Nigeria: Again, Nigeria Turns to IMF

12 April 2020

The Nigerian economy is in a tailspin and has been in that state for some time now as a consequence of poorly thought-out economic policies. Nigeria has been forced to turn to the IMF once again to help deal with financial challenges. While there has been a history of significant opposition to the IMF and its influence on policy formulation in Nigeria in the past, this time however, many Nigerians might be glad to access the Fund's assistance. The inconvenient truth is that the President Muhammadu Buhari administration has no other place to turn to, to garner funds to create the much-needed space for both the federal and state governments to effectively and sufficiently deal with the economic impact of the COVID-19 pandemic. Nosa James-Igbinadolor reports

Overall, it is likely to be a very bad year for the Nigerian economy. The prognosis looks very grim indeed; Fourteen days of enforced economic hibernation and probably many more days to come, coupled with low oil prices, poor oil sales as well as the overall economic costs of the COVID-19 pandemic are not only negatively affecting economic activities and growth, but would certainly impact GDP, thus further shrinking the ever-decreasing size of the economy.

As noted by Bloomberg, "The global pandemic has hit its economy hard as plummeting oil prices and capital flight threaten to push the economy into recession. Fitch Ratings earlier on Monday followed S&P's March 26 decision to downgrade Nigeria's credit rating further into junk territory, citing its dependence on oil, which represent about half of government revenue."

This overwhelming dependence on oil was further highlighted by Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, when she warned last week, "Now, we have to work with an average of $30 per barrel. We also have to adjust the volume from 2.1 million barrels per day to 1.7 million barrels per day because the market is low.

"In the last couple of weeks, we have cargoes of crude that are not moving because Europe is literally shut down and that's where we have our biggest market and also India is shut down. So, the demand is very low. We have seen countries planning to shut down production or part of their production. We hope it doesn't get to that."

It wasn't as if the economy was in a great shape before the global contagion began to distress the country in March. On the contrary, the economy was in a tailspin, defying poorly thought-out economic policies that drove production aground and led to some eight million job losses in less than three years. The last five years of the Buhari administration has been a leviathan antithesis to what can best be described as the 'halcyon' years between 2000 and 2014 when growth in the Nigerian economy floated between 4 and 6.5 per cent. Since 2015, the economy has fallen into recession, had a recurring slow recovery characterised by growth of less than 2 per cent ever since, all due to off-colour economic decisions by the current government in power such as the over-optimistic revenue projections that have led to higher financing needs than initially envisaged, resulting in over-reliance on expensive borrowing from the central bank to finance the deficit. In addition, the administration's policies has resulted in distortions in the exchange system, with large differentials between the official and parallel exchange rate generating opportunities for corruption, as easy profits are being made in "round-tripping" by those with the right to buy dollars at one rate and sell them at the other.

By any reckoning, the coronavirus pandemic will deal a further blow to the already pummeled and feeble economy. No one is expecting a V shaped recovery anytime soon, at least not under the Buhari administration. The general assumption is one of a possible entré into a second economic recession in five years. According to Investment firm, CardinalStone, although previous fiscal assumptions were premised on expected Federal Account Allocation Committee (FAAC) disbursements of N888.5 billion monthly, actual FAAC allocations have underperformed projections so far this year, with March disbursement being around N580 billion and are expected to decline further to around N400 billion against N600 billion required to meet key obligations in coming months.

Minister of Finance, Budget and National Planning, Zainab Ahmed, last week warned Nigeria would have to take tough measures to stop the country from slipping into an economic recession as a result of the harmful impact of COVID-19 on the economy. She further warned with the massive plunge in the price of oil, arising from multiple shutdowns occasioned by the advent of COVID-19, which had distorted the basic assumptions of the 2020 Budget, the country would have to take bold steps to avert a recession.

"So, we need to do things that are very radical, and very bold and very different and maybe, even unusual so that we don't slip into a recession," she said.

Ahmed expressed worry at the state of the economy, which had been worsened by the free fall in the prices of oil, Nigeria's major foreign revenue earner.

"It worries me that our economy is in crisis," she told Arise TV, adding: "It worries me that when we did an assessment, our own assessment is that we could go into a recession in 2020 and the numbers we have from the NBS (National Bureau of Statistics) is a -3-4 and that is very disturbing. The multilateral institutions placed us on a much higher number."

And it is to the multilateral institutions that the country has had to recourse to for economic succour. Ahmed further announced last week Nigeria was seeking about $7.050 billion, an equivalent of N2.679 trillion, from multilateral financial institutions and the Nigeria Sovereign Investment Authority (NSIA) to mitigate the impact of COVID-19 on the economy. Of this amount, $3.4 billion is being sourced from the IMF, $2.5 billion from the World Bank and $1 billion from the African Development Bank (AfDB) as well as $150 million to be drawn from NSIA, bringing the total to $7.050 billion or N2.679 trillion at an exchange rate of N380/$.

Nigeria's drawdown request from the IMF is in line with a COVID-19-related provision that allows nations to draw down between 50.0%-100.0% of their contributions without facing the usual loan conditionalities of the IMF.

The International Monetary Fund Managing Director, Ms. Kristalina Georgieva, in a statement on April 7, 2020 acknowledged Nigeria's critical economic situation in response to the country's request for the fund's assistance and pledged swift response to country's request.

"Nigeria's economy is being threatened by the twin shocks of the COVID-19 pandemic and the associated sharp fall in international oil prices. President Buhari's administration is taking a number of measures aimed at containing the spread of the virus and its impact, including by swiftly releasing contingency funds to Nigeria's Centre for Disease Control and working on an economic stimulus package that will help provide relief for households and businesses impacted by the downturn.

"To support these efforts, Nigeria's government has requested financial assistance under the fund's Rapid Financing Instrument (RFI). This emergency financing would allow the government to address additional and urgent balance of payments needs and support policies that would make it possible to direct funds for priority health expenditures and protect the most vulnerable people and firms. We are working hard to respond to this request so that a proposal can be considered by the IMF's Executive Board as soon as possible."

The benefit of this move could come in form of a two to three years forbearance on interest payments on external loans across for the. As at December 2019, Nigeria had external debt of $27.7 billion and expended $1.3 billion in debt service. 24.7% of the debt service went to multilaterals like the World Bank and the AFDB.

Nigeria's former Finance Minister and former World Bank Managing Director, Dr. Ngozi Okonjo-Iweala, underscored the need for this respite when she recently told the BBC that countries in debt such as Nigeria need to apply for such relief to free up resources to battle COVID-19, noting if African countries get debt relief, the monies they should pay in servicing debts, which for Nigeria is N2.72 trillion in the 2020 budget could be channelled towards dealing with the COVID-19 driven economic emergency.

"You know we have several sources, you've got the African Development Bank, which has just floated a social bond for $3 billion that will be available to the countries on the continent," she said.

"You have the World Bank that has set aside $14 billion of which they've already committed $2 billion to 25 countries -- and 11 of them are Africans. Many of our countries need to move, to take advantage of this, and they are willing to commit $150 billion dollars over the next 15 months.

"It also has a $1 billion grant fund; catastrophe containment and relief trust, which they can approach. Let me mention my own organisation, GAVI, where I am chair of the board. We have made immediately available $200 million to $300 million grant."

"Once these monies become available, if the countries get debt relief, that means that the monies they would have been paying to service the debt they've taken from other countries; bilateral debts or from institutions, can now be used to procure food and supplied and support the livelihood of people in the rural and urban areas.

"Government can use these resources as part of an intervention fund to help people directly, and I think this is what they should be looking to do. But we need to move quickly, the debt relief we haven't got it yet.

"There needs to be a great deal of pressure on the G7, G20 to come forward with this measure and then countries need to start availing themselves of the already available resources, and then pressure for the debt relief."

The decision to seek the help of the IMF is not unprecedented. Nigeria has had a chequered history with the IMF. The fund has long been criticised by Nigerians for focusing on macroeconomic and related structural policies rather than a broad development agenda. In addition, the IMF has had to contend with widespread condemnations of exerting pressure on debtor economies by emphasising rectilinear prescriptions.

In 1986, Nigeria adopted an IMF prescribed Structural Adjustment Programme, SAP, that emphasised the restructuring and diversification the productive base of the economy, fiscal stability and positive balance of payments, reduction of the dominance of unproductive investments in the public sector and set the basis for a sustained non-inflationary or minimal inflationary growth. The programme according to Prof. Oyedeji Ademola of the University of Ibadan, "arose from pressure by Nigeria's external creditors to reach an accommodation with the World Bank and the Fund, but once the decision to undertake such a programme had been taken, it became largely 'home‐grown' and contained a number of heterodox elements, including a ban on imported foodstuffs. Other major elements were a shift to a market‐determined exchange rate, the winding‐up of the six government commodity marketing boards and the gradual elimination of administrative controls on overseas trade."

It was a largely discredited and widely resisted programme that led to popular protests across the country, resulting in deaths.

While there has been a history of significant opposition to the IMF and its influence on policy formulation in Nigeria in the past, this time however, many Nigerians might be glad to access the fund's assistance. The inconvenient truth is that the Muhammadu Buhari administration has no other place to turn to, to garner funds to create the much-needed space for both the federal and state governments to effectively and sufficiently deal with the economic impact of the coronavirus pandemic.

It might be pertinent however, to demand a reassurance from the federal government that the minister' statement that the IMF loans come with a conditionalities deficit remains true as prior attestations suggest that IMF-administered rescue programmes have worked countercyclically, resulting in a cobra effect.

The idea that Nigeria's problems are financial in nature rather than structural and political is likely a consequence of false diagnosis, thus diverting the government from the grave issues it needs to address which have little to do with the finances. For example, maintaining multiple foreign exchange regimes and subsiding the importation of petroleum products as the government does, only helps to steal billions of dollars of scarce foreign exchange from the economy

In addition, one of the fundamental influencers of the current economic predicament is a loss of investor confidence that has characterised the economy since President Muhammadu Buhari assumed office in May 2015. This is linked to other factors like policy uncertainty, social instability and mismanagement of public resources mixed with corruption. An IMF bailout will certainly not tackle these problems.

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