn i.e. $1.5bn per month. This was mostly made up of oil money.
But there were other sources of forex in the economy too. And that’s what the IMF is referring to as autonomous sources. These ones mostly do not relate to oil. In the same July to September 2013 period, the alerts from autonomous sources was $27bn or $9bn per month. By April to June 2016, this source of forex had dropped to $9.5bn or just over $3bn per month.
Ok, so oil prices went from $110 to $40. Fine, we understand that. But wetin concern autonomous with oil again? To make matters worse, they said this
There is an almost four-to-one relation between FX inflows from autonomous sources and declines in earnings in the services sector, which accounts for 25 percent of GDP.
That’s like that thing we used to say about some Chinese films when we were younger — 1 blow, 4 die. The services sector which makes up a quarter of Nigeria’s economy is very sensitive to forex. In other words, you need to be careful with anything you do in terms of policy in this area because whatever you do, the effect is quadrupled by the time it lands there. That is, let’s say $1 equals N300. In a direct relationship, if you withdraw $1, the economy will suffer a loss of N300. But in the service sector the loss is N1,200.
For oil companies there is a multiplier forex effect as well
A change in the market spread only appears sensitive for petroleum firms, with a one percentage point increase in the spread associated with a 9.5 percent decline in firms’ operating profits.
And when you drill down further, the specific industries that suffer in the petroleum industry are
The recent decline in FX inflows seems to have adversely affected corporate performance, mostly through macroeconomic fluctuations, but with additional adverse effects through a decline in non-oil FX inflows. After controlling for macroeconomic fluctuations, the decline in FX inflows to the CBN, which mostly captures the oil revenue to the federation account at the central bank, was associated with the recent decline in operating profits of firms in the chemicals, rubber, plastics, and non-metallic products sectors. The decline in FX inflows to the economy through autonomous sources, which capture non-oil export receipts, remittances, and capital inflows, however, seems to have had a more pervasive and adverse impact on operating profits, particularly in the other services sector.
This is serious and important because the effect is that these companies end up sacking workers when their performance declines which in turn means those sacked workers can’t spend money in the economy like they used to. And so on. I always like to remind myself of that quote from Larry Summers where he said ‘it is not easy to understand how an economy works’. His point was that you need to be careful when you make policies because sometimes you don’t even know where the effect might land once it leaves its starting point.
So back to the question I asked earlier — why did autonomous sources dry up like that?
Evidence highlights the importance of policy actions affecting non-oil FX inflows. FX inflows through autonomous sources are certainly not independent of developments in the oil sector and oil revenue, but evidence shows that the decline in those inflows has had additional adverse effects on firms’ operating profits. This evidence highlights the importance of policy actions affecting those flows and the potential impact of those actions on economic performance.
Again, they are being polite here. The summary of what they are saying is ‘you played yourself’. It was Nigeria’s policy actions that caused autonomous forex to dry up like it did. Simple. The people making these policies often don’t have a clue about the effect of their actions. But because they do it with so much braggadocio, by the time the result comes in and they see the damage, their pride won’t let them walk back their actions. So they just say it was their plan all along and then hope for the best.
Financial Sector Wahala
They also looked at the financial sector in Nigeria. They found that 45% of the loans given out by Nigerian banks are in foreign currency. I think you see that these people are mad. Let’s say $1 equals N150. You lend a company $100 to pay back over 10 years, so for simplicity $10 per year. That company makes N5,000 revenues. This means that the company can pay back N1,500 and still have N3,500 left to pay salaries, buy diesel etc and still make maybe N1,000 profit. So far, so good.
Then $1 becomes N300. Now the company has to pay N3,000 out of the same revenues. By the time it buys diesel, there is not enough left to pay salaries. It sacks workers. Or it just stops picking the bank’s calls. The bank too has to pay salaries and buy diesel. So it stops lending to other companies and uses whatever money it has to block the hole in its own balance sheet. The companies that can not get funding, have to sack workers. Anyhow you slice or dice it, the impact on the economy is tough.
Normally, this will be the time for banks that did not lend money in forex to step up and plug the gap caused by the banks who have stopped lending. But this is what the IMF said
The banking system is oligopolistic. While the size of the five largest banks fell from 60 percent of assets in the second half of 2015 to 43 percent of assets in the first half of 2016, low competition continues to characterize Nigeria’s banking system. The Herfindhal-Hirschman index for the industry was 743 at end-June 2016 (Financial Stability Report) and market shares for the other 18 banks in Nigeria ranged from 0.3 to 6.4 percent.
In other words, even though Nigeria has about 20 banks, you only need 5 of them to sleep and face the same direction for the whole sector to be a mess. And we know they sleep and face the same direction. The nice table of charts further explains things
In the bottom right chart, we see Nigeria’s depth of credit is even lower than Ghana’s. Giant with feet of clay. Then look at the bottom left chart. They hardly lend to manufacturing but even when they lend its mostly in naira and not dollars. This can be explained by saying there are many other factors at play. But when they hear oil and gas? They bring out the dollars. Of course this is the sector that has now suffered heavily from the oil price crash of 2014. Most of those loans were made when oil was $100 and life was good.
As a result we see this chart about non-performing loans (NPL) i.e the people no longer picking the banks calls
From 2014, it started aiming for the sky.
On a positive note, IMF says Nigerian banks have decent capital compared to other African countries sha. So things will need to get much worse before Buhari and co are forced to ‘launch’ AMCON II.
The obvious solution to this will be to ensure that other sources of funding in the financial sector are developed. They conclude with these recommendations on the pension and insurance sectors
As pension funds approach the upper limit on investment in government bonds, it will be important to introduce regulatory measures to limit their liquidity and interest rate risks, and consideration should be given to relax exchange rate risk.
With respect to the insurance sector, while the move towards risk-based regulation is welcomed, it will be important to maintain close monitoring and continue building the capacity of the regulator as the industry grows. Preparation to adopt Solvency II, an international standard for the insurance sector, should be pursued building on work done to date.
Pension funds need to do more than just buy government bonds. Keep an eye on the insurance sector before they run themselves into trouble. (Random Point: Solvency II is what I’ve spent the last 4 years of my career here in the UK doing).
Jobs Jobs Jobs
They also did some nice charts on the employment/unemployment situation in Nigeria.
The chart on the top left is quite scary — the gap between the two lines is the number of people who have nothing but time on their hands. The top right and bottom left chart also shows something interesting. The economy is creating jobs but it seems to be mostly part time. My sense is this would be in agriculture where a lot of work is seasonal. But in terms of full time work, they have collapsed.
Well, Buhari did say you guys should go back to the farm. But how do you live a full time life on a part time salary? Let’s discuss that another day.
Doing Business
We all know this is a headache. And to be fair to the current government, they are making some effort in resolving this. But the IMF compared Nigeria to other countries and found the following
Again, Nigeria is underperforming its mates in almost every area except protection of minority interests and getting credit. I find the protection of minority interests to be a strange place to excel in because in Nigeria’s particular context, it reflects a risk averse attitude. And in any case, that one is on paper because the law has made Nigerian business managers develop world skills in how to shaft minority shareholders. But not today.
Revenue Sharing
Another nice chart. Keep it handy so you can refer to it later when you want to remember how money is shared in Abuja.
So FIRS and their friends collect 4% on Corporate taxes and then 4% on VAT. Interesting.
States and Local Governments
No point going indepth into the section on states and local governments as I’m not really a fan of horror films. But below is a good summary
Chart (a) shows where the states get their ‘IGR’ from — 2/3rds is from PAYE i.e. what they deduct from mostly their own workers’ salaries. Chai. Chart (b) shows the level of dependency on money sharing in the states. This is not news in any case. Chart (c ) shows how much budgets at the state level are just a work of fiction on the capital spending side — long before oil prices crashed the budgets were already meaningless in terms of what happens in reality. In 2011, They even spent more than they budgeted for on recurrent expenses. And if a governor tells you he’s going to spend N100 on capital, just be grateful if he ends spending N62. Chart (d) shows where the poverty is concentrated in the country.
The IMF thinks it has a short term solution to the states funding crisis
Comprehensive tax policy reforms are necessary to ease SLGs’ fiscal strains. With 85 percent of VAT receipts allocated to SLGs, reforming the VAT system and raising its rate could provide sufficient resources to fulfill subnational spending mandates. Reforming the VAT system to broaden the base (allow tax credits for all inputs including capital goods, increase the registration threshold with a simplified presumptive tax regime for SMEs, and rationalize exemptions) and progressively increasing the VAT rate from 5 to 15 percent over the medium term — will increase non-oil revenues by at least 4 percent of GDP for SLGs in the medium term. In a similar vein, reforms to Personal Income Tax (PIT) and Corporate Income Tax (CIT) (including a review of the existing rate structure, rationalizing tax expenditures, reviewing incentives, and phasing out income tax holidays) would help reduce the reliance on oil revenue since close to half of the collected revenue falls to SLGs.
Since 85% of VAT revenues goes to states, increasing the VAT rate (and collection) is automatically more money for states. But this is tricky given the nature of Nigeria’s economy. Where do you think most of this extra VAT will be collected from to be shared across the country? Exactly. Doing that will probably open up another fight in how exactly to share that money.
As you already know, this spirit of sharing money and not knowing how to earn it is actually built into the constitution as the IMF observes
Encouraging the collection of independent revenue is essential to diversify SLGs’ finances. According to the constitution, tax revenue sources assigned to SLGs are limited. However, reforming the income tax (PAYE) and introducing a property tax could help augment internally generated revenue of states, by about 0.5 percent of GDP. Improving tax administration is also essential. For instance, states’ ability to achieve development goals can be buttressed by strengthening capacity of the Joint Tax Board (JTB) to disseminate best practices and enabling systems; establish and enforce minimum standards; and monitor the quality of state PIT administration.
These are not problems that will solve themselves. Government has to take charge drive the reforms through. But I don’t know if you can still get this kind of constitutional amendment through in the 2 years that the current government has left. So you can forget this one happening anytime soon.
Finally they conclude with this
The recent oil shock brought to the fore vulnerabilities of subnational governments. As oil prices collapsed and economic activity weakened, SLG deficits widened, increasing recourse to debt while adjustment was insufficient. To address these vulnerabilities and structural challenges present in the current framework, strong and bold reforms are needed. Some of these have been initiated through the government’s FSP. Additional reforms would include: depoliticizing the budgeted oil price, initiating comprehensive tax policy reforms, better reporting of fiscal outcomes and risks, and stronger coordination between the different levels of government. Finally, capacity building at the SLGs level is key.
Faya! For una mind. Depoliticise which oil benchmark price? Something that is the life and joy of the National Assembly?
Conclusion
The economy is not a toy. You can’t just enact a policy just because it sounds good in your head (“why should Nigerians spend billions importing so and so?”). You might think you are solving one problem but you end up creating 5 in its place with rash decisions and hare-brained policies.
What has happened since 2015 when the Buhari government came into power cannot just be attributed to the collapse in oil prices. It has been economic vandalism. Policies that even the policymakers do not understand have been rolled out just because it makes them feel good. These things go beyond what is computed on a spreadsheet — there has been a serious human impact, too.
You can say the IMF’s mouth is smelling and they are just agents of neoliberal satanic market forces who want to bring black slavery. Na you sabi.
I’ve sha told you what they said they saw in you people’s economy.
FF