The IMF issued its 2019 Article IV Consultation Staff Report last week. While complimenting fiscal and monetary authorities for measures taken to start the recovery of Nigeria’s economy after the 2016 recession, the IMF also pointed out that significant structural and policy changes would have to be made if the country’s economy is to grow fast enough to lift a majority of the country’s mostly poor citizens out of poverty. Their key findings will not come as news to many.
There were a few areas of note in the Staff Report that need to be looked at more closely. One of the key areas that analysts had hoped would be addressed in the report is the funding of the fiscal deficit of the Federal Government in the 2018 fiscal year. The 2018 Q3 Budget Implementation Report of the FG indicated that at the end of Q3, expenditure had exceeded both revenues and borrowing by ₦1.6 trillion. There was no official explanation as to how this “net deficit” had been funded. As a result, most analysts thought that the only way this net deficit could have been funded, was by the CBN printing money to pay those bills or through the FG issuing IOUs to contractors, or asking them to continue work with the intent to pay whenever funding was available. The IMF Article IV Staff Report was to confirm either hypothesis.
While the IMF Staff Report did not directly address the issue, it hinted at how this could have been funded in a small footnote. In the footnote it said that the overdrafts and government deposits at the CBN almost cancel out. This means that the “net deficit” was in effect funded by the CBN lending the FG cash against the balances in the TSA account. The IMF did not appear to have an issue with this, and did not consider this type of unusual lending to be a risk to inflation. However, given that parity has now been reached between these overdrafts and deposits, it means there is limited scope for this type of lending in 2019. The FG will have to find other ways to reduce the deficit as the CBN may no longer be able to come to its rescue.
Another piece of information from the report which requires some review is that CBN has reduced its daily foreign exchange sales to banks at the official exchange rate of ₦305/$ from $500,000 to $100,000. This official rate is largely only used for fuel imports and the budget. However, it is also, potentially, a key source of corruption as anyone who has access to foreign exchange at this rate is capable of immediately selling it on the interbank or parallel markets at ₦360/$ and enjoying easy profits. By reducing the amount sold daily, it appears the CBN is ready to close this arbitrage window and effectively move all FX transactions to the much more liquid interbank market. This move is also important for fiscal operations at all levels of government because ₦305/$ is the rate at which oil sold by NNPC on behalf of the government gets converted into local currency, effectively shortchanging all three arms of government who receive the revenue from the oil sales. If the official rate is effectively phased out and the higher interbank market rate is adopted, it immediately provides a cash windfall to the cash strapped federal, state and local governments. As a result, the CBN’s move indicates respite may be on the way for the government.
Finally, the IMF sometimes issues a supplement to the main Staff Report that contains research outcomes of a few areas that the IMF thinks requires deeper analysis. A supplement was issued this year and one of the areas covered was on fuel subsidies. The IMF found that a removal of the subsidy would reduce income inequality (given that the rich use more petrol than the poor) but could lead to an increase in poverty as the poor spend a larger fraction of their income on fuel and transport and the resulting broad based increase in inflation would also reduce their purchasing power. No surprises there. However, while removing the petrol subsidy could well save up to ₦1.06 trillion, their analysis indicates that providing compensation with a total cost of ₦239 billion to the most vulnerable households through the national safety net programmes could lead to a situation where overall poverty remains at current levels but the poverty gap (income inequality) declines by 1.3 points. It’s a rather unique situation where the right thing to do on such a controversial issue does not involve costly trade-offs in policy outcomes. However, there is little indication that the current administration will pursue such a course of action.