Nigeria—Act with Resolve, Build Resilience, and Exercise Restraint

IMF News, January 6, 2016

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Authors: Christine Lagarde
Published: January 6, 2016

Introduction

Speech by Christine Lagarde, Managing Director, International Monetary Fund, to the Nigerian National Assembly, Abuja, January 6, 2016. As prepared for delivery.
Three central themes framed as the "three R’s": resolve, resilience, and restraint.
Objective: identify global economic transitions affecting Nigeria and the region; discuss managing near-term vulnerabilities; and outline policies for more inclusive and sustainable growth.

1. Global economic transitions and implications for Nigeria and the region

Sub-Saharan Africa growth estimated to have dropped from 5 percent in 2014 to about 3.8 percent last year, with only a modest recovery expected in 2016.
Major transitions affecting growth:
- China’s move to a new growth model.
- Prospect of commodity prices remaining lower for longer.
- Increasing divergence in monetary policy in major economies, especially since the recent rise in U.S. interest rates.
Oil-exporting countries generate about half of the region’s GDP and are facing massive pressures and challenging prospects.
Medium-term oil price outlook: likely to remain much lower than the 2010-13 average of more than $100 a barrel due to oversupply (U.S. shale, Iraq and Iran returning to market), OPEC behavior, and lower demand in emerging economies.
Impacts noted:
- Sharp reductions in Nigeria’s export earnings and government revenues.
- Reduced policy space to address social and infrastructure needs.
- Private sector investment affected by weak investor confidence and tighter financing conditions.
- With U.S. interest rates expected to continue to rise, capital outflows risk and exchange rate pressures could increase.
Geopolitical spillovers (including Boko Haram) increase public spending needs and widen budget deficits, raising financing needs that can crowd out other essential public spending.

2. Managing near-term vulnerabilities

Recent progress: Nigeria created a large and diversified economy that has grown by about 7 per cent a year over the last decade.
Near-term outlook and vulnerabilities:
- Growth in 2015 is estimated at about 3.2 percent—its slowest pace since 1999—and only a modest recovery is expected in 2016.
- For a rapidly increasing population, this implies almost no real economic growth in per capita terms.
- Low fiscal savings and reserves restrict ability to manage shocks.
- Weakening oil sector could stress balance sheets and put pressure on the banking system.
- Non-oil corporate sector less resilient than in 2008-09; companies with increased leverage and US-dollar debt face pressure from rising interest rates and a stronger dollar.
- Nigeria’s regional impact example: a one percent reduction in Nigeria’s growth causes a 0.3 percent reduction in Benin’s growth.
Immediate policy priorities and recommendations (framed by the three R’s):
- Act with resolve—step up revenue mobilization:
- Broaden the tax base.
- Reduce leakages by improving compliance and enhancing collection efficiency.
- Consider increasing the VAT rate: "the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered."
- Build resilience—make careful decisions on borrowing:
- Nigeria’s debt is relatively low at about 12 percent of GDP, but "it weighs heavily on the public purse."
- About 35 kobo of every naira collected by the federal government is used to service outstanding public debt.
- Exercise restraint—focus on quality and efficiency of spending:
- Prioritize high-impact, high value-added capital projects (power, integrated transport, housing).
- Streamline recurrent expenditure and improve public service delivery across federal and sub-national governments.
- Address transfers and tax expenditures.
- Continue moves begun in the 2016 budget to eliminate resources allocated to fuel subsidies to allow more targeted spending, including innovative social programs.
Evidence and rationale on subsidies:
- IMF research cited: more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.
- Fuel subsidies in Nigeria have been associated with corruption and inefficiencies (queues, administration problems).
Sub-national governments:
- State and local governments account for the bulk of social spending but have limited tools to manage declining oil revenues.
- Recommendation: manage smaller purses better and build capacity to increase internally generated revenue.
- IMF can provide technical assistance on public financial management (example: assistance to the Kaduna State Government).
Strengthen external position:
- Policy package for external competitiveness: business-friendly monetary policy, flexible exchange rate, disciplined fiscal policies, and structural reforms.
- Additional exchange rate flexibility—both up or down—can soften external shocks, reduce output and employment volatility, build external reserves, and avoid the need for costly foreign exchange restrictions (which should remain temporary).
- Improved competitiveness and exchange rate flexibility will facilitate needed export diversification.

3. Achieving inclusive and sustainable growth

Nigeria’s positive structural features:
- More than 140 million cell phones in use.
- Nollywood is the world’s second-largest film industry by output and employs about one million people.
- Services account for about half of Nigeria’s output.
Structural challenges remaining:
- Poverty and inequality remain high in parts of the country.
- Women account for about 42 percent of the total labor force.
- Women’s literacy rates are well below that of men.
- Maternal mortality is relatively high due to limited access to health care.
Policy priorities to foster inclusive and sustainable growth:
- Invest in quality infrastructure:
- Improve transportation networks and power delivery (generation, transmission, distribution).
- Example: reduce import dependence (tomato paste) by improving roads and rail so farmers can bring crops to market.
- Reduce reliance on backup generators through energy investment.
- Make the banks work to build resilience:
- Channel more savings into productive investments and infrastructure.
- Banks are generally well-capitalized and more resilient than in 2008-09, but rising non-performing loans require careful monitoring and management.
- Improve governance and fight corruption:
- Corruption described as a severe impediment to growth; President Buhari cited corruption as "a form of evil that is even worse than terrorism."
- Global estimates cited: cost of corruption equivalent to more than 5 percent of world GDP, with over US$ 1 trillion paid in bribes each year.
- Positive initiative: publication of monthly data on finances and operations of the Nigerian National Petroleum Corporation to increase transparency and accountability of oil revenues.
- Fighting corruption is a multi-year, multi-generational struggle.

Conclusion

Nigeria has assets—cultural richness, ingenuity, and belief in a better future—and has embarked on a new journey.
Policymakers have an opportunity to address near-term vulnerabilities and medium-term challenges by acting with resolve, building resilience, and exercising restraint.
Closing quotation: Ben Okri—"Our future is greater than our past".

Source: Speech by Christine Lagarde, Managing Director, International Monetary Fund, "Nigeria—Act with Resolve, Build Resilience, and Exercise Restraint", January 6, 2016.