Some economic experts have said that the current economic policy insufficient to boost growth. This reaction came on the hind of the International Monetary Fund (IMF) report on Nigeria’s economy last week. Afrinvest in its analysts review said; “The report is largely consistent with our views on the direction of the economy and the need for structural reforms to boost growth and investment.
Analysts said they discovered IMF increasing focus on human capital, similar to the World Bank’s last Bi-Annual update on Nigeria in October 2018. Investment in human resources is at its lowest as Nigeria continues to losing best brains to advanced economies around the world.
Afrinvest reckons that this is welcome, considering the latest focus on physical infrastructure improvement by the President Buhari’s administration. Without human capital development, Nigeria’s growth ambitions would be difficult to realize. Other areas of interest include fiscal policy management, monetary policy and exchange rate management and structural reforms. In each of these areas, we highlight key policy priorities for the Nigerian economy over the next four years and the changes proposed by the Fund.
“There is need for policies convergence between monetary and fiscal authorities angle to ensure overall, albeit inclusive growth. There is a need to get to the point where these two policies forces have to rest on equilibrium point for the benefit of the nation. As it is, there seems that utopian relationship except the policies authorities have different goals they are pursuing”, Jide Famondun, Senior Consultant at LSintelligence said.
Economic growth is forecast to remain broadly unchanged over the medium-term. 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.
“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”, Afrinvest said.
“The Fund expects inflation to remain sticky and above the Central bank of Nigeria’s (CBN) target of 6-9.0%, at an annual average of 11.4% between 2019 and 2023. In our view, major downside risks to inflation in the form of delayed electricity and fuel price adjustments would push this significantly higher. As government’s fiscal condition tightens, there is a high chance that these adjustments would materialize”.
On fiscal policy, the Fund recommends increasing non-oil revenue and better efficiency in expenditure. This is underscored by the fact that FG’s deficit to gross domestic products (GDP) reached 4.0% in 2018, above the fiscal responsibility threshold of 3.5%.
According to Afrinvest; “We note that all revenue targets underperformed in 2018, while debt service to revenue and recurrent expenditure to revenue remained elevated. The implication of this is reduced scope for spending on health and education which should be priority but are one of the lowest in the world. Without improved revenue collection given increased minimum wage and payroll expenditure, spending on health and education could be further restricted”.
To boost revenue collection, the Fund suggested a set of measures. Some of the suggestions include increasing value added tax (VAT) rate and compliance, removal of customs duty waivers and closing loopholes and exemptions on company income tax (CIT) and Education tax. We note that an increase in VAT would be contentious and suggest that the removal of fuel subsidy should be a priority before tax increases are considered.
“On monetary and exchange rate policies, we find the suggestions of the Fund insightful. The main proposal is the need for convergence and flexibility of exchange rates, and better transparency of policies. The advocacy for a single exchange rate is consistent with our view as it helps to remove inefficiencies and increase revenue collection”, the analysts remarked.
In furtherance to the review, analysts said that the stability of the monetary policy rate (MPR) and cash reserve ratio (CRR) despite tight liquidity suggests that other tools have been prioritized. On this, the Fund suggests the re-introduction of MPR as the anchor rate. Although the CBN adjusted the MPR lower by 50 basis points to 13.5% in March 2019, the reduction is too marginal to mark a shift and it is too early to suggest that it signals a change since the CBN offered no guidance.
Also on transparency, the Fund proposed better communication of policies through the monetary policy committee (MPC) communiqué and an end to the practice of unannounced open market operations (OMO) which affects liquidity operations of banks. Considering the aggressive development financing of the power and agriculture sectors by the CBN, the Fund urged the FG to undertake such investments and to cost and budget them properly.
Meanwhile, on structural reforms, the proposal of the Fund slightly aligns with FG’s plans as outlined in the economic recovery and growth plan (ERGP). Structural reforms are required for better economic diversification and to reduce the impact of energy shocks on the economy. The suggested reforms include strengthening the business environment, increasing public investment efficiency on health and education, accelerating the Power Sector Recovery Plan (PSRP) and strengthening governance and anti-corruption initiatives.
