Nigeria: Taking Economic Challenges in its Stride

Resolving issues currently bedeviling the Nigerian economy may be a daunting task, but the country has decided to be in control of its own destiny writes Kunle Aderinokun, who covered the just-concluded Spring Meetings of IMF and the World Bank

The recently held 2016 spring meetings of the IMF-World Bank was an opportunity for Nigeria to show the world that she could solve her problems by herself without necessarily leaving herself to the whims and caprices of foreign and multilateral development institutions like the IMF. Even though the IMF told the federal government that Nigeria must put in place an integrated economic policy, the current administration led by President Muhammadu Buhari has said it had its own homegrown programme.

And so it has taken up the gauntlet to move the economy forward in a sustainable way without a bailout from the IMF because “Nigeria is not sick.”, it is only experiencing some challenges. The economy is facing challenges occasioned by the volatility of oil prices which had plummeted to as low as $20 per barrel whereas the oil price-based budget benchmark is at $38 per barrel.

The resultant effect of which has retarded the accretion to the foreign exchange reserves. Realising the debilitating effect the scenario could have on the fiscal buffer, the CBN had banned importation of some 41 items that could be produced locally. But it did not stop at that, it swung into action by boosting the local production of some of those items, apparently walking the talk in the diversification of the economy.

For instance, the CBN, as part of its Anchor Borrowers’ Programme (ABP) established in 2015, has committed N40 billion. The ABP in Kebbi State is a pilot programme launched by President Muhammadu Buhari in November 2015. It has benefitted close to 80,000 rice farmers which covers over 90,000 hectares of farmland. About N5billion has so far been disbursed. The programme has the capacity to absorb over N15billion in the next few years to come.

According to the CBN Governor, Godwin Emefiele, the economy is going through a structural reform, part of which is the diversification and it is attracting a series of investments that would translate to a major recovery in about two years. He pointed out that agriculture was a major component of the government’s diversification effort.

“Basically, the issue is how the country would respond to the challenges that we are facing right now. Other than the area of investment in infrastructure, one other area has to do with structural reforms which have been suggested. These reforms had worked in the South Eastern Asian countries like Malaysia, India, Indonesia, Bangladesh and that is why growth from these areas have remained fairly very strong.

“Diversification of the economy is an issue here that have been proposed as part of the structural reforms, particularly oil export producing countries should be looking at. I must say here that I am glad that Nigeria is taking the issues of diversification from oil very seriously,” he explained at a closing press briefing with Nigerian journalists.

He added: “Recently, we have seen people coming to talk about investing in agriculture in Nigeria. About two weeks ago I inspected a 16,000 hectares sugar cane farm as well as a milling and refining facilities in Niger State. We have Nigerian investors looking at investing in fertiliser. So the biggest fertiliser plant in the world will be in Nigeria. We believe that over time and hopefully around the middle of early 2018 or the end of 2018, that with the demand for some from these final products, the pressure that on reserve and CBN will be substantially reduced and I think with that we can see the green light at the end of the tunnel.”

Speaking on the effect of rising inflation on interest rate, Emefiele noted that it would be difficult not to have a high interest rate when inflation is rising, adding however that, the CBN would intervene to ensure the effect of the high interest rate does not affect productivity and ultimately prices.

According to him, “the inflation rate is at 12.8 per cent in the month of March and if the policy rate is at 12per cent, it is not in our economic model to pursue if the policy rate is lower than the inflation rate, that is negative real interest rate, we can do that. Inferentially, what I’m trying to say is that, it would be difficult for you to run away from a fairly high interest rate in an environment of rising inflation.

He, however, added that, “in any case, I had also underscored that the Central Bank of Nigeria in line with the development finance objective will continue to provide intervention to some of the target sector of the country, like agriculture, mining and some of the real sector of the economy that will help engender growth and improve productivity and when productivity improves, naturally, what you will find out is that prices would come down and that will positively impact on inflation, that is exactly what we are talking about. I’m optimistic that will work and eventually Nigeria will have a cause to smile.”

Similarly, the CBN governor shed more light on the currency swap with China and took time to highlight the benefits derivable from the deal.

“On the Swap, we have been holding discussions with the People’s Bank of China about the Swap arrangements which entails using of Yuan transaction between Nigeria and China. At the meeting what we did was to sign a mandate agreement between the Central Bank of Nigeria and Industrial and Commercial Bank of China, which is the biggest in the world to act as our agent in concluding the consummation of the transaction,” he explained.

“The benefits are two-fold: It affords Nigerian importers the opportunity to open letters of credit using Renminbi as a currency rather than using the Dollar. As you know, in 2015, Nigeria net import between Nigeria and China is about $15 billion. The benefit with the arrangement makes it easier for you to make your transaction in Chinese currency which put less pressure on you looking for dollars to carry out your trade transactions in China.

“Also, China has appointed South Africa as its trading hub for Southern Africa countries, while Kenya will represent East African Countries and the mandate we signed is for Nigeria to be appointed as the trading hub in the West African Sub-region. In all, it put less pressure and we expect it is going to be mutually beneficial and eventually, we will be talking to China about importing some of its own items from Nigeria so that the trading balance can be reduced. Will Nigeria benefit from this? I want to say Nigeria will benefit from it and put less pressure on the dollar and reserve,” he explained.

Besides, to ensure constant revenue flow into the economy, the government is broadening the tax base by ensuring it pulls all tax payers into the tax net and ensure strict compliance.

Minister of Finance, Kemi Adeosun, clarified that in broadening the tax base, the federal government would ensure very high compliance before it considers, next year, an increase in value added tax (VAT), which is now at 5 per cent.

She also clarified her statement that “Nigerian economy is not sick.” According to her, “We are not saying that as a country we don’t have challenges. We recognise those challenges and we are facing them, what we do is to take responsibility for providing solutions to our problems. That comment was made in respect of a non-Nigerian guy who said ‘Nigeria is in a mess’, I take an exception to anybody saying that. Fine we have our challenges and we are not the only country in the global economy that has economic challenges. But we have the diagnosis of our problems, the country is adjusting and people are going through very tough adjustment in their personal finances and government is going through technical adjustment on how it spends her money and trying to be more efficient in spending, how revenues are coming, trying to plug leakages.

“So we are fixing the problems ourselves that is what I mean and we say that as a country we have the capacity, we have the will, most importantly both political and will of the people to solve our problems our own way. We are not denying the fact that we have challenges but we have everything that it takes to solve the problems. We have the local knowledge to solve the problems. Our priority is to position the economy properly for growth, recovery and creation of jobs for Nigerians.”

Adeosun had earlier at the meeting during a panel discussion on “Sub-Saharan Africa: Just a Rough Patch?” boldly told the world that Nigeria did not need a policy reform programme or a bailout loan from the IMF and any other multilateral development financial institutions, since the country was not sick, assuring that if at all the country was sick, the government had local remedy to cure the sickness.

She noted that Nigeria had a home-grown solution to the challenges it is currently experiencing and would not need any foreign assistance to solve its domestic problem, ruling out the possibility of approaching IMF for loans

She noted that the kind of support it sought and received was a budget support in form of loans from the World Bank and African Development Bank and not a bailout from the International Monetary Fund.

“Nigeria is not sick and even if we are, we have our own local remedy,” she said with a wave of assurance.

Responding to a specific question posed to her by the moderator of the discussion, Nancy Birdsall, President, Center for Global Development, about a lot of borrowings coming from outside to buoy Nigeria’s economy in this challenging times, Adeosun said: “We are speaking to the World Bank and AfDB for budget support loans. We see the Nigerian opportunity as a policy opportunity and we feel the bank is the place to go to support our policy reforms. There is a lot of stigma and a lot of institutional memories in Nigeria around IMF that is not positive and we believe that this type would not be the right message for Nigeria at the moment.”

The statement of the finance minister aligns with the position of the IMF managing director, Christine Lagarde. Lagarde had during her visit to Nigeria in January said given the determination and resilience of President Muhammadu Buhari’s administration, Nigeria had no reason to seek IMF loan.

Lagarde, who responded to a question on whether the IMF was also out to attach conditions to loans Nigeria might seek from the organisation, stressed that she was not in the country to negotiate a loan with conditionality.

Adeosun at the panel discussion, noted that the Nigerian economy was vulnerable to shocks because of its over-dependence on crude oil, the single source of revenue but quickly added that, “We have resolved to build resilience into the country’s economy to hedge against future oil shocks.”

“This is because dependence on oil brings about vulnerability and laziness. So we are doing a combination of things to diversify our economy, with revenue mobilisation to enable sufficient investment in developing the non-oil sectors.

“We have great opportunities to reset the Nigerian economy and ensure that as we go forward, growth will be in a sustainable manner so that we won’t be vulnerable to oil price fluctuations, and with a truly diversified economy we would have enabled opportunities for wealth creation that would trickle down to every Nigerian.

“The compelling business case in Nigeria is that the fundamentals remain very strong, a teeming, young growing population, rich in resources and with a government determined to finally get it right.

“The great thing is that long term investors recognise this and understand the difference between short term and long term issues and the case for Nigeria persuades one to plan for the longer term opportunities,” she explained.

Meanwhile, rays of hope seem to be coming in the direction of Nigeria and other African countries in the power sector as African Development Bank (AfDB) has earmarked $62 billion for energy infrastructure in Africa in the next five years

This became known at a panel discussion on Global Infrastructure Forum 2016 on the side lines of the 2016 spring meetings.

He explained that the bank would provide $12 billion while it would leverage $50 billion from the private sector.

“For us at the bank, we are going to put in $12billion over the next five years into energy sector and we also looking to leverage foreign buy back $50billion from the private sector. For this to happen, we have to pay attention; so many ministers have a host of infrastructure we are talking about,” he said.

Adesina advised that the energy ministers should optimise the opportunities around them.

“I mean for us, partial risk guarantees and also partial credit gurantees can help to leverage a lot of money. Now we have done something at the AfDB, I’m speaking on behalf of my collegues here, which AfDB Exposure Exchange, just to allow us to free up a lot of backlog for ourselves. For the bank itself, we have been able to free up about $10billion that allows us to lend a lot more for infrastructure.

“Our core financial arrangement, we work with China, we work with Japan in terms of core financing arrangement and all of here, we do blended financing both in terms of concessionary and non concessionary finacing, but at the end of the day, the monies that are out there in the Capital Market, far exceed all the things we get put together,” he added.

2016 IMF-World Bank SPRING meetings/interview Pages