Tag International Monetary Fund

Inflation: IMF urges CBN to raise interest rate

The International Monetary Fund has urged the Central Bank of Nigeria to hike the interest rates in the next Monetary Policy Committee to address the country’s high inflation rate.

The agency’s Director of the Communications Department, Julie Kozack, disclosed this during a press conference held on Thursday. The transcripts of the conference were published on the IMF website on Saturday.

Koszack noted that the CBN’s policy of mopping up excess liquidity from the system has contributed to the growing inflation in the country.

“You asked a specific question on inflation. Inflation in Nigeria is running very high. It reached over 27 per cent in October, that is the year-on-year number.

“The Central bank, under its new leadership, has started to withdraw excess liquidity that was in the system and contributing to high inflation.

“The next Monetary Policy Committee meeting should further raise the policy interest rate. So, the Central bank is taking action to try to address the high inflation problem. As we mentioned in our Article IV Consultation, which was held in February of 2023, raising revenue from the very current low revenue-to-GDP ratio of 9 percent is essential to create fiscal space for social and development spending. 9 percent of GDP is a very low revenue to GDP ratio, and it is really not high enough to be able to support strong social safety nets, and development spending, to help protect vulnerable households and also to meet Nigeria’s development needs,” she said

She also commented on the 2024 budget, stating that it “aims to reduce the fiscal deficit while also creating space for these priority spendings, both on the social side and also on the development side.”

(Punch)

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IMF warns African countries over economic ties with China as Nigeria’s Chinese debt rises to $4.73bn

The International Monetary Fund (IMF) has cautioned Nigeria and other Sub-Saharan African countries over the risks of close economic ties with China.

The warning, issued in the latest IMF Regional Economic Outlook on Sub-Saharan Africa, is coming amid reports that Nigeria’s debt to China had risen to $4.73 billion as of June 30, 2023.

Data on Nigeria’s external debt profile from the Debt Management Office (DMO) showed that the country’s debt to China increased by $800 million in one year, from $3.93 billion as of June 30, 2022, to $4.73 billion as of June 30, 2023.

The debt involves concessionary loans that the Nigerian government obtained to finance the execution of infrastructural projects ranging from power generation, railways, water supply, airport terminals, agricultural processing and communication.

Projects being executed with Chinese loans include the Nigerian National Public Security Communication System project, Wu-Kaduna section of the railway modernisation project, Abuja light rail project, Nigerian Information and Communication Technology infrastructure backbone project, Abuja, Lagos, Kano and Rivers airport terminals’ expansion project, Zungeru hydroelectric power project, 40-parboiled rice processing plants project, Lagos–Ibadan section of the railway modernisation project, and rehabilitation/upgrading of the Abuja-Keffi-Markurdi road project.

The first Chinese loan, a sum of $200 million agreed on in 2006 to finance the Nigerian Communications Satellite project, has been cleared by the Federal Government with additional payment of $40.02 million interest.

Nigeria’s rising indebtedness to China underscores the close economic ties between both countries. According to an article by Cui Jianchun, Chinese Ambassador to Nigeria, posted on the website of the Ministry of Foreign Affairs of the People’s Republic of China, from 2016 to 2021, bilateral trade between Nigeria and China increased by nearly 142 per cent.

The Chinese ambassador added that in the first ten months of 2022, the bilateral trade volume reached $20.04 billion. Currently, Nigeria is China’s third largest trading partner in Africa, and China is Nigeria’s largest source of imports.

However, in its latest Regional Economic Outlook, released in October 2023, the IMF warned that Nigeria and other Sub-Saharan African countries are exposed to vulnerabilities due to their close economic ties with China.

In ‘Analytical Notes’ on the Regional Economic Outlook: Sub-Saharan Africa, titled, ‘At a Crossroads: Sub-Saharan Africa’s Economic Relations with China’, the IMF noted that Sub-Saharan African countries have forged broadly beneficial economic ties with China over the last two decades, adding that China has become the region’s largest trading partner, a major credit provider, and a significant source of foreign direct investment.

But the IMF warned that dangers lie ahead, noting that the recent slowdown in economic growth in China will have adverse effects on trading partners in Sub-Saharan Africa, including Nigeria.

The IMF noted: “However, China’s support to Africa has also faced some criticisms. Recently, China has retrenched its financing activities in sub-Saharan Africa amid a growth slowdown and reduced risk appetite. The projected future deceleration in China’s growth is likely to affect African trading partners negatively over the medium term, mainly through reduced trade.”

The IMF further observed that funding for infrastructural projects will take a hit if the slowdown in economic growth forces China to pull back from its commitments to Sub-Saharan African countries.

The danger is that China is currently the major source of funding for infrastructural projects in African countries, including Nigeria.

According to the IMF, “China has also become a major funding source for African governments since the early 2000s after initiating its official “go out” policy. Chinese loans — mostly directed at financing public infrastructure projects — have risen rapidly in the region in the late 2000s. Consequently, China’s share of total sub-Saharan African external public debt rose from less than 2 percent before 2005 to about 17 percent in 2021.

“This has provided African countries with a new source of infrastructure financing, and China is now the largest bilateral official lender to countries in the region.”

Five countries – Angola, Kenya, Zambia, Cameroon and Nigeria – account for 55 per cent of official Sub-Saharan African debt to China, according to the IMF.

The IMF also observed that there is a correlation between the prevalence of bilateral trade and lending disbursement between China and Sub-Saharan African countries – implying that that African countries that engage in higher volumes of trade with China receive more loans from the Chinese government.

Apart from the surge in Chinese loans to Sub-Saharan African countries, the IMF noted that China’s Foreign Direct Investment, FDI, to Sub-Saharan Africa increased significantly since 2006, reaching about 23 per cent of annual FDI inflows (or $3 billion) to the region in 2021.

But, according to the IMF, warning signs emerged in China’s economic ties with Sub-Saharan African countries when, during the 2021 China-Africa Cooperation Forum, China announced its first cutback in financial support to Africa, from $60 billion to $40 billion over three years. The reduction was linked to China shifting away from direct infrastructure financing toward more trade credit, a development that was believed to have been informed by many African countries’ increased debt vulnerabilities.

The IMF further observed that Chinese lending to Sub-Saharan Africa has drawn considerable criticism over imposition of relatively harsh terms on debtors and using natural resources as collateral.

“Other concerns include the lack of standardization and transparency in public debt because Chinese lenders do not systematically document loans to individual overseas borrowers, leading to significant data gaps,” the IMF added.

The Nigerian government had repeatedly assured that loans obtained from China came with very lenient terms.

But in 2020, there were concerns that the controversial ‘waiving sovereignty’

clause in the commercial loan agreement signed between Nigeria and Export-Import Bank of China ceded part of Nigeria’s sovereignty to China.

However, then Minister of Transportation Rotimi Amaechi explained that the clause did not cede sovereignty in the technical sense but provided some relief to enable China to take over Nigerian assets for loan recovery if and when necessary.

According to the IMF, Sub-Saharan African countries that are either in debt distress or at high risk of debt distress account for about 40 per cent of the total public debt stock to China at the end of 2020. The prevailing situation in those countries had thrown up the need for debt restructuring. However, the IMF noted that debt restructuring negotiations for some countries have been slow and challenging.

Noting that China is currently experiencing a decline in economic growth, the IMF warned that Sub-Saharan Africa could face spillovers from China’s continued slowdown.

“China’s growth has declined even further since the pandemic, and the latest IMF projections show average annual growth of only about 4 percent in the next five years, with notable trends toward reduced investment and greener technologies.

“Given the deep economic ties, a further slowdown in China’s growth in the medium to long-term is likely to affect economic activity negatively in Sub-Saharan Africa,” the IMF said in its latest Regional Economic Outlook. It added that negative spillovers would emerge primarily from trade links, in the form of decline in export volumes and commodity prices.

To avert the danger, the IMF advised that Sub-Saharan African countries should adapt to evolving economic ties. “Sub-Saharan Africa has benefited from China’s growth take-off, but the region needs to adapt to China’s slowdown and declining economic engagements.”

To adapt to the situation, and ultimately escape the dangers posed by the Chinese slowdown, the IMF advised Sub-Saharan African countries to increase regional trade integration, strengthen policy frameworks to reduce macro-economic vulnerabilities and external reliance, promote economic diversification, and undertake reforms to create favourable business environments.

However, some economists and financial analysts, who spoke with DAILY POST, said Nigeria is not at risk over economic ties with China.

Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise, CPPE, said Nigeria has nothing to worry about concerning the reported economic slowdown in China.

“I don’t think it is something Nigeria should worry about. I don’t think the challenge the Chinese economy is facing is that grave. I don’t think it has reached a level we have to worry about,” Yusuf said in a telephone interview with DAILY POST.

“Secondly, if you have trade relations with someone, if the economy is slowing down, the risk you face is very low. If things are not working out with them you can always find another trading partner. I don’t think the risk Nigeria face is that high, even if their (China) economy is slowing down. But I don’t think the Chinese economy is facing any major problem.”

Yusuf noted that what Nigeria should worry about is the country’s rising debt level and the attendant high cost of debt servicing. “If there is any alarm concerning China, I think such alarm is disproportionate,” he added.

Ayo Teriba, Chief Executive Officer, Economic Associates, EA, argued that the IMF warning is a distraction as Nigeria has a lot of internal economic issues it should be worried about.

“Nigeria has more than enough to be worried about at home. Chinese economic outlook is the least of the problems of Nigeria. Nigeria has its own baggage and should prioritize addressing its own baggage rather than the marginal effects that the outlook of China may or may not have on Nigeria,” he said.

Teriba also observed that IMF forecasts are not always stable.

“You cannot swear on IMF forecasts. They will do a forecast today and revise it tomorrow. They release forecasts and revise them several times before the year runs out. So if you begin to tell Nigeria to start worrying about IMF forecast on China, you will be distracting Nigeria from addressing non-forecast problems that Nigeria has.”

According to him, “the problems Nigeria has to deal with are factual, they are not forecasts”.

“We have problems of foreign exchange to deal with, we have matters of fiscal to deal with, and we have matters of systemic liquidity and market liquidity to deal with. They are here in the present, it is not about next year forecast. Let’s not shift our attention, charity begins at home,” Teriba stressed.

(Daily Post)

Inflation: Protect poor people from high energy prices, IMF tells FG

The International Monetary Fund, IMF, has called on the Federal Government to focus spending on protecting poor people from the inflationary impact of high energy prices.

Briefing the media at the backdrop of the Fiscal Monitor report released by the Fund at the ongoing World Bank/IMF Annual Meetings in Marrakesh, Morocco, yesterday, the Assistant Director, IMF’s Fiscal Affairs Department, Era Dabla-Norris, commending the FG for the removal of the fuel subsidy, however, said the reform must be complemented with smart policies that focus on spendings to protect vulnerable groups from impact of high energy prices.

According to her, to further curtail the inflationary effect of the fuel subsidy removal, there must be a suite of other macroeconomic policies that will help to bring inflation down, including leveraging the country’s untapped tax potential to increase revenue collections and debt service spendings.

Protecting poor people

Speaking on the need for FG to focus spending on protecting the poor, Dabla-Norris said: “When we talk about smart policies, we are really referring to policies that make room in the budget for protecting priority spending. And that is really education, health care, and targeting these policies better to protect the most vulnerable groups.

“Take removal of fuel subsidies, and I think that fuel subsidy reform was an important reform Nigeria undertook, the costs to the budget of having these broad base removal of fuel subsidies is quite significant.

“By reducing fuel subsidies the government has freed up space for other types of spending. The important thing is to be able to protect the most vulnerable group from higher energy prices. So from that perspective, this policy creates space, a portion of the revenues, it can be unpopular, it can be a challenging policy, and I think it was the right one, it was the right decision to make at that time. Now the key is to be able to target better, because most of these policies don’t benefit low income groups. Across the world we’ve seen that fuel subsidies tend to benefit middle or higher income groups. So the key thing is to prioritize this towards the most vulnerable.”

Curtailing inflation

“The first is to protect the most vulnerable from the cost of living. And there are a number of targeted programs that can be ramped up and the poor, the really vulnerable populations are protected.

“A suite of other policies, macroeconomic policies are needed to bring in to durably bring inflation down. In the case of Nigeria, the revenue to GDP ratio is quite low relative to other emerging markets and developing countries. So efforts will need to be made to increase revenue collection in an efficient manner. Our research shows that countries like Nigeria have large untapped tax potential.

“This is not something that can be done magically overnight, but definitely over the medium term. Expanding tax bases, reducing exemptions in value added tax, reducing tax expenditures, rationalizing other types of taxes, strengthening the quality of your tax institutions, these are all steps that can be taken to effectively mobilize revenues in a progressive manner, and then channel that for priority spending, having appropriate monetary policies in place. Doing away with any kind of central bank financing of the budget and ensuring that policies are working in the same direction to bring inflation down is really the issue.”

Reducing debt service

“The most important thing would be durable revenue collections because revenue collections are very low in Nigeria relative to other peer countries. And this is widely recognized by the government. So that’s one thing. The second important component would be to rationalize expenditures, to see what are the priority spending, can spending be cut or reprioritized, this would be another very important thing to do.

“And finally, invigorating growth; Nigeria has tremendous growth potential. It is one of the largest economies in Africa. It has tremendous potential for growth. So the kind of structural reforms that are needed, governance, business climate reforms that are needed to catalyze private investment and to durably grow, that would be another important way of bringing debt down.”

Many analysts and financial experts who spoke to Vanguard expressed divergent opinions on the IMF’s recommendations.

 We need to reform energy sector- Kurfi

Commenting on the IMF’s position, Mallam Garba Kurfi, Analyst and CEO, APT Securities & Funds Limited, said: “Yes we need to reform Nigeria’s energy sector particularly the oil sector. We need to go back to days when our crude production can reach two million barrel per day in order to generate more foreign exchange to meet our local demand. The same with power in order to promote small scale entrepreneurs.

“As regard smart policies it is all about implementation.  The palliatives policy of N35, 000.00 to FGN staff, if it can be extended to states, will be welcome. Also the distribution of N25,000.00 to low level workers for a period of six months is a welcome development.

“The issue of raising tax collection in order to generate more revenue may not necessarily curtail inflation; it may increase it. To stabilize the exchange rate and reduce inflation we need to refine our petroleum products.”

 No money to cushion effect of high energy cost – Adonri

In his own view, David Adonri, Analyst and Executive Vice Chairman at HIGHCAP Securities Limited, said: “Nigeria’s financial situation is precarious and IMF knows. There is no money to cushion the effect of high energy cost on the vulnerable or producers. Except if IMF means plugging the leakages of tax revenue to boost public revenue, Nigeria does not presently have untapped sources of tax that are not in limbo.

“For the very scarce financial resources of FGN to be optimally allocated and have mass effect, the security sector and productive sector must be given priority to close supply gap. The excessive burden of debt servicing which consumes almost all public income must also be addressed, possibly through debt restructuring so that funds can be available for the smart spending that IMF advocates. The economic problem that confronts Nigeria now is beyond any selective rescue operation. When ongoing market reforms together with fiscal enablers start employing all idle domestic factors of production, enterprises will resuscitate and the vulnerable will enjoy productive employment.”

 IMF’s recommendations are right  – NASO boss

Commenting also, President of the National Association of Stevedoring Operators, NASO, Mr. Bolaji Sunmola, said that Nigerians are a lawless people but are quick to obey the laws of other countries.

He said: “Are we a country that keeps to our social responsibilities? We all know the answer.  But then we all want things to work well. Any leadership that’s going to enforce this of course is going to encounter brick walls, opposition and sabotage. To me IMF is right; please let us take the hard decision now to move forward for the sake of generations coming.

(Vanguard)

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Nigeria’s economic reforms must be holistic, IMF insists

*Commends CBN’s decision on 43 items
*Says Nigeria’s debt manageable

*To provide assistance to FG

The International Monetary Fund, IMF yesterday said that the ongoing economic reforms in Nigeria must be holistic to produce the right impact in terms of curbing inflation and improving welfare.

The IMF also commended the decision of the Central Bank of Nigeria, CBN, to remove the foreign exchange restrictions on 43 items, saying such restrictions create ‘unhelpful distortions’

Director, Africa Department, IMF, Abebe Selassie, stated this at the Africa Regional Economic Outlook press briefing in the ongoing World Bank/IMF Annual Meetings in Marrakesh, Morocco.

While commending the recent decisions of the Federal Government to remove fuel subsidy and the unification of official exchange rates, Selassie averred that these measures must be complemented with tight monetary and fiscal policies.

Abebe also said that Nigeria’s debt stock was manageable generally, and there was no debt discussions that are going on, debt profiling or debt restructuring on Nigeria,
He however stressed that the most important cause of the pressures was the fact that the government does not generate enough tax revenue for all the services it needs to provide and hence debt service as the ratio of revenue is high and does not allow much room to spend on other issues.

He said: “In Nigeria the most important cause of the pressures is the fact that the government does not generate enough tax revenue for all the services it needs to provide. Interest payment as a share of revenue is very high and not leaving much room to spend on other issues, that is the key issue that needs to be worked on.

“While there is not enough tax revenue, I think in the past reliance on oil when prices were high and second is the subsidy regime which also implies and entails lots of government resources being directed where they should not be. “These are all interlinked issues including causing some of the inflation that you see because given the difficulty to tap the international capital market, the government has had to rely more on domestic financing, which of course has crowded out the private sector and put constraints on monetary injections which has weakened the exchange rate.

“You have a medley of things rooted in the fiscal challenges that Nigeria is facing in not having tax revenue. At the same time, the country has incredible potential and we have seen reforms moving in the right direction in recent months.

Holistic Reforms

“What is needed, we feel, is making the reforms holistic and help reinforce each other just as things were not reinforcing each other in the past, there is scope to make the reforms reinforce each other. So, the exchange rate reform that the government did was very welcome in trying to unify the rates.

“Similarly, the fuel subsidy will not help or stick unless they tighten monetary policy. Unless you are also doing something to mobilise more tax revenue.

“So, a holistic package of reforms is what is needed and we have to give a bit of time to the new administration also. The CBN governor has just been appointed, and the Minister of Finance has only been appointed a few weeks. So we are hopeful that they will move in the right direction and we stand to provide every policy advice that the government needs.

Debt stock manageable

Speaking of the challenge posed by the country’s debt stock, Selassie, said, “The assessment of debts should not be based on the nominal value of a debt stock but on how it relates to many other economic variables. “It’s at the highest level because you mention it in naira terms but as a ratio to GDP and as a ratio to many other indicators is what you have to look at. When we look at the debt in Nigeria, our sense is that the stock is manageable in general, it is the debt servicing that is much more difficult and the debt service is hampered by the country not generating enough non-oil tax revenues. And I think that is by far the most important area of work and reform there is for any administration in Nigeria.”

Commends CBN

While commending the CBN on the removal of foreign restrictions on 43 items, Selassie, said, “Our view has always been in Nigeria, and in many other cases, many economies are so sophisticated and complex, that I don’t think that these kinds of restrictions work. The best way to manage a modern economy for government authorities is to have fiscal policy lever and monetary policy lever.

Whether we call these fiscal policy lever or monetary policy lever, it is to try and use those to affect the kind of policy outcome you have rather than going and saying I don’t like these goods and so I don’t want it to come in, that tends to create an unhelpful distortion. “Of course, there are other tax policies you can also use if you really want to lean against certain types of import etc. In general, I think the direction CBN has moved in is a helpful one”.

Policy Coordination

Stressing the need for fiscal and monetary policy coordination, Selassie, said: “I think when we pointed out that the adjustment and correction to the exchange rate gap were necessary but not sufficient is unless you underpin it with tighter monetary policy conditions.

Because if monetary policy conditions are loose it creates a lot of liquidity, then it’s going to create inflation and then of course exchange rate will inevitably move. So, unless you are tightening monetary conditions, it would not be enough.

“You have to support monetary policy with some fiscal policy tightening. The fact that the government is absorbing a lot of the liquidity to finance the large deficit it has is causing monetary policy to be loose. So that is the type of holistic and coordinated reform package Nigeria is going to need. And Nigeria has incredible politicians and policymakers, it is something that can be done and it is the political will and the decision to move in that direction that is needed”.

(Vanguard)

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