The IMF article IV visitation team and the economy

Last week the boys from Washington were in our country under the framework of the IMF Article IV Visitation exercise.

Under the statutes of the Fund, the Article IV team is authorised to carry out economic and surveillance activities in member countries. They normally meet with key government functionaries and with functionaries of key agencies such as the Central Bank, Ministry of Finance, FIRS and with bankers and other captains of industry for the purpose of undertaking a fair and objective assessment of the health of the economy.

In their summary report for this year, the IMF team noted that macroeconomic growth in Nigeria remains precarious while inflation is rising and external vulnerabilities are worsening.

While welcoming the recent fiscal consolidation and the tightening of monetary policy, they pointed out that major policy adjustments are still very much needed.

Led by Amine Mati, Senior Resident Representative and Mission Chief for Nigeria, the Fund’s team noted that “the pace of economic recovery remains slow, as declining real incomes and weak investment continue to weigh on economic activity. Inflation—driven by higher food prices—has risen, marking the end of the disinflationary trend seen in 2019. External vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals”.

The IMF visiting team however lauded the fact that the exchange rate has remained relatively stable.But they expressed concern about the high fiscal deficits in the context of weakening non-oil revenue, which have encouraged CBN interventions and fiscal overdrafts.

As a result of these developments, the Fund have announced that they are cutting back on their growth forecast for 2020; revising it downwards to 2.0 percent from an earlier figure of 2.5 percent.

They predict that inflation is likely to increase while terms of trade and capital outflows will make our external position more vulnerable. They are therefore recommendingmeasures to boost revenue through implementation of the Finance Bill and the Deep Offshore Basin Act while taking bold steps to enhance budget execution and implementing structural reforms particularly in the areas of Doing Business, power sector reforms, governance and public sector management,

The mission looked askance at the motely of CBN intervention funds as being inimical to prudent public financial management. They advocate, instead, securitisation of longer-term government instruments to mop up excess liquidity while implementing a more flexible exchange rate regime.

They demanded removal of the restrictions on access to foreign exchange for the 42 categories of imported goods. They equally raised issues with banking system vulnerabilities.

While welcoming some of the measures taken to reduce legacy non-performing loans, they called for introduction of risk-based minimum capital requirements so as to boost bank resilience. The IMF team also took strong exceptions to the continuing border closure which they believe is harming the economies of our neighbours. They urge all parties involved to work out a solution that is fair and equitable.

I am not altogether surprised that iinflation is reported to have risen to 12.13% in January 2020, up from 11.98% recorded in December 2019.  The IMF Article 4 team are not entirely wrong in blaming the current development on food shortages and the border closure. But these things need to be placed in proper perspective. The border closure was bound to trigger certain temporary price shocks. But these are inevitable, until when local producers respond to new opportunities. Such events naturally have time-lags. This explains partly the rise in prices.

Ordinarily, January is still within the harvest season, so we should not be expecting food shortages. But the factor of rural banditry must be taken into account. Farmers in the rural communities have come under heavy assaults by herdsmen militias and other rural bandits.

Fear and uncertainty have been dampeners on agrarian production, hence the phenomenon of shortages and scarcity that translates into higher inflation pressures. Another factor that perhaps the Fund team did not mention is, of course, the 50 percent hike in the VAT tax.

This issue needs to be scrutinised against the backdrop of the of the much talked about progress in local food production in the country.  The talk of increases of food production is more hype than reality. There is no doubt that some of the so-called intervention funds by CBN have had some positive impacts on the rice sector. Local production has risen significantly. But we are not yet anywhere near self-sufficiency in local rice production as is being claimed.

The reality is also the fact that nobody has actually done a cost-benefit analysis of the CBN intervention funds. There is anecdotal evidence that the costs far outweigh the benefits and impacts. Whatever improvements that have been registered have been undermined by the herdsmen militias and rural bandits that are succeeding in destroying the agrarian bread basket of the country, which is the Middle Belt.

On the border issue, I am of the view that Fund have no business interfering in matters of national security.

The border closure decision has more to do with national security than international economics. So far, the border closure has significantly reduced the mindless killings going on across our country. We are aware that the decision to close our borders has angered several European powers who have been using our neighbours to dump all their goods on our shores. I strongly urge that we do not back down. We should continue on this path until we have cast-iron guarantees that our neighbours will not be used to engage in trade dumping or muggling of weapons that are injurious to our country.

On the restriction placed on the 42 items, I think the Fund are wrong. Why should we continue to import things that we can easily produce locally? We must say no to such nonsense. Remember also that the CBN never “banned” these items as such. The new guidelines merely specify that anybody that wants to import such items cannot come to the official forex window for them.

On the excess use of CBN overdrafts and intervention funds, I am inclined to agree with the IMF. The rule in terms of global best practices is that such overdraft facilities must be kept to a minimum.

Across the world, Central Banks do from time to time provide overdraft facilities to government. What is essential is that they are kept to a minimum and that they are operated with a high level of transparency.

My main concern is that the way we are going about things these days leaves a lot of unanswered questions. Where are all the trillions of so-called “intervention funds” coming from? Who is evaluating their impact? How are we sure that we are not just printing money for dubious pork-barrel expenditure? I would therefore urge that we keep such overdrafts within the bounds of reason and we must be transparent about them. We must also carefully weigh the implications for inflation and long-term exchange rate stability.

Going forward, I believe what we need in Nigeria is, first and foremost, to secure the peace of the commonwealth.

It would bolster business confidence while reversing capital flight and financial hemorrhaging. It would also bolster the real sector.

The CBN should also be moderate in its use of intervention funds. I am also disappointed that we do not really have mechanisms to stabilise prices of agricultural products through the use of agricultural silos.

The idea is to store farm produce during the peak harvest seasons and to gradually release them into the market during times of scarcity.

We also badly need to reform the public sector while building an eco-system that allows innovation, creativity and entrepreneurship to flourish.

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