IMF's suggestions on economic development
The recent report of the International Monetary Fund (IMF) on (second review under the Policy Support Instrument) has exposed some structural defects in the economy, both at the public and the private sector, which government must address in order to move the nation forward.
Some of these defects include the expansionary government spending this year, the crisis in the Niger Delta region, data inconsistencies in the banking industry including the Central Bank of Nigeria, the fiscal responsibility bill to check excessive spending by the executive arm of government at all levels, the foreign exchange management and poor infrastructure in the country.
IMF said there is nothing wrong in the authorities' request to modify the 2006 fiscal program and to accommodate higher infrastructure spending in priority areas in the 2007 program since capital spending is needed to reduce the infrastructure bottlenecks that hamper medium-term growth prospects. Given 's increased oil wealth, higher infrastructure spending will buttress private sector activity and reduce poverty. Moreover, restoring stability in the Niger Delta through increased infrastructure spending will be key to achieving favorable growth and boosting revenues.
However, carefully managing the macroeconomic impact of government spending will be
a challenge for the authorities stressing that while much of the planned infrastructure spending will have a high import content, the domestic component of the spending could give rise to inflationary pressures, a risk that the Central Bank of Nigeria (CBN) must manage by allowing adequate exchange rate and interest rate flexibility.
Again, it affirmed that the apex bank must advance initiatives to improve liquidity management and the quality of monetary statistics. To manage liquidity injections resulting from the fiscal stance, the authorities plan to strengthen macroeconomic policy coordination. A liquidity assessment group comprising technical staff of the CBN, the Ministry of Finance, and other relevant agencies is being formed. This, together with the newly produced daily balance sheets, will enable the CBN to prepare more reliable short-term liquidity forecasts, and thus react quickly to inflationary pressures. It stressed that steps to establish the technical interagency liquidity assessment group are encouraging adding that through frequent meetings, CBN should be able to react quickly to liquidity pressures. Furthermore, implementation of the new policy interest rate using a standing facility should limit interest rate volatility and liquidity swings. More generally, policy implementation would be enhanced by strengthening monetary statistics.
It was also suggested that pre-election and post-election spending that endangers macroeconomic stability must be avoided. "By passing a 2007 budget built on a conservative reference oil price and consistent with the government's proposed budget, the National Assembly could mitigate such spending pressures. Similarly, a new administration needs to pursue its national priorities within the agreed fiscal envelope while large-scale extra-budgetary projects need to be executed in line with macroeconomic stability, and the carryover of capital spending from one year to the next should be eliminated", IMF said adding that the ability of the authorities to keep spending within program targets is the main program risk. The authorities should redouble their efforts to enhance spending quality.
Aside this, it states that further strengthening of public financial management is essential, given the high levels of capital spending, and the weak starting point. All investment projects should be based on cost-benefit analysis and include a full assessment of obligations (a practice not yet fully employed within the government). Complex contractual and financing arrangements that protect private partners and shift market-related risks to the government should be discouraged. "Eliminating the fuel subsidy in the medium-term would improve resource allocation while establishing and implementing guidelines on the use of oil savings will be key to ensure value for money from infrastructure spending and prevent inappropriate use of funds", the fund advised.
On the external debt management, IMF recommends the development of a long-term debt- and asset management strategy, which would help safeguard national wealth. A comprehensive debt management framework would help prevent unsustainable debt accumulation while non-concessional borrowing should be avoided. Regarding the management of international reserves, IMF said the CBN needs to ensure that the new regulations, which allow international banks and investment institutions to manage a portion of official reserves in collaboration with domestic banks, do not lead to an erosion of 's wealth.
On the need to consolidate past economic gains, the IMF said institutionalizing recent government reforms implemented over the past few years is critical. It agreed that the priority the government has assigned to the passage of key economic legislation. Approval of key bills submitted by the government such as the Fiscal Responsibility Bill, the Public Procurement Bill, the Tax Reform Bills and the NEITI Bill would help secure past gains. "A strong Fiscal Responsibility Bill is also important for preserving macroeconomic stability. The National Assembly's approval of the Banking and Other Financial Institutions Bill would help provide a resolution of deposits in failed banks and complete the restructuring of the banking sector", IMF said.
IMF noted that the quality of monetary data remains weak. For example, it states that the consolidation of 89 banks to 25, and the transition to new software for central bank accounting and data transmission has given rise to challenges in compiling monetary statistics. IMF informed that though, the CBN has been working to resolve data inconsistencies, including on international reserves, however, the value of net foreign assets of the CBN could be lower by US$4 billion, which would also imply a lower forward-looking NFA path. The CBN has established a committee to address these issues, and an MCM technical expert is providing support but IMF said the authorities should monitor closely risks in the newly-consolidated banking sector.
On the asset side, the fund said the CBN should develop a clear strategy for managing international reserves. New regulations allow domestic banks to partner with international banks and investment institutions to manage a portion of official reserves. Full legal liability rests with the international banks, which are required to have an "A" credit rating from two of the three major international rating agencies. Currently, 14 domestic banks have been identified as potential partners and are expected to develop their operational capacity through their partnerships with international banks.
Again, it advises that CBN should increase foreign exchange sales to encourage private sector imports and increase exchange rate flexibility to reinforce efforts to dampen inflationary pressures stressing that the real appreciation (stemming from the domestic component of public spending) should lead to a widening of the non-oil current account deficit and greater private sector imports; this real transfer of resources should in turn help boost productivity and growth. Foreign exchange sales, executed through the Wholesale Dutch Auction (WDAS) system, should increase by US$4 billion in 2007.
It also affirmed that the authorities' pursuit of an ambitious structural agenda ahead of elections is commendable. Right-sizing additional ministries, restructuring parastatals and the customs service, and efforts to build the skills and capacity of the civil service are important and will help sustain reforms because privatization should improve the provision of commercial services, support private sector growth, and allow the government to focus on its core mandate.
The IMF observed that 's reform program has laid the groundwork for a significant break from the past. For example, the reforms, which are based on the National Economic Empowerment and Development Strategy (NEEDS), have resulted in several positive outcomes, including: Faster economic growth as per capita income has doubled in the last five years compared with the previous two decades; Improved macroeconomic indicators as headline inflation has declined to single digit in 2006, and the parallel and official exchange rates converged, reflecting the unification of foreign exchange markets.
Also, it noted that there was a stronger external position as reserves rose to US$41½ billion in October 2006 from just US$7 billion in 2003, despite the repayment of US$12½ billion to Paris Club creditors while the ratio of external debt to gross domestic product is projected to fall to only three percent at December, 2006, compared with an average of more than 60 percent in the 1990s, reflecting also the repayment of a portion of London Club debt in November 2006.
Another serious challenges mentioned by IMF is in the area of transmitting the benefits of the government's reforms to ordinary Nigerians. It stressed that the government is keen to emphasize those areas of economic activity that will enable the benefits of the economic reforms to reach the Nigerian public, in the form of delivering the MDG targets (as also captured under the NEEDS program), poverty reduction, wealth creation, employment generation among others.
It said that this will entail greater investment in physical and human infrastructure (education and health), productive activities, and a more vigorous pursuit of the indigenous participation agenda. This will enable the private sector to play the lead role as engine of growth. In this context, the Government is targeting an annual real GDP growth rate of about 7-10 percent (it is estimated that a 7 percent growth rate is needed in order to achieve the objectives of NEEDS). Current estimates indicate that there is a financing gap of about $4 billion per annum if is to meet the NEEDS and Millennium Development Goal objectives.