|
The IMF Executive Board 2010 Article Iv Consultation Report On Nigeria: Analysis And Implications For Economic Management By Mr. Shafii Ndanusa
Background
The International Monetary Fund (IMF) frequently engages in economic and financial research on a wide variety of factors in order to generate information on the economic performance of member nations, for the purposes of providing amongst others policy advice. Under Article IV of the IMF Articles of Agreement, the IMF liaises with members, generates economic and financial data as well as information on the probable outcomes of key policy initiatives/actions of member nations. A staff team report on findings is thereafter submitted to the Executive Board which serves as the foundation for deliberation by the Executive Board. At the end of the discussions, the views of the Executive Directors are summarized and forwarded to the relevant member country authorities. This exercise is normally carried out on an annual basis.
On Friday the 11th of February 2011, the Executive Board of the IMF reportedly concluded the 2010 Article IV Consultation with Nigeria. Consequently, the relevant Public Information Notice (PIN) No. 11/25 was issued and published by the IMF. The PINs are issued as part of IMF’s attempt at promoting the transparency and access to IMF’s analyses and views on the economic and financial performance of member states during the period of review.
Summary of the IMF Report
Although the IMF Report commended some of the efforts of the Nigerian authorities in year 2010 and also stated that the economic outlook for Nigeria is positive, the report raised a number of key issues about the direction of general economic management within the year. Amongst others, the following conclusions may be made from the content of the IMF Report:
Overcoming the Global Economic Recession
The two key factors that facilitated Nigeria’s recovery are:
1. Strong Foreign Reserve position 2. Low Sovereign Debt Portfolio
Nigeria would have been harder hit by the global economic recession had any of the above factors been absent or even different. A significant portion of the nations foreign reserves were built up years prior to the onset of the crisis through the prudent management of foreign exchange income. Nigeria had also pre-crisis negotiated a favorable settlement of its large external debt position from international multilateral financial institutions. It is obvious that even the strong foreign reserves position would have been overstretched if significant sovereign debt obligations were required to be concurrently offset at the same time that the global economic crisis was taking its toll on the nation’s economy.
It is therefore advisory that the building up of foreign reserves becomes a key priority of economic management. In the same vein, the accumulation of sovereign debt must be approached with great caution. It is vital that a healthy balance be maintained between what may be termed secured sovereign wealth and the proposed sovereign debt.
Successful Management of the Recent Banking Crisis
One of the remarkable feats achieved in the ongoing banking reforms in Nigeria is the continued maintenance of confidence in the financial system. Despite the scale of impact of the crisis on the balance sheets of the affected banks, confidence in the ability of the financial system to deliver as at when due remains high. Concerted efforts by the Central Bank of Nigeria to redirect the affected banks back to profitability have largely been successful.
The establishment of the Asset Management Corporation of Nigeria and its recent purchase of bad bank loans has further increased confidence in the financial system. Attention appears to now be focused on the next phase of the banking reforms consolidation that may come in the form of mergers and acquisitions, takeovers or reclassifications.
It is equally important to reflect on the cost of the successful management of Nigeria’s recent banking crisis. Apart from the direct cost in the form of the Nigerian banking stimulus funds that was injected into the affected banks, the resultant high double-digit inflation rate at the end of year 2010 is part of the net effect of the crises. This in my view represents some form of indirect cost.
According to figures released by the National Bureau of Statistics (NBS), Nigeria’s inflation rate stood at 11.8% in December 2010. The inflation rate increased to 12.1% in January 2011. Increasing levels of inflation have the tendency to reduce the quality of life all things being equal. The implication of the above analogy is that while the relevant authorities at face value have successfully managed the domestic banking crisis, the people are still paying through high and increasing levels of inflation.
Going forward, it is advisory that the objectives of price stability to be achieved through inflation control be strongly considered as an economic priority of Government.
Improvement in Economic Growth
The improvement in economic growth measured by the real GDP rate is a positive sign of the effect of the combined fiscal stimuli packages that were implemented during the year 2010 as well as the multiplier effect of the fiscal stimulus packages of previous years.
A key concern resulting from this is to ask whether in light of the present economic and infrastructural realities, the high growth rates that have been achieved can be sustained. At a time when economic policy may favor a scaling down of fiscal stimulation of the economy, a realistic target of the future economic growth rate becomes relevant. Going forward, emphasis may likely shift from a growth-led by fiscal stimulus to a growth-led by real productive economic activity.
High Inflation in the Year 2010
High inflation leads to a higher cost of living and hence a reduction in the quality of life. High inflation reduces the value of fixed income and one of the best ways to deal with it is for economic policy to focus on price stability. Controlling inflation remains a key concern to all Governments because it hits at the very essence of human development – the quality of life.
Depleted Foreign Reserves
While it may be argued that factors such as the global economic crisis contributed to put pressure on the Nigerian currency and this contributed to the depletion of Nigeria’s foreign reserves in the year 2010. It is inexplicable to rationalize the continued spending of extra-budgetary income earned from crude oil sales during the period.
A clear framework for the build up of foreign reserves should be implemented so that the nation can reap the full benefits of its natural resource endowments. Undoubtedly, the establishment of the proposed Nigerian Sovereign Investment Authority signals a positive effort in that direction. CBN’s Focus on Exchange Rate Stability and Low Interest Rate Again while the exchange rate of the Naira should remain a key priority, it is wise to also focus on domestic price stability as this is a major determinant of the quality of life of the citizenry. Perhaps the institutional framework to enable the achievement of this objective is yet to be fully developed. The process can be sped up. In a similar vein, the objective of interest management should not only focus on the banking industry but also on the general economy as a whole.
CBN’s Conflicting Monetary Policy Initiatives With high economic growth rate and a high level of inflation, it was imprudent to intensify fiscal stimulus. The net effect is that the inflation rate is further increased. The Nigeria economy was already well on its way to recovery with strong growth statistics at the beginning of the year. The high inflation rate at that time should have served as a red flag and this should have led to a gradual withdrawal/reduction of fiscal stimulus packages. Going forward, monetary policy initiatives need to be clearer, more targeted and more coordinated.
Is the Nigerian currency overvalued? The IMF Report stated that Directors noted IMF staff assessment of an overvaluation of the Nigerian currency and therefore recommended greater flexibility in exchange rate management. The implication of this is that it suggests that the present exchange rate management system is rigid and does not create room for healthy competition for foreign exchange.
My take on this is that so long as the exchange rate of a currency (such as the Naira in this case) is determined through a market mechanism where buyers and sellers offer and accept deals, it is debatable to accept a different assessment as to the fair value of that currency.
It is my view that the devaluation of the Naira cannot be a wise option for a country like Nigeria now. Nigeria currently imports far much more than it produces and this will drive up the cost of imports which will ultimately translate to a higher cost of living and thus a poorer standard of life for most of its people. Even the incremental benefits that may accrue through the lower cost of exports may be exponentially wiped out by the inflation that will come once the currency is devalued.
Assuming Nigeria’s productive capacity had been sufficiently developed, a cheaper cost of production could increase output and ramp up exports resulting in a significant increase in foreign exchange revenue. Assuming also that Nigeria refines its crude oil and then markets the petroleum products to the global economy, this suggestion of devaluation might create significant competitive economic advantage for the country. The benefits of which can best be imagined. However, this is not the case now.
It is therefore advisory that restructuring the economy and boosting its productive capacity in all the key areas of competitive advantage remains the best option for strategic economic growth and development.
|