Nigeria’s Finance Minister, Kemi Adeosun, last week stated Nigeria would not need any assistance, particularly a loan from the International Monetary Fund (IMF) despite the challenges it is currently experiencing.
Adeosun, who spoke at a panel discussion on “Sub-Saharan Africa: Just a Rough Patch?”, noted that the kind of support it sought and received was a budget support in form of loans from the World Bank and African Development Bank and not a bailout from the International Monetary Fund.
According to her, the country’s economy is not sick and per adventure, it falls sick, the federal government has a ‘local remedy’ for the sickness.
There was no hint at that time however that Nigeria is seeking financial support from China.
China has offered Nigeria a $6 billion loan to fund infrastructure projects, the Minister of Foreign Affairs, Mr. Geoffrey Onyema, said last week in Beijing the Chinese capital.
The confirmation by Onyema coincided with an agreement reached between Nigeria and China on a currency swap deal, as it looks for ways to shore up the naira and fund a record budget deficit, possibly by issuing yuan-denominated bonds in China.
The Ministry of Finance responded swiftly to clarify that Nigeria is not close to bankruptcy, although the true state of Nigeria’s fiscal health is difficult to assess due to weak transparency and poor financial management in state owned companies and agencies.
Nigeria is facing its worst economic crisis in decades as sinking oil prices eat into its foreign reserves and the naira weakens against other currencies, thereby causing a cash crunch that has forced it to tighten spending.
The naira currency has also slumped and GDP growth stalled to under 3.0 per cent, while inflation is nudging 12 per cent.
Nigeria has been for months looking for sources to help plug a projected 2016 deficit of N2.2 trillion ($11.1 billion) as President Muhammadu Buhari plans to triple capital spending in the 2016 fiscal year.
Buhari has unveiled a 6.08-trillion-naira (about US$30-billion) budget, increasing investment on capital expenditure to stimulate growth and lower dependence on crude exports.
But oil prices have remained around $40 per barrel throughout the first quarter of the year, and are unlikely to increase dramatically any time soon.
It has therefore become increasingly urgent for the government to find alternative means of covering the fiscal deficit, making a deal with China more attractive.
The statement of the finance minister aligns with the position of the IMF managing director, Christine Lagarde. Lagarde had during her visit to Nigeria in January said given the determination and resilience of President Buhari’s administration, Nigeria had no reason to seek IMF loan.
This would not have been the first time that Nigeria turned to the IMF for assistance. In 1986, after the collapse of oil prices Nigeria went to the IMF for a stand-by arrangement to address short-term balance of payment problems. IMF assistance is seen as coming with too many conditions, and in government circles it is believed that with China’s help, Nigeria did not need IMF support.
The instrument most likely to have been used this time around is an Extended Fund Facility (EFF), designed to support middle income countries with significant medium-term balance of payment issues. As such it is better placed to assist Angola with its stated objective of economic diversification.
Nigeria graduated to the largest economy in Africa in 2014, an achievement driven by the oil boom it has experienced over the past decades, which makes it ineligible for the concessional financing (loans at discounted interest rates) reserved for lower income countries. Instead, an IMF loan will be charged at market-based interest rates. This removes a compelling argument for seeking assistance from the IMF as Nigeria’s debt sustainability indicators are deteriorating and might struggle to maintain its status as a middle-income country.
But an IMF arrangement would represent a unique opportunity for Nigeria to obtain financing and address some of the deeper structural issues affecting its economy at the same time. Chief among these is the need for greater transparency and accountability in state-owned enterprises (including but not limited to NNPC, the state oil company). We know from crises elsewhere that a lack of transparency leads to significant fiscal risks, notably hidden liabilities that can make a debt burden become unsustainable overnight. State-owned enterprises should publish audited annual financial statements and be brought under increased parliamentary oversight.
Other reform areas will need to be considered too. A coordinated strategy with the African Development Bank, the World Bank and other stakeholders would increase the chances of success. Recent reports indicate that there is significant scope for improvement in public investment management, particularly by reducing the temptation for corruption through better procurement processes and oversight.
As the Nigerian government tightens its fiscal belt, it’s also important that social expenditure (both recurrent spending and public investments) such as health and education are safeguarded.
An IMF deal (rather than a deal with China) will not turn around Nigeria’s economic fortunes on its own. It will provide some financial assistance but more importantly it could encourage reform. Success though depends on genuine Nigerian government appetite to embrace deep structural changes rather than short-term measures designed to increase liquidity until oil prices strengthen. What Nigeria’s leaders still need to fully appreciate is that the era of high oil prices may never return and that the old ways of doing business must change.
ABOVE PHOTO: WASHINGTON, DC – APRIL 01: Chinese President Xi Jinping (R) greets President of Nigeria Muhammadu Buhari (L) during a plenary session of the 2016 Nuclear Security Summit April 1, 2016 in Washington, DC.
[A Nigerian Perspective on World Affairs]