•How Senate leadership kept mum on IMF’s economic recommendations
By Fred Itua, Abuja
Tuesday, January 5, 2016 would have passed like any other day. But for the leadership of the Eighth Nigerian Senate, it was a unique day. On that day, the Senate President, Bukola Saraki, supported by other lawmakers drawn from the Upper Legislative Chamber, hosted the managing director of the International Monetary Fund ( IMF), Ms Christine Lagarde. Senators, who until that day were still savouring the beauty of the New Year and observing their Christmas break, had their holidays cut short.
As duty would demand, they were summoned to respond to an urgent ‘national function’. Although the Speaker of the House of Representatives, Hon. Yakubu Dogara was expected to co-host the meeting, he was conspicuously absent. Lawmakers from the Green Chamber were also not in attendance. No formal or informal reason was given for their boycott of the meeting. Similarly, Deputy President of the Senate, Ike Ekweremadu was also not in attendance. Apart from Saraki, another principal officer who was in attendance was the Chief Whip of the Senate, Olusola Adeyeye (APC-Osun Central).
There were, however, other big names in the Senate who were in attendance. Senators Shehu Sani ( APC, Kaduna), Rabiu Kwankwaso (APC, Kano), Adamu Aliero ( APC, Kebbi), Dino Melaye ( APC, Kogi), among others attended the meeting. Officials from the Central Bank of Nigeria ( CBN), Federal Ministry of Finance and other government agencies and parastatals attended the meeting.
What would have turned out as a meeting between the Senate leadership and the management team of the IMF, ended as a lecture. The Senate president, Saraki and other lawmakers were sat down by Ms Lagarde for over an hour as she lectured them on recent happenings in the global market. For pundits who carefully observed what transpired during the meeting, cum lecture, the Senate leadership, led by Saraki was not prepared to confront the IMF team, led by Lagarde.
The first faux pas came from the Senate president, Saraki, when he bridged the protocol and read his prepared speech, as against the regular practice, wherein he listens to his visitor, after which he responds. Some of the Senators who were in attendance, exchanged surprised looks, but could not muster the courage to do something about it.
Soon after the Senate president read his speech, the IMF chief, whose recent four-day visit to the country received divided reactions from a cross section of Nigerians, took over the floor. “My first visit to Africa as IMF Managing Director was in late 2011, and the first country on my itinerary was Nigeria. At that time, Nigeria was emerging from the 2008-09 commodity price collapse and the banking crisis that followed,” she began.
Ms Lagarde heaped praises on Nigerians and commended the government and the people for a successful transition from one dispensation to another. “Since that visit, Nigeria has been acknowledged as the largest economy in Africa—with a maturing political system. We saw a peaceful general election last year in which, for the first time in Nigeria’s history, there was a democratic transition between two civilian governments. It was a strong sign of Nigeria’s commitment to democracy, to a new Nigeria. At the same time, the external environment has changed,” she remarked.
Her first blow came when she re-echoed the obvious. She reminded lawmakers of the dangers ahead, following the sharp drop in the price of crude oil at the international market. She revealed how the import of oil crash will affect some problems of the federal government, as well as the building of critical infrastructure in the country.
She said: “Oil prices have fallen sharply; global financial conditions have tightened; growth in emerging and developing economies has slowed; and geopolitical tensions have increased. All these have come at a time when Nigeria is facing an urgent need to address a massive infrastructure deficit and high levels of poverty and inequality.
“So, Nigeria faces some tough choices going forward. Nigerians, however, are well known for their resilience and strong belief in their ability to improve their nation and lead others by example. I firmly believe that Nigeria will rise to the challenge and make the decisions that will propel the country to greater prosperity.”
Lagarde exposed how the global financial meltdown is affecting Sub-Saharan African countries, especially Nigeria. Unlike the economic growth forecast which was put at 5 per cent in 2014 by the global bank, Lagarde said in 2015, only 3.8 per cent growth rate will be expected. She however added modest growth will be expected in 2016.
“So let me start with the big picture. For more than a decade, growth in Sub-Saharan Africa was driven by an extraordinary combination of improved policies, stronger institutions, high commodity prices, and high capital inflows.
“The region has now entered a different phase, where commodity prices and capital flows are far less supportive. We are in the process of updating our forecasts, but broadly the IMF staff estimates that regional economic growth dropped from 5 percent in 2014 to about 3.8 percent last year, with only a modest recovery expected in 2016. For example, spillovers are now affecting oil-exporting countries, which generate about half of this region’s GDP. These economies, including Nigeria, are facing massive pressures and challenging prospects,” she noted.
Oil, which contributes a significant percentage to Nigeria’s Gross Domestic Product (GDP) is at its lowest ebb in over a decade. Already, Nigeria’s economy is bleeding from the poor revenues generated from sale of crude oil products. To add more pains to injury, the IMF boss told lawmakers that more shocks should be expected in the months to come.
She said: “Over the medium term, oil prices are likely to remain much lower than the 2010-13 average of more than $100 a barrel. Why? Because of the huge oversupply in global oil markets! Think of the shale oil boom in the United States, and some historically large producers such as Iraq and Iran coming back to the market. Other factors include OPEC’s strategic behavior and the drop in global demand for oil, especially in emerging economies.
“Already, lower oil prices have sharply reduced Nigeria’s export earnings and government revenues. Both are likely to remain at depressed levels, reducing the space for policy interventions to address Nigeria’s social and infrastructure needs.
“Private sector investment will also be affected. Investor confidence about the outlook has remained weak, and financing is likely to become more difficult and more costly for everyone. With U.S. interest rates expected to continue to rise, albeit slowly, the likelihood of capital outflows will increase, and exchange rate pressures could mount as investors re-assess their appetite for risk.”
She educated lawmakers on how the growing tension in the region will affect the economic fortunes of the various countries, especially Nigeria. “More broadly, Sub-Saharan Africa is also facing spillovers from geopolitical factors, including the fight against Boko Haram. The threat of terrorism is very real and never far from our minds. Having been in Paris during the November attacks, I know firsthand the sorrow that so many Nigerians carry in their hearts.
In this region, terrorism not only takes a human toll but it also makes public finances more fragile. How? By widening budget deficits. Revenues are lower, including from lower growth, and spending needs higher, including for security and for supporting those impacted by the violence. One immediate downside is higher financing needs that can crowd out other essential public spending,” she revealed.
Nigeria is said to be the only country in West Africa with the lowest Value Added Tax ( VAT) regime. For Lagarde, it is time to raise the bar in tandem with the current global economic realities.
She recommended: “Hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward. My policy refrain is this: Act with resolve—by stepping up revenue mobilization. The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, 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—by making careful decisions on borrowing. Nigeria’s debt is relatively low at about 12 percent of GDP. But it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the federal government is used to service outstanding public debt.
“Exercise restraint—by focusing on the quality and efficiency of every naira spent. This is critically important. As more people pay taxes there will, rightly, be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.”
The IMF managing director touched one aspect that has remained in the public space, long before her visit to Nigeria: fuel subsidy removal. True to predictions made by labour unions and other civil society organizations that Ms Lagarde was in Nigeria to mount pressure on the federal government to jettison fuel subsidy regime became a reality. While calling for the complete removal of fuel subsidy, she however advised how monies meant for it can be channeled into other sectors of the economy.
Lagarde said: “Continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programmes for the most needy.
“Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that 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.
“Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change—think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas so that they can go about their everyday business.
“At the same time, we should not forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments—which account for the bulk of social spending—have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue.”
Naira devaluation is an issue that has been in the public space for a while. In the last few months, the naira has weakened significantly against the dollar and other major currencies. More so, President Muhammadu Buhari has repeatedly rebuffed pressure to further devalue the naira. Economists and analysts support the position of Buhari. But the IMF boss thinks differently. During the meeting with the Senate, she tactically called for further devaluation of the naira, which according to her will help the nation’s economy which depends more on exports.
“To be clear, the goal of achieving external competitiveness requires a package of policies including business-friendly monetary, flexible exchange rate and disciplined fiscal policies, as well as implementing structural reforms. Additional exchange rate flexibility—both up or down—can help soften the impact of external shocks, make output and employment less volatile, and help build external reserves.
“It can also help avoid the need for costly foreign exchange restrictions – which should, in any case, remain temporary. And going forward, improved competitiveness from improved exchange rate flexibility and other reforms will facilitate the needed diversification of the exports base and, ultimately, growth”, she said.
In conclusion, Lagarde proffered solutions on how to tackle the hydro-headed corruption in the country. While acknowledging some significant achievements recorded so far by President Buhari, the IMF boss said a lot needed to be done in that direction.
“In his first public speech after the election, President Buhari singled out corruption as a “form of evil that is even worse than terrorism.” Corruption not only corrodes public trust, but it also destroys confidence and diminishes the potential for strong economic growth.
At the global level, it is estimated that the cost of corruption is equivalent to more than 5 percent of world GDP, with over $1 trillion paid in bribes each year. Here in Nigeria, important initiatives to discourage graft are underway and should be applauded. Let me highlight the publication of monthly data on the finances and operations of the Nigerian National Petroleum Corporation. This provides information on a key sector, building confidence in transparency, and improving accountability of oil revenues, for the benefit of all Nigerians. Much more can and needs to be done. Fighting corruption is a multi-year, multi-generational struggle that must be won,” she concluded.
Again, Saraki responded to Ms Lagarde, but declined to comment on some of the salient points raised by the IMF boss. Whether some of the issues raised or advice rendered by Ms Lagarde will come up for discussion when the Senate reconvenes soon is uncertain. Pundits however believe that the responses of the Senate president was below expectation and hope that subsequently, things will improve.