Is Nigeria implementing IMF-like reforms?

The answer is yes, as far as raising taxes, hiking interest rates to tame inflation and plugging revenue leakages go; but a bunch of other IMF conditionality lets Africa’s biggest economy down.

Kemi Adeosun, Nigeria’s finance minister said that the country is already implementing International Monetary Fund (IMF)-like reforms, so it could land an IMF loan if it wanted one.

Adeosun is quoted to have said “What the IMF does is that they give you programs of reforms; however, we are already doing as much reform as any IMF program will impose on us,” Adeosun said in an interview on CNBC Africa on Tuesday.

“So my questions are what an IMF program will bring that we are not already doing. What measures will be introduced that are not in place already,” Adeosun added.

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We juxtaposed the Washington-lender’s loan details for African peer, Egypt last November which runs into $12 billion, to see “what measures will be introduced that are not in place already” in Nigeria, as the finance minister said.

Egypt Loan Details

• Risks to implementation of loan program are “significant,” but “backing at the highest political level” helps to mitigate those risks, the IMF staff said.
• Egypt’s government requested loan for budget support.
• Access to the loan to be distributed evenly over three years.
• Egypt’s economic program is fully financed in 2016/17, additional financing will be needed for 2017/18 and 2018/19. Financing gaps in these two years are “much smaller,” with “good prospects that they can be covered with multilateral support, rollovers of some maturing liabilities, and little fresh financing,” the IMF staff said.
• Loan reviews will be semi-annual; first to be completed on or after March 15. Second review on or after Nov. 11.

Growth

• Egypt’s current-account deficit to narrow to 3 percent of gross domestic product by 2018/19 (it was 5.6 percent in June, according to official data).
• GDP growth to rebound to 5 percent to 6 percent in medium term; 2016/17 output to remain “well below” its potential (Egypt cut its 2016/7 growth forecast to 4 percent from 5 percent this week).
• “Fiscal consolidation coupled with monetary tightening would inevitably constrain growth. The planned structural reforms will take time to bear fruit,” the IMF staff said.

Reserves

• Central bank to accumulate $4.9 billion in gross reserves between June 2016 and June 2017; $7 billion in 2017/18 and $4 billion in 2018/19. Reserves to reach almost $33 billion — equivalent to 5 months’ of imports and services — by end of program (it was $24.3 billion in December).
• Central bank to develop new investment guidelines for reserve management, including capping allocation of investments to foreign subsidiaries and branches of Egyptian banks’ stock at $5.6 billion.
• Financing gap for the program is $35 billion, half of it due to the need to boost reserves.

Monetary policy

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• Monetary policy framework during the program will rely on “money targeting.”
• Monetary policy instruments to include deposit auctions, standing facilities; central bank may also resort to changing reserve requirements as needed.
• Program aims to bring inflation to mid-single digits over the medium term (headline inflation was 23.3 percent in December).
• Central bank to “maintain short-term interest rates at levels that ensure tight liquidity conditions,” the IMF staff said.
• As inflation starts to decline in 2017/18, interest rates will come down to permit credit recovery.
• Direct central bank financing of the budget through overdrafts to fall to below 75 billion pounds in 2016/17. In the letter of intent, Egyptian authorities said they would convert 250 billion pounds to government securities by Dec. 31.
• Starting March 2017, Egypt’s central bank will publish quarterly monetary policy and/or inflation reports.

Exchange Rate, Banking

• Egypt to lift $100,000 limit on transfers abroad by individuals, as well as the $50,000 cap on cash deposits for importing non-priority goods, by June 30.
• IMF staff will conduct a full analysis of the exchange system before the first loan review to verify Egypt’s compliance with Article VIII.
• Egypt to develop a collateral registry by end-March 2017 to help grant credit to small- and medium-sized enterprises.

Deficit, Debt

• Government debt to decline from 94.6 percent of gross domestic product in 2015/16 to 85.8 percent by 2018/19, and 78.2 percent by 2020/21.
• The overall deficit is expected to fall during the program from 12.1 percent of GDP to 4.7 percent.
• Program aims to turn primary balance (excluding interest payments) to a 2.1 percent surplus in 2018/19 from a deficit of 3.4 percent of GDP in 2015/16. The budget for 2016/17 targets a primary deficit of 0.8 percent of GDP.

Taxes, Revenue

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• Tax revenue to increase by 2.5 percent of GDP over the length of the program.
• Before the end of March 2017, Egypt will introduce a simplified tax regime for small- and medium-sized enterprises, where smaller tax payers will pay a reduced flat rate on annual recorded turnover.
• Capital gains tax to be reinstated from May 2017, effective no later than 2017/18. Revenue generated will likely be 0.1 percent of GDP initially, but has the potential to grow strongly over the longer term.
• Other measures, including sale of telecom licenses and land, to boost revenue by 0.3 percent of GDP in 2016/17, rising to 0.5 percent in 2018/19.
• First offering of stakes in government-owned enterprises to take place in the first quarter of 2017.

Spending

• Increase in the wage bill to be contained below the projected level of inflation, to generate fiscal savings equivalent to 0.9 percent of GDP.
• Government will increase the level of fuel costs it recovers to 100 percent in 2018/19.
• Government to develop roadmap for pension reform by June 2017.

Oil and Gas

• Gas production to increase to 4.9 bcf per day from 3.8 bcf per day by June 2017, and to 7.7 bcf per day over the next three years; Egypt’s domestic needs are 5.2 bcf per day.
• Government will adopt an energy sector reform strategy based on a report prepared by an international consultant.
• State-run Egyptian General Petroleum Corporation will seek to reach agreements with creditors on a schedule for the repayment of its arrears by the end of June 2019. It will ensure that no new arrears are accumulated.

The Central Bank of Nigeria’s aim to tame inflation despite weak economic growth over the medium term, efforts to grow the country’s tax to GDP which is a paltry 5 percent of GDP, and plans to plug revenue leakages have every appearance of IMF conditionality, but a bunch of other conditionality lets Africa’s biggest economy down.

Asset Privatisation

The IMF recommended sale of stakes in Egyptian government-owned enterprises to take place in the first quarter of 2017, something that has stalled in Nigeria.

A motley crew of experts advised Nigeria to sell down some stakes in under-utilised government assets to raise sufficient cash to support the budget but officials are reluctant.

Despite publicly admitting that the sale of some government assets was an option on the table, the finance minister has given no details on the assets being considered and the possible amount it can fetch.

More often than not, it appears like government officials are sensitive enough to keep the idea of asset sales under the carpet in order not to spark a widespread protest from Nigerians who are sceptical about how the funds from an asset sale will be utilised since previous sales had been shrouded in secrecy and sold to friends rather than highest bidders.

Desperate to score political points, it is unlikely that the country would want to be subjected by the IMF to sell down government assets.

The fact that President Muhammadu Buhari has often titled towards socialist principles, which preach government control on the factors of production makes it even more unlikely that Nigeria will be open-minded to privatising public assets.

Foreign exchange market management

Despite floating the naira last June, the CBN has returned to pegging the exchange rate, while the process of dollar allotment is shrouded in secrecy and devoid of free-market principles.

The IMF clearly frowns at this and has often criticised the policy.

Gerry Price, an IMF spokesman said last year that “a significant macroeconomic adjustment that Nigeria urgently needs to eliminate existing imbalances and support the competitiveness of the economy is best achieved through a credible package of policies involving fiscal discipline, monetary tightening, a flexible exchange rate regime and structural reform.”

Allowing the exchange rate to better reflect market forces is an integral part of that,” according to Rice.

Fuel subsidy

“Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 percent of the benefits go to the poorest 20 per cent.”

These were the words of IMF boss Christiane Lagarde, when she came on a four-day visit to Nigeria last year.

Nigeria claims it no longer incurs any subsidy costs, yet the renewed rally in oil prices, the naira devaluation in June and higher gas prices have increasingly made a N145 per litre retail price template set in May (eight months ago) obsolete.

Brent crude traded for $56 per barrel as at midday on Wednesday, after the Organisation of Petroleum Exporting Countries (OPEC) and Russia agreed to cut output to 32.5 million barrels daily, 34.7 percent of global oil demand.

The landing cost of petrol in Nigeria is N122.03 per litre, while distribution costs take total cost to N140/$, according to data on the Petroleum Products Pricing Regulatory Agency (PPPRA). This template was reached in May, when oil prices traded at an average of $45 per barrel.

But with crude prices rising, the landing cost of petrol clearly exceeds the retail price of N145 per litre.

Recurrent expenditure

Nigeria’s recurrent expenditure accounts for as much as 70 percent of total government spend according to budget documents, another of a pile of policies certain to irk the IMF which advocates fiscal discipline and frugal spending.