07 January 2016, Abuja – The International Monetary Fund on Wednesday advised the Federal Government to consider a flexible exchange rate policy rather than outright devaluation of the naira and the current forex restrictions. It also called for an increase in the Value Added Tax rate from the current five per cent.
The Managing Director, IMF, Christine Lagarde, on the third day of her four-day working visit to Nigeria, said during an interactive session with members of the Senate at the National Assembly complex in Abuja that additional exchange rate flexibility, up or down, could help soften the impact of external shocks on the nation’s economy, make output and employment less volatile, and help build the external reserves.
She said, “It (exchange rate flexibility) can also help avoid the need for costly foreign exchange restrictions, which should, in any case, remain temporary.”
“And going forward, improved competitiveness from improved exchange rate flexibility and other reforms will facilitate the needed diversification of the exports base and, ultimately, growth.”
She said since the nation had the advantage of huge population, increasing the VAT rate would enable it to earn more revenue for developmental projects and service its foreign debts.
She said, “For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS member states. So, some increase should be considered.
“This is critically important. As more people pay taxes, there will rightly be increasing pressure to demonstrate that those tax payments are producing improvements in public service delivery.”
The IMF boss also advised the government to consider the total removal of subsidy on petroleum products, because rather than helping the poor, who were the target of the welfare arrangement, an insignificant percentage of the rich were the major beneficiaries.
She said, “Indeed, fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. The 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 seven per cent of the benefits go to the poorest 20 per cent.
“Moreover, the experience here in Nigeria of administering fuel subsidies suggests that it is time for a change”
She expressed the willingness of the IMF to offer Nigeria technical assistance in the areas of capacity building, increment in internally generated revenue and boosting of public financial management, especially at the local government level, which account for the bulk of social spending but have only limited tools to manage the impact of declining oil revenues.
She noted with concern that oil prices had fallen sharply and that global financial conditions had also tightened, leading to slow growth in emerging and developing economies and increased geopolitical tensions.
“All this has come at a time when Nigeria is facing an urgent need to address a massive infrastructure deficit and high levels of poverty and inequality,” she noted.
She reiterated the need for the government to deemphasise borrowing despite the fact that the country’s debt to Gross Domestic Product rate was relatively low.
“Nigeria’s debt is relatively low at about 12 per cent of the GDP. But it weighs heavily on the public purse. Already, about 35 kobo of every naira collected by the Federal Government is used to service outstanding public debts. Exercise restraint by focusing on the quality and efficiency of every naira spent,” Lagarde said.
On capital expenditure, she advised that the focus must be on high-impact and high value-addition projects like power, integrated transport (roads, rail, air and water), and housing.
On recurrent expenditure, Lagarde said efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments.
She lamented that lower oil prices had sharply reduced the country’s export earnings and government revenue and that both would likely remain at depressed levels, thereby “reducing the space for policy interventions to address Nigeria’s social and infrastructure needs.”
Private sector investment, she added, would also be affected since investor confidence about the outlook had remained weak, and financing would likely become more difficult and more costly for everyone.
She added that the current insurgency in Nigeria and some of its neighbours would also greatly affect the nation’s economy this year.
She also asked Nigeria to build resilience by fostering a sound banking system that would help channel more savings into productive investments, especially in quality infrastructure.
“To be sure, Nigeria’s banks are generally well-capitalised and more resilient than during the downturn of 2008-09. But they are beginning to feel the impact of the growing vulnerabilities in the corporate sector. This means rising non-performing loans, which will need to be carefully monitored and managed,” the IMF boss noted.
She stressed the need for the country to sustain its fight against corruption, because “corruption not only corrodes public trust, but it also destroys confidence and diminishes the potential for strong economic growth.”
The Senate President, Bukola Saraki, urged the IMF to support Nigeria’s economic policies and help to spread the message to the international community that the new government in the country was committed to fiscal discipline.
He said the executive arm of government had a supportive legislature, which was devoted to enacting legislation that would create a conducive atmosphere for businesses to thrive.
He said since the economy was being affected by oil price volatility, what Nigeria required from international institutions like the IMF was solid backing for its policies aimed at diversifying and modernising the economy.
Lagarde also on Wednesday met with the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, to discuss issues that had to do with the development of the nation’s financial sector.
The meeting, which was held at the headquarters of the central bank in Abuja, lasted for almost two hours and was attended by the managing directors of Deposit Money Banks in the country as well as other top officials of the CBN.
Lagarde, who addressed journalists shortly after the meeting in company with the CBN boss, said there was a need for the financial sector to channel more funds into the real sector of the economy.
As the driver of growth in any economy, the IMF boss said lending to the real sector should be done at concessionary terms.
She described Nigeria’s financial sector as “strong and solid,” adding that with these attributes, the sector was well equipped to support the growth and development of businesses in the economy.
Emefiele explained that the IMF boss encouraged the banks to continue to support the real sector of the economy through lending.