IMF clears air on engagement with Nigeria

Gene Leon

Gene Leon

In its annual review of the economic situation of Nigeria, the International Monetary Fund cut its growth forecast for Nigeria to 2.3 per cent, citing key risks caused by lower oil prices, shortfalls in non-oil revenues, a further deterioration in finances of state and local governments among others. CNBC Africa’s Esther Awoniyi spoke to Gene Leon, IMF’s Senior Resident Representative and Mission Chief for Nigeria, on the funds engagement with Nigeria.

In the latest report released by the IMF, Article 4 consultation, it cites the Nigerian economy and the headwinds that the authorities can expect to continue this year, let’s start with what the IMF assessment  is of Nigeria current economic policy to revive the economy?

Leon: I think we can summarize this as follows. One is that the Nigerian economy has been hit largely as most oil exporting economies by a very large fall in oil prices. Second,  the falling oil prices is expected to continue over the medium term because of that the impact of that fall in oil prices is going to be durable. It’s not one year or one-off event. Consequently, because of that durability of the impact, there has to be some adjustment, at least, adjustment in the sense of policies that were expected to be done a year and half ago. That adjustment we believe has to be comprehensive. It cannot be a one size policy approach, because you start from a position of almost a legacy position where the economy is now and so we see a comprehensive approach that includes fiscal monetary exchange rates and structural reforms, including the strengthening of the financial sector or financial resilience as the mix that will take Nigeria from where it is now in the context of this durable impact of oil prices to somewhere which would be more sustained and inclusive growth.

You have mentioned delayed policies; could you shed more light in that for us?

LEON: Delayed policies in the following sense is when you have a shock to your system and adjustment is necessary, you want to start adjusting to it as quickly as possible because the longer you take, the longer the delay, the less the impact in a very short time frame and in this particular junction we are talking about, I think the absence of a coherent policy framework that can guide markets and start the economy on the growth path that is needed has not actually taken place. For example, the budget is still to be passed and signed and we are already in the middle of April. The budget is for January to December, at the best, your one year’s activity will either have to be cramped into eight months also, or for that matter, your quality effectiveness of implementation is going to be diminished. So when we talk of delays, we are referring to at least some of those.

Let’s highlight the forecast of the 3.1 percent growth, in the non-Oil sector for 2016, this is down from 3.6percent in 2015, why does the IMF see this percentage of growth this year, giving the significant increase in capital projects spending to key sectors for this year?

LEON: Well, the capital spending that is expected is only a small part of the entire mix. It is true that capital spending from government has an impact on corporates but the whole capital budget needs to be spent effectively over a period of one year. If it’s going to be spent now over a shorter period of time, it means the impact is not as planned and not necessarily as effective, which is one component. Another component is that, if we take the pure government’s contribution out, and focus on the private sector, are the conditions there to allow the private sector to realize the potential that it has? A good measure there is the sharp fall in non-oil production that we saw in the second half of 2015 particularly in the fourth quarter. The question will be, has any of those conditions changed significantly to be able to make one more bullish about the production capacity in the non-oil over 2016. I can specifically mention shortages of foreign exchange, oil restrictions that have hampered some of the non-oil activity, unless those change, then your average production for 2016 will have to be nearer where it was in the second half of 2015 as a means of giving you a better sense of projection of where non- oil is going to be in 2016.

Even though there is a chance that the entire budget can be spent within eight months which many people say might not be possible, but obviously, there is still a chance. The IMF prefers to take a more conservative approach to growth for the non-oil sector.

LEON: There is a chance as you say, the entire capex cannot be spent in Eight months but I think one should focus on how effective that could be. We could always argue, “I can spend the money”, but let’s make sure we can spend the money wisely to the extent that we have 1.8trillion earmarked for capex over one year. If you are going to spend it over eight months, it must call into question issues of capacity, issues of implementation, issues of governance, adequate costing and  implementation issues of that nature does cause one pause; to be a little conservative about full implementation. That’s on the public side, on the private side, how quickly do you get confidence in the private sector? How quickly do you have access to foreign exchange when you need it? how quickly do you have access to domestic finance when you need it?, are the Banks’ lending? Are the overall conditions for non-oil sector to thrive, have those changed materially since the beginning of the year, so that we could say, I have seen a boost, a shift, in the first half of the year that can give you a degree of confidence, that over the entire 2016, the average or the total would be more than what would have been expected if the latter half of 2015 did not occur.

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