IMF expresses deep concern over Nigeria’s economic outlook

• The economy is worse than the IMF reports portrays –Dr. Idika Kalu

President Buhari

 By UCHE CHRIS

 Contrary to recent report that the economy is recovering, the International Monetary Fund, IMF, has expressed deep concerns over the state of the economy in spite of the modest growth of 1.9 percent recorded in 2018. The report said that this miserly growth for the largest economy in Africa in 2018 does not discount the present and persisting danger to the economy given the worsening challenges it faces.

According the report the general outlook of the economy remains uncertain and challenging, demanding strong fiscal interventions and clear policy direction to overcome the immediate difficulties, and accelerate the rate of growth. The report predicts that the economy will not grow above two percent in the next few years.

“Under current policies, the outlook remains therefore muted. Over the medium term, absenceof strong reforms, growth would hover around 2½ per cent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock”..

The IMF said that a 2.5 percent GDP growth for the   economy is in absolute terms no growth at all,as the mere rise in oil price which has been the case since 2017 could produce or add that margin to the GDP without any economic activity. The agency therefore warns that policy makers in the country should take concrete steps to produce effective measures to implement necessary reforms to set the economy on a path of growth.

IMF said “persisting structural and policy challenges continue to constrain growth to levels below those needed to reduce vulnerabilities, lessen poverty and improve weak human development outcomes, such as in health and education”.

This conclusion also agrees with the view of other global agencies such the HSBC and the Economist Intelligent Unit reports on the economy in the past year. In June and August 2018, the agencies released reports suggesting that the economy was not really out of the woods and growth remained fragile and challenges, such as infrastructure deficit, political risk, rising debt, unstable oil price etc. strong and consolidating.

In August 2018, Nigeria became the world’s capital of poverty after overtaking India with 78 million people living below poverty line, which is living on less than $2 per day; the number rose in February to 81 million and is increasing by the day.

However renowned economist and former minister of finance, Dr. Idika Kalu, believes the report does not fully reflect the true situation of the economy and could be seen as patronising to the government.

“It is unfortunate how, after so many years, we still don’t seem to understand better how to relate to all these international financial institutions. They try to be very mild in assessing us. They expect us to be much more stringent in assessing our performance. Their report was being very nice and patronising; it does not reflect the situation on ground”, he said.

According to him – a former staffer of the agency – the reality is that we are still technically in recession because even though they say we grew by 1.9 percent, it is still much less than the rate of population growth. You cannot say that your economy is growing when the rate of population growth is higher than the rate of economic growth.

“That is why poverty is growing and there is hunger all over the place. We have too many people in poverty; we really have a lot of work to do”.

The Executive Board of the IMF said at the conclusion of its consultation with Nigeria, according to a statement issued in Washington, DC by a spokesperson for the Fund, Lucie Fouda, that although the Nigerian economy is recovering with GDP and falling inflation at the end of 2018, there are challenges of a large infrastructure gap, low revenue mobilisation, governance and institutional weaknesses, continued foreign exchange restrictions, and banking sector vulnerabilities were dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production.

Monetary policy focus on exchange rate stability would help contain inflation but worsen competitiveness if greater flexibility is not accommodated when needed. High financing costs, on the back of little fiscal adjustment, would continue to constrain private sector credit, and the interest-to-revenue ratio would remain high, the report said.

“Risks are moderately tilted downwards. On the upside, oil prices could rise, prompted by global political disruptions or supply bottlenecks. Bold reform efforts, following the election cycle, could boost confidence and investments, especially given relatively conservative baseline projections.

“On the downside, additional delays in reform implementation, a persistent fall in oil prices, reduced oil production, increased security tensions, or tighter global financial market conditions could undermine growth, provoke a market sell-off, and put additional pressure on reserves and/or the exchange rate,” the Fund said.

However, they welcomed, in this context, the significant increase in public investment but underlined the need for greater investment efficiency, while also recommending increasing funding for health and education. They noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space.

“Real GDP increased by 1.9 per cent in 2018, up from 0.8 per cent in 2017, on the back of improvements in manufacturing and services, supported by spill-overs from higher oil prices, on-going convergence in exchange rates and strides to improve the business environment.

“Headline inflation fell to 11.4 per cent at end-2018, reflecting declining food price inflation, weak consumer demand, a relatively stable exchange rate and tight monetary policy during most of 2018, but remains outside of the central bank’s target range of 6-9 per cent.

“Record holdings of mostly short-term local debt and equity and a current account surplus lifted gross international reserves to a peak in April 2018, while the three-times oversubscribed November 2018 Eurobond helped cushion the impact of outflows later in the year”.

With inflation still above the Central Bank target, Directors generally considered that a tight monetary policy stance is appropriate, and  also urged ending direct Central Bank intervention in the economy to allow focus on the central bank’s price stability mandate. They commended the authorities’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows.

They noted that a unified market based exchange rate and a more flexible exchange rate regime would support inflation targeting,and stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification.

They welcomed the decline in nonperforming loans and the improved prudential banking ratios but noted that restructured loans and undercapitalised banks continue to weigh on financial sector performance.

IMF also recommended establishing a credible time bound recapitalisation plan for weak banks and a timeline for phasing out the state backed asset management company AMCON, urging the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals.

They pointed to the importance of improving the business environment, implementing the power sector recovery programme, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities, and welcomed improvements in the quality and availability of economic statistics and encouraged continued efforts to address remaining gaps, including through regular funding.