It was entirely predictable. The visit of the International Monetary Fund (IMF) to Nigeria in the middle of an economic crisis was bound to strike a raw nationalist nerve in the country. This, after all, is a country where, judging by some public comments, the IMF is hated with a passion. Indeed, reading most of the media comments on the four-day visit of the IMF managing director, Christine Lagarde, from 4 to 7 January, one would think that an enemy force had invaded Nigeria. One commentator described the IMF boss as “Hurricane Lagarde”, another reckoned she was in Nigeria to institute some form of “deviltry”. Few acknowledged that, outside its routine Article IV surveillance visits, the IMF doesn’t normally go to a country, or get invited by a country, unless there is a crisis. And that, in this instance, Nigeria is in a deep economic mess, a situation the IMF, given its mandate, could simply not ignore!
It is, of course, deeply unpopular to defend the IMF, but it’s time someone put his or her head above the parapet and did so. For me, the IMF is a force for good. It’s not perfect, of course, and has its flaws. For instance, as the Sky News economist and London Times columnist, Ed Conway, recently said, the IMF is unrepresentative (in terms of the distribution of voting rights) and can sometimes seem dictatorial. Indeed, the former Tanzanian president, Julius Nyerere, once asked: “Who elected the IMF to be the ministry of finance to every country in the world?” Over the past two weeks, some commentators in Nigeria have tried to invoke this sovereignty argument to challenge the IMF boss’ visit and policy interventions. One asked, for instance, “We are a sovereign nation yet, aren’t we?” To which my response is, “Yes, we are, but the old Westphalian concept of ‘absolute sovereignty’ died centuries ago”.
The truth is we now live in a world of “shared sovereignty”. Once a country joins multilateral institutions, such as the United Nations, IMF, World Bank and WTO, it agrees to share its sovereignty and constrain some of its own behaviour or regulatory authority in pursuit of the collective good. And, let’s face it: globalisation increases the capacity of nations to injure each other. Tell me, who still hangs on to the old-fashioned view of “absolute sovereignty” in a world where terrorism can start in one country and be exported to others or where a disease, such as Ebola, can originate in one country and spread to others?
The same goes, in particular, for economic crises. As the economic historian and Harvard professor, Niall Ferguson, showed in his book, The Ascent of Money, every financial crisis in history was preceded by government failures. But what looks like a domestic policy failure can often become a regional or even global problem. Think about the 2008 global financial crisis. It started as a US problem, when its ill-advised sub-prime lending policy went belly up, but soon spread and caused havoc across the world’s financial system. Even the current fiscal challenge is largely due to the failure of most oil-dependent countries to recognise that the oil boom fuelled by China’s economic bubble would not last. They failed to create some self-insurance by building up huge reserves during the boom.
So, we live in a globalised world where the domestic policies of one country can create significant externality or spill-over effects in others, and where there is only so much a country can do alone. This makes international coordination of national policies imperative to avoid the tragedy of the commons. And it is for this reason that the IMF, World Bank, WTO and other international economic institutions exist – to fill the great lacuna in global economic cooperation and policy coordination. In the case of the IMF, it was created to monitor national economic policies and extend balance-of-payment financing to countries at risk.
Of course, given that, as argued above, most economic crises are caused by failed domestic policies, the IMF is not there to mollycoddle nations facing a financial crisis. Its role is to show tough love, that is, to support a struggling nation financially but to make sure they get their acts together by implementing self-correcting measures. It has a mandate to promote fiscal discipline and reform to ensure the stability of national and global economies. But it is precisely this so-called conditionality that most critics of the IMF loathe about the institution. Yet, it is wrong, in my view, to expect the IMF to give financial assistance to a country that has mismanaged its own economy without insisting on structural reform. This would simply create a moral hazard, encouraging other countries to think they can mismanage their economies and get a blank cheque from the IMF. No commercial bank treats an indulgent customer that way, why should the IMF?
But, let’s be clear, no country is compelled to take an IMF loan or accept its conditionality. For instance, during the sterling crisis in the late1960s, the IMF made the extension of credits to Britain conditional on strict deflationary measures. The British rejected this, but instead swallowed their own bitter pill by devaluing the sterling. However, in 1976, Britain itself went cap-in-hand to the IMF for £2.3 billion bailout and had to undergo some structural adjustment. The fact is that any country, whether developing or developed, seeking IMF support must meet its strict terms. For instance, in the past two years, Greece has had a referendum on whether to accept IMF/EU bailout with its conditionality. The largest borrowers from the IMF are Western countries, such as Greece, Portugal, Ireland, Romania and Ukraine, and all had to accept its conditionality. But listening to some critics of the IMF, you would think the Fund’s raison d’etre is to wipe out developing countries from the face of the earth!
For instance, in Nigeria, the 1980s Structural Adjustment Programme (SAP) is a stick to beat the IMF with. Some commentators think SAP was IMF’s evil scheme to destroy Nigeria. A senior and distinguished Vanguard columnist, Bisi Lawrence, wrote recently that SAP “sapped” our “blooming prosperity”. A “blooming prosperity” shortly before SAP? Few would say that the years preceding the introduction of SAP were nothing but blooming. Read Charles Soludo’s analysis of the economic situation in Nigeria in the pre- and post-SAP years in his recent speech titled “Avoiding the mistakes of the ‘old’ Buharinomics”. Or, for a more detailed scholarly work, consider the paper titled “Nigeria: Economic and Political Reforms at Cross Purposes”, written by Jeffrey Herbst and Adebayo Olukoshi and published in a 1994 book titled “Voting for Reform”.
My point is that SAP may not have delivered a perfect outcome, but Nigeria would have been worse off without it. By the time General Babangida took over in 1985, crude oil was selling for as low as $10 per barrel, and Nigeria was ostracized by the entire global financial system because the previous Shagari government and Buhari regime, even though sought IMF and World Bank loans, rejected the IMF conditionality of structural adjustment. Nigeria’s economy was extremely closed and uncompetitive pre-SAP, and it was certainly not sustainable to continue in that state of economic isolation. Those who are nostalgic about the pre-SAP value of the naira should remember that the fundamentals of the economy couldn’t sustain the pre-SAP value, which was fixed. Of course, the value of a country’s currency is an emotional issue, but to allow nationalism to destroy an economy is unforgivable. So, let’s be realistic, there was no alternative to SAP!
Now, coming to the IMF boss’ policy interventions, there was nothing she said that I found objectionable. For me, the red line would have been an IMF loan. But she made it clear from the outset that wasn’t her mission. Indeed, she said that Nigeria doesn’t need a loan, pointing out, correctly, that using about 35 kobo of every naira collected by the federal government to service outstanding debt “weighs heavily on the public purse”. Some have picked on the fact that she said IMF officials would scrutinise and audit the 2016 budget, but the IMF scrutinises and comments on national budgets all the time, including, in recent times, that of the British government. But nothing stops a government from saying “thank you for your comments but we are sticking with our policy”, assuming, of course, that this is not borne out of sheer national pride but rational, evidence-based, analysis and conclusions.
Most of the things that Lagarde said on, for example, tax reform, the exchange rate, the fuel subsidy, fiscal discipline and corruption are not new. They have been discussed extensively by Nigerians, including in this column, long before she visited the country. And let me say that I share most of her views. I agree with her, for instance, that the fuel subsidy contributes to carbon emissions and undermines our climate change mitigation, and that it does little to help the poor, and should, therefore, go! I also agree with her, as I have consistently argued in this column, that we need a flexible exchange rate. Although she didn’t use the word “devaluation”, but if a currency needs to be devalued to be competitive, it should. Now, who doesn’t believe that Nigeria needs to broaden its tax base, if necessary by raising VAT and certainly by improving tax administration? And on corruption and costs of governance, tell me, is there any Nigerian who doesn’t believe more needs to be done to tackle these problems? And who doesn’t believe Nigeria needs to spend more on infrastructure, education, health and things that can yield economic returns rather than on maintaining a bloated state? For the IMF, these are standard recommendations, drawn from ideas attributed to the economist John Williamson, but they are sensible policies for any serious government.
So, let’s recognise the IMF for what it is: a force for good. If it didn’t exist, the world would have had to invent it. Above all, though, if Nigeria wants to avoid IMF crisis visits, the government should turn the economy around!
Olu Fasan
