International Monetary Fund’s Panacea For Economic Recovery, Growth

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James Emejo examines the wide-ranging recommendations by the International Monetary Fund to both the fiscal and monetary authorities on the pathway to economic stability and recovery amidst a second recession, and aggregates experts perspectives on the advice

If anything, the IMF (Nigeria) Staff Country Reports, also known as Article IV Consultation, has become an annual ritual whereby the fund had continued to deploy its array of instruments to gauge the health of the Nigerian economy.

By so doing, the Breton Woods institution, where applicable, applauded credits to the government where it feels the right policies have been adopted and as well condemned policies which are not orthodox and failed its empirical analysis.

IMF’s recommendations are often taken seriously partly because of the integrity of the organisation as well as its near role as International Lender of Last Resort (ILLR) to countries in a fiscal crisis.

No doubt, the fund, has in the recent past, influenced some of the government’s economic decisions by issuing conditions for approving some loan requests by the federal government.

The infamous federal government’s austerity measures introduced in the 1980s to contain the fiscal crisis which emerged following the drop in global oil prices among others is an example of the strong influence the IMF has on policy choices in various countries.

There’s no doubt the recent increase in the Value Added Tax (VAT) from 5 per cent to 7.5 per cent was not unconnected with pressures from the fund on the to boost resource mobilisation.

The IMF had also been vocal about the need for the federal government to end petrol subsidy, a contentious topic that has now been finally laid to rest through the recent deregulation of the downstream sector.

Furthermore, the IMF advisory also has impact on foreign investors who rely on its reports to make investment decisions.

However, toeing its long established tradition, the fund last week released its 2020 country report, urging the federal government to double up on its resource mobilisation efforts by raising VAT to 10 per cent by 2022 and further to 15 per cent by 2025.

The fund noted that the “Nigerian economy is at a critical juncture – a weak pre-crisis economy characterised by falling per capita income, double-digit inflation, significant governance vulnerabilities and limited buffers, is grappling with multiple shocks from the COVID-19 pandemic.”

It said real output is projected to contract by 3.2 per cent in 2020, with a weak recovery likely to keep per capita income stagnant and no higher than the 2010 level in the medium term.

The IMF pointed out that policy adjustment and reforms are urgently needed to navigate the current crisis and change the long-running lackluster course.

The Washington-based institution, therefore, advised the government to rely initially on progressive and efficiency-enhancing measures with higher tax rates, while awaiting a more sustained economic recovery.

The 2020 Article IV Consultation further stressed the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.

Among other thing, it called for a more flexible exchange rate adding that the Naira is currently overvalued by 18.5 per cent.

The IMF further prevailed on the CBN to introduce more clarity in foreign exchange as well as work towards a unification of multiple exchange rates.

But, analysts believed some of the IMF’s recommendations are currently unimplementable give the country’s precarious macroeconomic parameters.

They particularly opposed any further raise in VAT especially as Nigerians are currently grappling with the adverse impacts of the ravaging COVID-19 pandemic.

In separate interviews with THISDAY, analysts also believed that though there’s need for reforms in foreign exchange management, a complete currency floating is particularly difficult given the challengs in the country’s productive capacity especially in the areas of exports at the moment.

The fund, though Nigeria over measures taken to address the health and economic impacts of the COVID-19 pandemic, which have exacerbated pre-existing weaknesses as well as notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector, nevertheles, urged the CBN to focus more on price stability and enhanced financial system vigilance to contain stability risks.

Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.”

The IMF directors observed that the accommodative monetary stance remained appropriate in the near- term, stating that tightening may be warranted if balance of payments or inflationary pressures were to increase.

In the medium term, they advocated that monetary policy operational framework should be reformed and central bank’s financing of budget deficit phased out in order to reduce inflation.

However, they welcomed the resilience of the banking sector and called for continued vigilance to contain financial stability risks.

They noted that COVID-19 debt relief measures for banks’ clients should remain time-bound and limited to those with good pre-crisis fundamentals.

The IMF directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.

In addition, they stressed the need to strengthen governance and anti-corruption frameworks, including compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) measures.

The directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.

“In the short run, the recommended policy mix is heavily tilted toward exchange rate adjustment given constrained capacity on the monetary and fiscal fronts.

“In the medium term, revenue mobilisation is a top priority. In the short run, fiscal policy should address economic and health impact of the pandemic in a transparent and efficient manner.

“Significant revenue mobilisation will be needed in the medium term to reduce fiscal sustainability risks arising from low debt-servicing capacity.

“With high poverty rates, revenue mobilisation will need to rely on progressive and efficiency-enhancing measures, with higher value-added and excise tax rates awaiting a firm economic recovery,” the IMF added.

Howeve, reacting to the recommendations by the IMF, economist and Chief Executive, Global Analytics Company, Mr. Tope Fasua, argued that there has not been a direct correlation between currency devaluation and productivity in the country despite previous exercises.

He said:”There has to be other factors responsible for growth in productivity because devaluation has not spurred that productivity here.”

He added:”Also the Marshall Lerner Conditions in Economies already let us know that devaluation will hurt you if your exports are not price elastic.

“Our exports are not price elastic as the world will buy just the amount of crude oil it needs from us and the price is set by the markets while the volumes are set by OPEC.

“So even if this is a right advice it is an incomplete advice. I agree that we should increase taxes but again we need to try and do the right thing before we become guinea pigs for experimentation by global economic bodies whose main concern is whether we can pay our debts or even fulfil balance of payment terms.”

Fasua said:”My thoughts are that we need to get out of this vicious cycle of devaluation and tax increases.

“Ordinarily we should be thinking for ourselves rather than wait for international bodies to help set our agenda after all we should know our economy more than anyone else.

*Since we have started devaluing in 1985/6 it’s been a one way track of devaluation and misery and apparently there are negative effects that are usually ignored. Looks like as we were devaluing the Naira we were also devaluing the people.”

Also, reacting to the latest IMF advisory for Nigeria, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, said Nigeria should strive to manage its foreign exchange policy well to avoid regular devaluation.

He pointed out that increasing VAT at a time when all countries in the world are implementing stimulus packages to their citizens is a “very draconian policy and could potray insensitivity on the part of the federal government.

Onoja further argued that increasing VAT will only reverse the momentum of economic recovery the country is gradually experiencing.

According to him:”I do not understand why Nigeria is always at the mercy of the Bretton Woods organisations. Countries like Ethiopia have refused to devalue their currency despite their economic challenges.

“The Birr is still strong till today. This was how Nigeria got hoodwinked into devaluation and the country’s currency fell from 85 Naira to $1 to the present 391.5 Naira to $1.”

On his part, acting Managing Director, UCML Capital Limited, Mr. Egie Akpata, however, faulted the fund’s recommendation that VAT be raised to 10 per cent in 2022 and 15 per cent by 2025.

He said such suggestion by the IMF is “misguided if they think it is the magic bullet to fix FGN finances”.

According to him:”Only 15 per cent of VAT goes to the federal government with the balance going to state and local governments.

“Increasing VAT will have very little impact on the structure of FGN finances. But much higher VAT will have a huge negative impact on majority of the population who are faced with falling per capita income.”

Akpata, howeve, pointed out that the fund’s view on the Naira and Nigeria’s foreign exchange market is consistent with most rational recommendations – overvalued official rate and too many fx windows.

He said:”However, there are parts of the report that suggest the IMF is not up to date with the strucure of the Nigerian economy.

“Contrary to the IMF view, the Nigerian economy is very diversified with only one sector making up over 20% of GDP. What is not well diversified is sources of exports and federal government revenue.”

Also, commenting on the IMF’s offer for economic prosperity, economist and Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said there’s no doubt that the Naira is overvalued as its true value is being reflected in the parallel market,

But he added,”I am not advocating for a complete float but rather an adjustment to reflect the current reality” adding that “a free float of the Naira would be devastating”.

He pointed out that with the CBN unable to meet FX obligations of exiting foreign portfolio investors, the pressure was moved on to the parallel market, which made prices soar to over N100 against official rates, stressing that the “supply demand dynamics are clear”.

He stressed that the multiple exchange rate system has further provided avenues for roundtripping which further makes a mockery of the official rates.

“With over 90 per cent of our FX inflows coming from proceeds of oil sales, we are at the mercy of global market dynamics. Oil prices drop and it squeezes our FX liquidity and puts pressure on our reserves,” he said.

Shelleng also contended that though the adjustment of the rates to reflect the true value of the Naira will cause inflationary pressures in the short term however, with more stability and a clearer picture of the value of the Naira, it will certainly be more encouraging for investors to enter the Nigerian economy.

This, according to him, would in turn “bring in more foreign exchange which will help increase liquidity and more importantly help to diversify our sources of FX”.

However, he said the calls for increase in VAT is ill-timed.

Hr said:”With an already depressed economy facing a number of fiscal challenges especially very low growth, the increase in VAT will be detrimental to economic growth.

The structural issues faced by producers already pushes up cost of production therefore the increase in VAT will further create inflation as the increased cost of production will be borne by the end user.

“This will reduce consumption especially for low-income households which make up the larger percentage of the Nigerian population. Lower consumption leads to lower growth.

“Ideally with govt requiring more revenue, the increase in VAT may be justified but the utilisation of the increased revenue would end up going into recurrent expenditure, which would have no impact on development.”

On his part, economist and Managing Director/Chief Executive, Dignity Finance and Investmemt Limited, Dr. Chijioke Ekechukwu, also cautioned that devaluation of the Naira and increase in VAT will lead to an embarrassing hyperinflation and make the standard of living more difficult by allowing for less disposable income.

As a result, he said crime and poverty will pervade the entire country.

He said:”Please we should be able to tell IMF that we do not need their proposals.

“As a country, we need to know that whenever IMF comes up with proposals like this, they are proposing to favour their corporate objectives of ensuring their loans are repaid seamlessly and to favour the country to be able to fund their obligations.”

Professor of Capital Market, Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the IMF recommdations for the country are “not fit-for-purpose”.

He said though the call for tax increase remained consistent with the country’s National tax policy of rebalancing the tax mix in favour of consumption tax, “But this recommendation fell short of providing the required balance which is a reduction in the standard company income tax rate from the current level of 30 per cent which applies to large companies.”

On the issue of ensuring a unified exchange rate, Uwaleke said, “as much as it finds theoretical support in its ability to respond to market forces, reduce market distortions and encourage foreign investments in the long run, these outcomes are subject to ceteris paribus conditions”.

He said:”Unfortunately, Nigeria has a peculiar case: the interplay of market forces in the forex market, lopsided in favour of demand, can only result in a very high equilibrium price. Even if a unified exchange rate solves the problem of multiple pricing and eliminates incentives for arbitrage; it does not address the liquidity challenge.”

He added:”Because the country imports fuel, raw materials, food and virtually everything, commodity prices will hit the roofs from pass-through effect of high exchange rate.

“Granted that government revenue will increase from the naira value of oil exports, but the cost of servicing government’s huge domestic debt will also surge following increased yields on government securities.

“Further, huge sums will be needed to implement dollar-dependent capital projects contained in the 2021 budget.

“It goes without saying that a unified exchange rate is capable of increasing the pump price of fuel. This will accelerate already elevated inflation potentially leading the CBN to change stance of policy.”

According to the former Imo State commissioner for finance:”The way forward therefore is to reduce the country’s import dependency and strive to join the league of net exporting countries. Only then, will exchange rates unification make economic sense for Nigeria.”

He added among other things that, “Tighter monetary policy implies, in part, jerking up the benchmark rate from the present level of 11.5 per cent which is most likely to put additional pressure on banks’ asset quality with commercial banks being compelled to reprice their assets resulting in an increase in the rate of non-performing loans thereby undermining financial stability and real sector growth.

“Many small businesses will suffocate under a harsh environment occasioned by the resultant high interest rate regime leading to loss of jobs.

By the same token, the increase in MPR will also spike the cost of government borrowing especially in view of the fact that domestic debt constitutes a significant proportion of the 2021 budget deficit financing.”

He said:”Also, the stock market, which has been the greatest beneficiary of CBN accommodative monetary policy, will be impacted negatively as equities become less attractive to portfolio managers as an asset class.

“Therefore, implementing this recommendation will spell doom for an economy in a recession still recuperating from the devastating effects of COVID-19 pandemic.

“The impression created by the IMF report is that the country’s economic woes would significantly vanish by removing forex restrictions and unifying exchange rates.

“To understand why this amounts to pipe dream, it is useful to point out that the country’s major challenge lies in its import-dependent nature and over reliance on oil revenue which accounts for about 90 per cent of forex inflows.”


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