Despite Oil Rally, Inflation Deceleration, Concerns Over Nigeria’s Future Grow


In the past few days the International Monetary Fund (IMF) has been analysing the Nigerian economy, from the acknowledgement of the fact that the economy is on the path of recovery typified by reduced inflation, increase in Gross Domestic Products (GDP) to strengthened reserve buffers, occasioned by higher oil prices.

The fund had similarly expressed worry over the country’s ability to repay its rising foreign debt and the continued retention of fuel subsidy.

Nigeria’s total debt profile as of December 31, 2018, stood at N24.387tn. The figure swelled by 12.25 per cent from N21.725tn in 2017 to N24.39tn in 2018.

The developmental roles of the Central Bank of Nigeria (CBN) came under scrutiny as against its core function of price stability.

CBN recently put the value of its development finance interventions across the country at over N1.36 trillion, even as transparency of some of the operations is being questioned

Besides, some analysts say the rationale for the intervention as adduced by CBN, which includes, championing the improvement of financial inclusion level and poverty reduction and diversifying the economic base, among others, are yet to have positive impact on the economy.

Godwin Emefiele, CBN Governor, while commenting on the initiative recently, had explained, “The far reaching objectives of the CBN in the implementation of schemes and programmes for real sector development focus on the inherent potential in the sector vis-a-vis our conviction that the sector has sufficient employment capabilities, high growth potentials, contributes significantly in accretion to foreign reserves, expands the industrial base and apparently diversifies the growth potentials of the national economy.”

However, the analysts contend that besides the rising unemployment, the restructured loans and undercapitalized banks continue to weigh on Nigeria’s financial sector performance.

Commenting on the mouthed diversification, some of the analysts say even though Nigeria will benefit from oil rally in the short term, concerns are rising regarding what would become of the country as the world moves beyond oil as a major source of fuel for vehicles and towards electric cars.

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Also, cries of oppression, marginalisation, negligence and other social vices that negate or suppress the freedoms and opportunities of citizens are seen as signs of ominous danger ahead.

In fact, some believe that when entire villages and communities are repeatedly attacked with many killed, injured and others permanently displaced, these are signs of dangers.

Some analysts are worried while Nigeria dithers as strict reforms lift millions out of poverty in China, India. In fact, the world’s most populous countries have been able to cut down by more than half the number of their citizens living below the poverty line, despite having five times Nigeria’s population. China has a population of 1.4 billion while India’s population is put at 1.3 billion.

According to Robert Omotunde, Head, Investment Research, Afrinvest, the report of the Fund is “largely consistent with our views on the direction of the economy and the need for structural reforms to boost growth and investment. Another discovery we made was the Fund’s increasing focus on human capital, similar to the World Bank’s last Bi-Annual update on Nigeria in October 2018.”

Corroborating the Fund’s assertion that the current Policies are insufficient to boost growth, Omotunde said that from a growth rate of 1.9% in 2018, growth is expected to peak at 2.7% and average 2.5% over the next five years, adding, “This is weaker than historical levels and growth in peer countries, showing that Nigeria’s per capita income would continue to deteriorate. While we are a bit more optimistic on growth, considering our growth estimate of 2.5% in 2019, we also do not see a significant boost to per capita income in the medium-term.”

According the summary of analysts at RTC Advisory services, in their Business and economic review for Q1, 2019, “Nigeria faces tough policy choices over removal of oil subsidies (which has historically been unpopular); probably contentious proposals to increase VAT rates; how to stimulate higher GDP growth and reduce poverty and employment; measures to reduce the infrastructure deficit particularly in power and transportation; reducing insecurity; and increasing investment in, and improving the quality of education, health and rural infrastructure.”

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They further said that “Investors will be watching the first appointments and policy pronouncements that the President Buhari administration will make in its second term for hints of a direction towards re-invigorated economic reforms and prioritising private capital.”

Emeka Okereke, Director General Enugu Chambers of Commerce, Industry Mines and Agriculture (ECCIMA) said, “Honestly speaking, I want to appreciate the several interventionist efforts of the CBN in critical sectors of the economy. However one is also worried that the CBN is progressively over aching its interventionist strategy. No wonder, the counsel of the IMF that CBN should return to its core responsibility and role in regulating the banking sector as the banker’s bank. Indeed there are some institutions in the financial and banking sector that have been designated for similar roles the CBN can work with and still achieve target result. So my thought and reasoning is in tandem with the IMF position, so that it would not derail in the focus of the institution.”

According to Johnson Chukwu, Managing Director, Cowry Asset Management Limited the nation needs to grow the economy at above 5 per cent for corporate organisations and for companies to begin to generate enough revenue and enough profit and to be able to meet their debt obligations.

According to Chukwu, it is when the economy is recovering and growing that the non performing loans can either be turned around or the restructured loans to start performing.

Explaining further, he said it is because the loans went bad in the first place that they were restructured, adding that because the loans are not performing the tasks, the banks might be tempted to use shareholders fund leading to the issue of undercapitalization.

“The reality is that what IMF observed is what is the reality on ground now and the central bank does not have the morale to talk about AMCON to take over non performing loans. So we are left with one option, and that is, that the government must do everything possible to stimulate the economic growth rate beyond the very current nomenclature of 1.91 per cent,” he said.

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Christine Lagarde, managing director, IMF at the weekend counseled the government on subsidy saying that it is the right thing to do.

According to analysts at InvestmentOne, “We believe the removal of fuel subsidy may be a step is getting high. In 2018, a total of about N730 billion was spent on subsidizing fuel; we highlight that this is higher than the budgeted education (N605billion) and health expenditure (N340billion) for 2018 which we believe are of in the right direction for the Nigerian Economy. Taking an economical approach to the subject, we realise that the opportunity cost of keeping fuel subsidy more value to the economy. We believe removing subsidy may also free up resources for infrastructure spending. However, we opine that policies and structures should be implemented in a bid to ensure success in subsidy removal; a total deregulation of the downstream sector should be considered.”

When a country joins the International Monetary Fund (IMF), it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, and to provide the IMF with data about its economy.

The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability, and culminates in regular (usually annual) comprehensive consultations with individual member countries.

The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.

During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discusses the country’s economic and financial policies with government and central bank officials.

Recently, on March 27, 2019, the Executive Board of the IMF concluded the Article IV consultation with Nigeria.

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