Key issues in the Nigerian economy

The World Bank/International Monetary Fund held its spring meeting in Washington DC recently with Finance Ministers, Central Bank Governors and officials of many countries around the world present at the meeting. The meeting, an annual ritual, was meant to review global economic trends, factors hindering growth and the way forward for each region of the world and each country.
The IMF gave its annual appraisal of Nigeria’s economy, including an evaluation of both fiscal and monetary policies of government as well as recommendations on the way forward. The fact that some ministers relevant to the economic growth and development of the country were at the Spring meeting also enabled them to hear the views of the IMF Board and the ways forward for Nigeria, fist hand.
The IMF said the country had exited recession but its growth was fragile and vulnerable to external shocks. It forecast a growth rate of 2.5 per cent for the country this year with a caution that oil price might crash.
The IMF noted that the oil and gas sector dragged Nigeria into recession and the improvement in the price of crude oil was also responsible for the country’s exit from recession. In other words, if Nigeria had diversified its economy early enough, particularly into agriculture, manufacturing, mining, entertainment and many other sectors with each of the sectors contributing positively to the growth of the economy, there would have been no recession. In the event of any crash in the oil price, the country would experience slow down in the economy and not a full scale recession.
The IMF also saw the increasing debt accumulation by the government as a major problem. It saw it as an indication of weak revenue mobilisation by the government. It noted that despite the tax drives of the current government, it still heavily relied on external debts to fund its annual budget. It also noted that bonds raising programmes of the government had been crowding out the private sector, thus reducing the credit raising opportunities for private
businesses.
The IMF also came down tough on the government on account of the vulnerability of the economy to domestic shocks such as the Boko Haram insurgency, herdsmen-farmers crisis and the weak implementation of structural reforms in the country.
On the Deposit Money Banks, it noted that there were many banking sector vulnerabilities, and advised that they should be contained. Consequently, the IMF commended the move by the Central Bank of Nigeria to increase capital buffers of weak banks by preventing dividends payment.
Although the IMF commended the country’s implementation of Economic Recovery and Growth Plan, it said that the Government should still initiate urgent, comprehensive and coherent policy actions that would impact positively on non-oil non-agricultural growth, lower inflation close to single digits, contain banking sector vulnerabilities and reduce unemployment.
It noted the progress in the economy such as the beginning of a convergence between official and parallel market rates in foreign exchange windows as a result of tight monetary policy by the Central Bank of Nigeria; improvements in tax administration, and significant improvement in the business environment.
However, the IMF directors noted the improved government efforts in tax administration with the introduction of the Voluntary Assets and Income Declaration Scheme to grant amnesty to tax defaulters. The directors stressed the need for more ambitious tax policy measures, including a reform in the Value Added Tax, increasing excises, and rationalising tax incentives.
Meanwhile, the Federal Government is considering increasing the VAT rate from the current five per cent to about 15 per cent before the end of the year. Again, government should not over tax people for their consumption as it would lead to reduced consumption or reduced revenue for those selling the items. Therefore, increasing VAT to 10 per cent is adequate.
The IMF directors also stressed the need for the Federal Government to consider implementing “an automatic fuel price setting mechanism, sound cash and debt management, improved transparency in the oil and gas sector, increased monitoring of the fiscal position of states and local governments, and substantially scaled-up social safety nets to support the adjustment.” Indeed, a situation where many states are broke and have to go to Abuja, cap in hand, for financial bail outs is shameful and has to be redressed.