Nigeria’s Economic Direction, Debt Sustainability Depend on Incoming Govt’s Policies, Says IMF

* Okonjo-Iweala calls for diversification of global supply chains

Obinna Chima, Nume Ekeghe and Ugo Aliogo in Washington DC

The International Monetary Fund (IMF) has stressed that the future trajectory of the Nigerian economy as well as the country’s debt sustainability would depend on the reforms and choice of policies of the incoming administration of the President-elect, Bola Tinubu.

The IMF Director, African Department, Abebe Aemro Selassie, said this during a media briefing to unveil the regional economic outlook for Sub-Saharan Africa (SSA) titled: “The Big Funding Squeeze,” at the ongoing IMF/World Bank meeting in Washington DC recently.

This was just as the Director-General of World Trade Organisation (WTO), Dr. Ngozi Okonjo-Iweala has called for the diversification of global supply chains, stating that global value chains make up to 45 to 65 per cent of world trade.
Okonjo-Iweala, who disclosed this in Washington D.C, the United States of America (USA), on the sidelines of the World Bank/IMF Spring meetings, said global value chains are the backbone of trade.

Nigeria is presently facing high inflation rate, at 21.91 per cent as at February 2023, revenue squeeze, high level of poverty, oil theft and wastes trillions of naira on a controversial fuel subsidy policy.
Selassie explained: “For a country like Nigeria, the future trajectory of its economy is going to depend on a whole host of variables; the reforms that the government decides to pursue, how effectively it uses the resources it has, and the oil price trajectory. It is a combination of those factors that will determine the sustainability of Nigeria’s debt.
“Right now, Nigeria’s debt looks manageable, but it is really also important, of course, and contingent on what policies will be pursued in the coming months and years.”
Commenting on the sustainability of Nigeria’s debt, Selassie said: “Whether debt is sustainable or not, is not dependent on just one number, one threshold, rather, you have to look at a lot of indicators to assess the trajectory, whether debt will be sustainable in the coming years or not.
“When we make an assessment and we classify countries as being a moderate risk or a high risk, or we talk about vulnerabilities being elevated, it takes into account what we think of the kind of policies that the government is going to pursue and, of course, certain assumptions about the global environment.
“The last several years have been full of shocks, so it has made countries’ ability to bring debt under a sustainable trajectory more difficult but, they have been compensating for that also with stronger economic policies.

He, however, acknowledged that the Nigerian government had implemented policies targeted at diversifying the economy. These, according to him, would help the incoming administration enhance its economic diversification plan.
He added: “Over the last several years, there has been a trade regime, foreign exchange regime and they have all been very challenging and have not allowed Nigeria to have robust growth the country needs desperately.

“Also, I think it’s appropriate that you look at policies in terms of their effectiveness. So, the question that we have to ask is the policies that have been pursued over the last three, or four years, have they helped achieve the diversification that it was intended to achieve?
“The new administration will see what they can do. We will be supportive of measures, policies and responses that are effective, in terms of addressing the diversification objective Nigeria has and also addressing the near-term challenges that the country is facing from revenue mobilisation to ensuring that there are sufficient resources to spend on health, education, infrastructure.”

Selassie added: “As always, the extent to which monetary policy will help address inflation is going to be dependent on a whole range of factors. I think if you have largely negative real interest rates, I’m not sure that that is conducive to the kind of signaling effect that you want to have, either in terms of supporting the exchange rate or the credit channel.
“When you have multiple exchange rates, that also becomes a lot more complicated, right? So, all those things must be factored in. Again, we’re not dogmatic that it always must be about interest rates increases. So that will work through the credits channel, as you said, for a large sum, thereby mobilising a bit more savings.

“But there are also cases where we support management, managing liquidity, even other cases where the financial markets are even more rudimentary. So, outright monetary targeting, explicit money targeting is what will work. I think it depends on a combination of those factors. I think you are very nuanced policymakers in Nigeria.”
Speaking further, he pointed out that Nigeria and SSA were facing a financing crash as a result of reduced inflows from multilateral institutions and lenders causing, “a big funding squeeze for the region.”

According to him, SSA countries should adopt four policies to help the country navigate out of the current turmoil.
He said consolidating public finances and strengthening public financial management, containing inflation, allowing exchange rates to adjust, mitigating the adverse effects on the economy, and ensuring important efforts to tackle climate change do not crowd out financing for basic needs like health and education, should be vigorously pursued.

He noted that amid a global slowdown, growth in SSA was expected to decelerate to 3.6 per cent before rebounding to 4.2 per cent in 2024, in line with global recovery, subsiding inflation, and a winding down in monetary policy tightening, citing the latest IMF regional economic outlook for sub-Saharan Africa.
The IMF official added: “Our latest regional outlook finds that this big funding squeeze is hitting countries hard, and many countries are facing tough decisions when it comes to investing in crucial areas like health, education, infrastructure. This will not only impact them now but also in the years to come.
“By 2040 or so, a third of the new entrance, a new labor market entrance will be from SSA. Skilled educated workers will be vital to the health and stability of the global economy, but today’s funding squeeze may impact the region’s ability to provide them.

“I’ve always said that this is the African century, but if measures are not taken to address this funding squeeze now, the region may be held back from developing its potential. Here at the IMF, we’re playing our part. As of last month, we had 21 lending arrangements with countries in the region, and we still have more programs under request and under discussion; and between 2020 and 2022, we will provide more than $50 billion through programs, emergency financing, and special drawing rights allocation. We also, of course, continue to provide capacity development, technical assistant, and training to our members, and will continue to do so in the coming months.

“In terms of policy priorities, we are flagging that there’s a need to first consolidate public finances and strengthen public finance management. This needs to rely on continued revenue mobilisation that are management of fiscal risks and more proactive debt management.
“In countries where debt levels are elevated and debt is clearly unsustainable, restructuring is going to be unavoidable, and a well-functioning debt resolution framework will be vital to create the required fiscal space.

“A second priority is to contain inflation. The inflation rates are varied across the region but remain elevated much more so than we’ve seen it for many years now; and monetary policy needs to focus on keeping inflation firmly on a downward trajectory and make sure that it pertains to the Central Bank’s target range.
“Third, I think, is a need to allow, in those countries where exchange rates are flexible, the exchange rates to adjust while mitigating adverse effects on the economy. And then, finally, climate change is, of course, increasingly, something that is weighing on policy makers in the region, on our people; and tackling this, including with support from the international community, will be very, very important.”

Okonjo-Iweala Calls for Diversification of Global Supply Chains

Meanwhile, Okonjo-Iweala has called for the diversification of global supply chains, stating that global value chains make up to 45 to 65 per cent of world trade.
She also revealed that financial inclusion has spread over several countries and this had led to job creation, increased incomes, adding that studies had been done to show that where you have global value chain spreading, income score per capita goes up.
She further stated that when global supply chains are trying to build resilience, by not being too concentrated in one country or the other, there is need to see this as an opportunity to encourage them to spread to more developing countries, because this can be used as a force for inclusion and to bring even Small Medium Scale Enterprises (SMEs) and women into the value chains.

“During the pandemic, when we had to deal with vaccines, we had these meetings with the CEOs of the vaccine manufacturers Pfizer, and Moderna, and others. What they said about the mRNA vaccine, especially Pfizer, is that it one has a spread over 19 countries, and the supply chain is over 90 countries, and manufacturing in 86 sites.
“So, it’s incredible, you know, and it is the first campaign for creating jobs and employment,” she stated.
She remarked that governments of nations and development partners cannot be talking about China Plus One strategy and also thinking about of diversification of supply chains.

China Plus One, also known simply as Plus One or C+1, is the business strategy to avoid investing only in China and diversify business into other countries.
“Let’s talk about China Plus Morocco, China Plus Egypt, China Plus Nigeria, China Plus Bangladesh, China Plus Brazil, Costa Rica. And with this kind of approach, global value chains can really be a force for inclusion,” she added.