Can the Economy Meet IMF’s Growth Projection?

The International Monetary Fund says that it expects Nigeria’s economy to grow by a very modest 2.5 per cent this year. Against the backdrop of many social, political and economic ills belabouring the country, as well as the persistent lack of growth over the past five years, Nosa James-Igbinadolor wonders if this projection can be met

In a report released last week, the International Monetary Fund (IMF), raised Nigeria’s growth forecast for 2021 to 2.5 percent from 1.5 per cent earlier announced in January.

The diffidently hopeful projections from the global financial institution comes against the backdrop of negative economic growth, contractions, depression and recession that have scarred the Nigerian economy over the past five years.

The IMF report noted that the future for the global economy “presents daunting challenges. The pandemic is yet to be defeated and virus cases are accelerating in many countries. Recoveries are also diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.”

Adding that, “these divergent recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations…Uneven recoveries are also occurring within countries as young and lower-skilled workers remain more heavily affected.”

The report urged for swift policy action, warning that, “policymakers will need to continue supporting their economies while dealing with more limited policy space and higher debt levels than prior to the pandemic. This requires better-targeted measures to leave space for prolonged support if needed. With multi-speed recoveries, a tailored approach is necessary, with policies well-calibrated to the stage of the pandemic, the strength of the economic recovery, and the structural characteristics of individual countries.”

And this is where it gets a lot disquieting for Nigeria. For an economy pounded by a gravelly mishmash of extremely bad macroeconomic and monetary policies, persistent contractions in GDP, reduced earnings from oil and gas, and a generally poor political economy environment that has been triggered by poor socio-political governance from the centre, it is more likely that the projections from the IMF is unduly optimistic.

Nigeria’s export structure has not fundamentally changed over the decades, with hydrocarbon products still accounting for 90 percent of the country’s exports today as they did in the 1970s. Successful economic diversification requires trade openness and competitive discipline. “The experience of Malaysia, Indonesia, and to some extent India has shown that a shift toward export-oriented industrialization can boost GDP. The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course. To accommodate a growing number of young people entering the labour market, Nigeria will need to create at least 5 million new jobs each year over the next decade”, an IMF report noted in February.

A horizontal analysis of the growth rate of the Nigerian economy since the second quarter of 2015 shows a -1.62 percent growth in 2016, 0.81 percent growth in 2017, 1.92 percent, 2.21 percent and -4.28 percent growth in 2018, 2019 and 2020 respectively.

In spite of the cautiously positive outlook from the IMF, the reality is that the Nigerian economy remains brittle; troubled by uncertainties around global oil price path and local production capabilities, rising inflation, a horrifying and ‘immoral’ rate of unemployment, unprecedented security challenges and social tensions largely allowed to incubate and fester by the actions and inactions of the Nigerian government.

More troubling for the Nigerian economy is the distasteful policy environment that have helped to spur the headwinds pushing against economic growth.

“It is essential,” the IMF warned in its report, “that progress is made on resolving trade and technology tensions.”

In February, the Central Bank of Nigeria (CBN) banned banks and financial institutions from facilitating payments for cryptocurrency exchanges and ordered that they needed to identify and close accounts associated with them. This further prompted the Securities Exchange Commission, SEC, to put on hold its plans to formalize cryptocurrencies as securities under its sphere of activity.

According to Buy Coins, one of Nigeria’s largest cryptocurrency exchanges, the crypto market had expanded so much that the volume of Bitcoin traded monthly is estimated at $200mn.

The decision by the CBN to put a halt to crypto trading likely added to the already expansive pessimism of current and likely domestic and foreign investors who were already cynical about the uncertain policy environment. The related effect could likely be an increase in capital outflows, which is risky for the naira and economic growth.

A report by a financial information outfit ‘Proshare’ warned in the aftermath of the ban, that “the recent ban on cryptocurrency transactions could taper investment flows into the country as global investors are beginning to heavily eye the cryptocurrency space. Just recently, Jay Z and Jack Dorsey (Twitter Founder) announced a $23.6mn investment to fund Bitcoin development in Africa. In addition, there is a fast-growing interest from Wall Street and the big players in the financial industry, such as JP Morgan and Morgan Stanley. This signals a huge potential for the crypto market in the coming years. There are high expectations of reduced volatility as investors could begin to increase cryptocurrency investments in emerging markets. This is good news but with the largest consuming market in Africa banning cryptocurrency transactions, this could limit potential investment in-flows that would boost economic growth…

“The fast expansion of the Nigerian crypto market has created numerous jobs especially for the youths. The ban will affect individual home-based traders and these traders often have employees of their own. Stopping the operations of the emerging crypto market means more job loss, and this could trigger a faster increase in the rate of unemployment.”

Another extremely unpleasant policy decision taken by the federal government that would likely negatively affect the economy in the short to long term is the uneconomically sound decision to commit a whooping 1.5 billion USD (575 billion Naira) for the rehabilitation of the 32 year old Port-Harcourt refinery.

The decision itself comes on the heels of the Federal Government’s proposal to sell or concession no fewer than 36 of its properties in the bid to raise funds to finance the 2021 budget. Top among these properties are the three refineries in Kaduna, Warri, and Port Harcourt, among others.

As noted in a recent report by a national daily, “Nigeria has spent about 25 billion USD in turnaround maintenance of refineries in the past 25 years, the prevailing development is coming after promises by the administration that the government would no longer spend on the facility. Previous rehabilitations notwithstanding, the Nigerian National Petroleum Corporation (NNPC) audit report had last year revealed that three of the nation’s four refineries recorded 1.64 trillion Naira cumulative losses in their 2014 to 2018 details.”

The sordidness of the decision by the NNPC to rehabilitate a refinery it has no capacity of efficiently running was well defined by former Vice-President Atiku Abubakar when he described the decision as “suspicious” and wondering if there was a public tender before the cost was announced, or if any due diligence was performed.

According to the former Vice-President and Businessman, “we cannot as a nation expect to make economic progress if we continue to fund inefficiency, and we are going too deep into the debt trap for unnecessarily overpriced projects.

“Our national debt has grown from 12 trillion Naira in 2015 to 32.9 trillion Naira today. Surely that is shocking enough to cause us to be more prudent in the way we commit future generations into the bondage of bonds and debt.”

Economist and former Stanbic IBTC Bank Chairman, Atedo Peterside had also urged the federal government to put a stop to the “1.5 billion USD approval for repair of Port Harcourt refinery and subject this brazen & expensive adventure to an informed national debate”.

He most likely spoke the mind of most Nigerians when he assessed that, “many experts prefer that this refinery is sold “as is” by BPE to core-investors with proven capacity to repair it with their own funds.”

These decisions as well as many others taken by the Buhari administration leaves many experts aghast at the rational route to meeting an ultra-modest 2.5 percent economic growth rate predicted by the IMF. The reality is that a growth rate of 2.5 percent will not do much to accelerate the more than needed ‘economic rearmament’ that Nigeria so much needs.

For that small and then ultimately strong growth to take place in the Nigerian macroeconomic landscape, the advice by the IMF that policymakers should also continue to ensure adequate access to international liquidity and that major central banks should provide clear guidance on future actions with ample time to prepare, to avoid “taper-tantrum” kinds of episodes as occurred in 2013 needs to be well heeded by the CBN.

The current system of multiple exchange rates as adopted and implemented by the Nigerian Central Bank creates uncertainties for the private sector because of multiple exchange rates and non-transparent rules for foreign exchange allocation. As noted by a report by the Fund in February, “unifying the various rates into one market-clearing rate would establish policy credibility. Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment in the exchange rate to reduce the gap between supply and demand. An appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sector-led recovery. Policy clarity is also important to attract larger capital inflows, including foreign direct investments, which have dropped significantly in recent years and successful diversification.”

As the Nigerian government remains largely clueless on how to engender a private sector led growth of the economy especially in manufacturing, the expectation and hope in government circles is for a rebound in the global price of crude to ignite growth.

Absent a dramatic rise in international oil prices, economic activity in 2021 would obviously remain dampened by low oil prices, falling public investment due to weak government revenues, constrained private investment due to firm failures, and subdued foreign investor confidence. Moreover, private consumption prospects will likely be weighed down by lost incomes and higher precautionary saving among nonpoor households, as well as lower remittances and the depletion of savings among poor and unemployed households amid inadequate social safety nets. In addition, pre-existing structural constraints, such as persistent power-supply disruptions, are expected to remain inelastic.

One way the Nigerian government could have expanded growth to meet the IMF forecast, was to raise more revenues to ensure a sustainable fiscal position. Nigeria has one of the lowest revenue levels as a share of GDP worldwide. A large share of revenues is spent on the country’s public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.

Therefore, mobilizing revenues through efficiency-enhancing and progressive measures is a top near-term priority. Revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.

However, the parlous state of the economy and the attendant unconscionable level of unemployment has put at risk the capability of the government to raise revenues from personal and company income tax as well as from VAT.

Equally important for the economy to grow and thrive is the need to ensure transparency in the financial management process at the federal, state and local government levels. The state of corruption in Nigeria is leviathan in scope and character. Despite the Buhari administration’s platitudes and shibboleths about fighting corruption, the data is clear; Corruption remains widespread and burgeoning.

At the end of the day, it is easy for rational watchers of the Nigerian economy to reach an unambiguous conclusion that the economic mandarins of this government do not possess the capacity to drive economic growth. Policies matter, and the attempts at policy making has so far been atrocious. A far cry from 1999 to 2015. What the government is obviously hoping for to meet the IMF projections is simply an astronomical rise in crude prices. An economy whose policy makers are content to depend on simply hoping for a rise in natural resource prices in the global market so as to collect rent at the end of every month, is an economy obviously wallowing in peril.

Nigeria needs more than 2.5 percent growth rate just to return the over 30 million jobs lost in five years to its pre-2015 state. Sadly, the Buhari administration has no wand to wave to make this happen. The president and his economic team have been very incompetent stewards of the Nigerian economy. It is going to be a few more years of sorrow, tears and pain. Just a few more years hopefully.