IMF warns against Central Bank fiscal deficit financing
The International Monetary Fund (IMF) has warned again on Thursday that Central Banks’ continued fiscal deficit financing may backfire leading to high inflation levels and distortions in the monetary policy process.
With widening fiscal needs, and limited finance, a few sub-Saharan African countries tapped their central banks in 2020 to help fund their crisis spending, including Democratic Republic of the Congo, Ghana, Mauritius, Nigeria, South Sudan, Uganda.
The IMF foresees that some of these countries may have little choice but to look to this source of funding once again if the Covid-19 pandemic persists.
It, therefore, warns that “Direct central bank lending to the government may jeopardise the former’s long-term effectiveness and undermine its commitment to contain inflation, with potential longer-term costs for the most vulnerable segments of the population.
“Countries should use such financing only as a last resort, and if used, it should be on market terms, time-limited, and with an explicit repayment plan over the medium term. Repeated monetization would de-anchor inflation expectations and add to pressure on the currency,” the fund noted in its 2021 Regional Economic Outlook for Sub-Saharan Africa.
Explaining further in a mailed note to BusinessDay, Abebe Aemro Selassie, Director of the IMF’s African Department who addressed a press conference on Thursday to discuss the report noted that “their assessment suggests that there are alternatives, and possibly cheaper, forms of financing beyond the Central Bank, including from the domestic financial market.
“Going forward, it would be essential to keep enhancing domestic revenue mobilisation, which should be accompanied by further improvement of public finance management practices—so that financing needs will be predictable and appropriately incorporated in the government’s debt management programs. “
The IMF is further of the view that Nigeria’s economic rebound would depend on bold steps to mobilise the desperately needed domestic revenues, reforms in the energy sector, as well as policies to create liquidity in the foreign exchange markets.
Nigeria’s economy contracted by 1.92 percent in 2020 and according to the IMF, is expected to grow by 2.5 percent in 2021—boosted by higher oil values and production and a broad-based recovery in the non-oil sectors.
During the virtual press conference, Selassie painted the gloomy picture of a slow and fragile recovery for economies in the SSA region and was cautiously optimistic for Nigeria which exited a recession with just 0.11 percent growth.
Over the medium term, the global shift to greener energy will continue to weigh on oil production – Nigeria’s largest revenue earner – while non-oil growth will likely remain sluggish if there is no determined effort to address the country’s long-standing structural weaknesses, including infrastructure and human-capital bottlenecks, and weak policies and governance, the fund noted in the report.
Responding to a BusinessDay question on reasons behind IMF ambitious 2.5 percent growth projection for Nigeria, Selassie explained: “We are seeing quite a lot of countries recovering this year simply by virtue of the fact that economic activities which had by design been held back through the containment measures countries needed to adopt had picked.
“It is now going to be, hopefully, provided that the pandemic continues to remain under control, economic activities should rebound and that will give stronger growth outcomes this year in many cases.
“But this is different from saying that, the fundamental drivers of growth over the medium to long term have been improved in a dramatic way allowing stronger growth, that’s a point I would stress in the case of Nigeria, really ensuring that the country enjoys and unleashes its tremendous potential requires reforms in three areas in our view.”
Selassie noted first and foremost, that Nigeria would need to create more fiscal space through domestic revenue mobilisation to pay for investments in health, education, in infrastructure which it desperately needs.
Secondly, energy sector reforms would be paramount as the cost of doing business spikes on account of the inefficiencies in the energy sector, power supply interruptions. He pointed to “the famous recourse to the use of highly inefficient, harmful generators, used up and down in the country,” adding that getting power supply, policies to make sure that Nigeria resolves this problem once and for all, is also paramount.”
Thirdly, he suggested, “macroeconomic policy calibration, including creating deep and liquid foreign exchange markets would be really important.”
Meanwhile, at 3.4 percent, and supported by improved exports and commodity prices, along with a recovery in both private consumption and investment, Sub-Saharan Africa would be the world’s slowest-growing region in 2021, with limits on access to vaccines and policy space holding back the near-term recovery, according to the fund.
Per capita output is not expected to return to 2019 levels until after 2022—and in many countries, per capita incomes would not return to pre-crisis levels before 2025.
The IMF is concerned that while recovery in advanced economies would be driven largely by the extraordinary level of policy support, including trillions in fiscal stimulus and continued accommodation by central banks, this is generally not an option for countries in sub-Saharan Africa.
“If anything, most entered the second wave with depleted fiscal and monetary buffers. In this context, and despite a more buoyant external environment, sub-Saharan Africa will be the world’s slowest-growing region in 2021.”
“Looking ahead, the region will grow by 3.4 percent in 2021, up from 3.1 percent projected in October, and supported by improved exports and commodity prices, along with a recovery in both private consumption and investment,” it noted in the report.
Other key uncertainties include the availability of external finance, political instability, and the return of climate-related shocks, such as floods or droughts. More positively, an accelerated vaccine rollout—or a swift, cooperative, and equitable global distribution—could boost the region’s near-term prospects.
IMF suggests that the first priority is still to save lives. “This will require added spending, not only to strengthen local health systems and containment efforts but also to ensure that the logistical and administrative prerequisites for a vaccine rollout are in place.
The next priority is to do whatever is possible to support the economy, however, this would require restoring the health of public balance sheets.
Going forward, the general challenge for policymakers would be to create more fiscal space, through domestic revenue mobilization, prioritisation and efficiency gains on spending, or perhaps debt management.
The fund estimates that to recover ground lost during the crisis, sub-Saharan Africa’s low-income countries face additional external funding needs of $245 billion over 2021–25, to help strengthen the pandemic response spending and accelerate income convergence.
The new projection is contained in the April 2021 World Economic Outlook (WEO) presented Tuesday in Washington D.C. by Gita Gopinath, the fund’s Chief Economist at the ongoing IMF/World Bank Spring Meetings which began on Monday and scheduled to end Sunday.
The Fund which also projected six percent growth for the global economy in 2021, moderating to 4.4 percent in 2022, estimated the growth for Sub-Saharan Africa, at 3.4 percent, with South Africa at 3.1 percent. .The new global projection came after an estimated contraction of –3.3 percent in 2020.
The IMF had in its World Economic Outlook report for October 2020 gave a revised contraction of 4.3 percent for Nigeria after its April projection of a 3.4 percent contraction of the economy. It also predicted a 5.4 percent contraction in June while it projected that the economy would recover by 1.7 percent in 2021.
Last year report also projected 2020 global growth to contract by 4.4 percent, a less severe contraction than forecast in the June 2020 World Economic Outlook Update.
However, in its latest report released Tuesday, the Fund said that the contraction for 2020 was 1.1 percentage points smaller than projected in the October 2020 WEO.
This, it said reflected the higher-than-expected growth outturns in the second half of the year for most regions after lockdowns were eased and as economies adapted to new ways of working.
“The projections for 2021 and 2022 are 0.8 percentage point and 0.2 percentage point stronger than in the October 2020 WEO, reflecting additional fiscal support in a few large economies and the anticipated vaccine-powered recovery in the second half of the year.
“Global growth is expected to moderate to 3.3 percent over the medium term, reflecting projected damage to supply potential and forces that predate the pandemic, including ageing-related slower labour force growth in advanced economies and some emerging market economies.
“Thanks to unprecedented policy response, the COVID-19 recession is likely to leave smaller scars than the 2008 global financial crisis.”
The United States of America is expected to grow by 6.4 percent and China by 8.4 percent in 2021 according to the report that noted that emerging market economies and low-income developing countries were harder hit and were expected to suffer more significant medium-term losses.
The IMF said that there were divergent impacts with output losses particularly large for countries that relied on tourism and commodity exports and for those with limited policy space to respond.
It added that many of the countries entered the crisis in a precarious fiscal situation and with less capacity to mount major health care policy responses or support livelihoods.
According to the report, the projected recovery follows a severe contraction that has had particular adverse employment and earnings impacts on certain groups.
The IMF said youth, women, workers with relatively lower educational attainment and the informally employed had generally been hit hardest and income inequality was likely to increase significantly because of the pandemic.
“Close to 95 million more people are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections.
“Moreover, learning losses have been more severe in low-income and developing countries, which have found it harder to cope with school closures and especially for girls and students from low-income households.
“Unequal setbacks to schooling could further amplify income inequality.”
Gopinath said that once the health crisis was over, policy efforts could focus more on building resilient, inclusive and greener economies, both to bolster the recovery and to raise potential output.
She also said that priorities should include investing in green infrastructure to help mitigate climate change, strengthen social assistance and social insurance to arrest rising inequality.
Also, introduce initiatives to boost production capacity and adapt to a more digitalised economy and resolve debt overhangs.
She added that policymakers should continue to ensure adequate access to international liquidity.
According to Gopinath, major central banks should provide clear guidance on future actions with ample time to prepare to avoid taper-tantrum kinds of episodes as occurred in 2013.
“Low-income countries will benefit from further extending the temporary pause on debt repayments under the Debt Service Suspension Initiative and operationalising the G20 Common Framework for orderly debt restructuring.
“Emerging markets and low-income countries will benefit from a new allocation of the IMF’s special drawing rights and through pre-emptively availing themselves of the IMF’s precautionary financing lines, such as the Flexible Credit Line and the Short-Term Liquidity Line.
The risks facing Africa and the rest of the world make the issuance of additional International Monetary Fund (IMF)’s Special Drawing Rights (SDRs) more urgent, according to a report released on Tuesday by Afreximbank.
Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the Washington based IMF.
SDRs are the IMF’s reserve asset, and are exchangeable for dollars, euros, sterling, yen and Chinese yuan or renminbi. The IMF has so far allocated SDR 204.2 billion, equivalent to roughly $285 billion.
Deploying additional SDRs will bolster investor confidence and strengthen Africa’s economic recovery, besides preventing liquidity crises from morphing into solvency crises, the report says.
The risks facing Africa’s growth outlook include weaker-than-expected recovery among the continent’s key trading partners; abrupt tightening of financing conditions; a premature return to fiscal consolidation; climate change and extreme weather events that could cause food prices to spike; and longer-lasting COVID-19 infection rates.
Most of these are contingent on the pandemic’s evolution, which could undermine the recovery process and weaken governments’ capacity to respond effectively to prolonged hardship.
Another risk facing Africa’s growth is if vaccine deployment is hindered by supply bottlenecks or some citizens’ reluctance to be vaccinated – as has been the case in parts of Europe – new waves of infection could rage. Slow growth in Africa’s main trading partners could inhibit the region’s resurgence through lower export demand and reduced investment.
According to the report, the development impact of such a move will also be broad-based and longer-lasting. It will benefit low-income Debt Service Suspension Initiative (DSSI) eligible African countries as well as those larger nations, like Nigeria and Kenya, that opted out of the G20 initiative to preserve access to international capital markets and will play a key role in the region’s recovery as major drivers of intra-African trade.
Five straight years of negative Per Capita GDP growth is unprecedented in Nigeria, at least, since the turn of democracy in 1999. But that is what has happened between 2015 and 2019.
For many Nigerians, connecting the dots between five years of an economy not expanding as fast as population is not so straightforward, not with an illiteracy rate of 62 percent, one of the highest globally.
What is unmistakeable, however, is the pain those five years of negative Per Capita GDP has wrecked on households and businesses, whether they understand what is happening or not.
Take the case of Jide Ibrahim (not real name) for example. Ibrahim’s highest qualification is a Bachelor’s degree in Human Kinetics from the Lagos State University (LASU). He worked at Woolworth, a South African clothing retailer, which closed its three stores in Nigeria in 2013.
It is been seven years and he is yet to pin down another job. His lack of job has forced some changes. He has had to move away from his two-bedroom apartment somewhere in Ikorodu to living with a friend in a one-bed apartment almost the size of a telephone booth within the same area.
When asked how he felt when he was laid off, he heaped the blame on Woolworth, saying the company unfairly asked people to leave after milking Nigeria dry.
“These foreign companies just use you and dump you,” Ibrahim said.
Little did he know that his lay off was no fault of Woolworth, but of the high cost of operating a business in Nigeria, which sucked the life out of the South African retailer and sent it scrambling back from where it came.
Hear what Woolworth’s CEO, Ian Moir, said about the exit at the time: “When an investment no longer generates viable returns, difficult decisions have to be made to contain costs.”
High rental costs and duties and complex supply chain processes made trading in Nigeria highly challenging, according to Moir.
Woolworth’s 18-month foray into Nigeria is peculiar for a company that has been operating in South Africa for decades – since 1931 in fact – and has operations in various African countries and elsewhere. The remaining 59 stores in 11 African countries were not affected by the Nigeria decision.
Since that time, Woolworth has expanded to 64 stores and is in 13 African countries.
Woolworth’s experience is not unique; several companies have had to close shop in Nigeria due to the country’s difficult business environment.
Though strides have been made to improve the business environment, the country sits at a lowly 131 of 180 countries surveyed by the World Bank.
Challenges from tax multiplicity to inefficient transportation networks and lack of adequate power have been unbearable to businesses. Over regulation and corruption in government are also chief culprits in pushing businesses, foreign or local, off the cliff.
This shows Ibrahim’s anger should be channelled towards the Nigerian government, which has failed to create an enabling environment for businesses to succeed.
On the evidence of the declining flows of FDI into the country since 2014 and tales of woes by local businesses, the government has not been able to significantly improve the business environment.
Since 2008, when Nigeria attracted a record $8 billion FDI following a wave of privatisation, the country got $3 billion on average between 2009 and 2015, and $1 billion a year since then, according to the NBS, effectively trailing smaller peers like Ghana.
Considering the size of Nigeria’s population, a billion dollars works out to $5 per head.
Foreign companies are not the only businesses to have walked out on Nigeria, even local companies have struggled.
The Manufacturers Association of Nigeria (MAN) said about 272 firms were forced out of business in 2016 alone, 50 of which were manufacturing companies, amid stifling government regulation. The manufacturers say that led to 180,000 job losses in the period.
Surely, Ibrahim and the over 20 million Nigerians without jobs, should hold the government more accountable for the damage done to their lives by bad policies. The lack of jobs has helped poverty thrive.
Nigeria, home to 87 million poor people, became the world’s poverty capital in 2019, overtaking India, according to a Brooklings Institution report.
Another set of statistics by the World Data Lab estimates that 90 million Nigerians live under $1.90 a day, while the United Nations Development Programme reported that 98 million Nigerians were in multi-dimensional poverty.
Yet the pain of a floundering economy growing slower than population also shows it is no respecter of persons. The rich have perhaps suffered just as much.
Take Aliko Dangote, Nigeria’s richest man, who doubles as the continent’s wealthiest person. Dangote is no longer worth half as much as he was in 2014.
Despite remaining the richest African for almost a decade, his fortune is down a staggering 72 percent to $7 billion from $25 billion in 2014, according to Forbes data.
What is Per Capita GDP and why is it important?
At its most basic interpretation, Per Capita GDP shows how much economic production value can be attributed to each individual citizen. It breaks down a country’s economic output per person and is calculated by dividing the GDP of a country by its population.
Per Capita GDP growth is said to be positive when economic growth is higher than population growth and negative when the population is growing faster than the economy.
The per capita metric is a popular measure of the standard of living, prosperity, and overall well-being in a country. A high Per capita GDP indicates a high standard of living while a low one indicates that a country is struggling to supply its inhabitants with everything they need.
Luxembourg, a small European country surrounded by Belgium, France and Germany, has the highest GDP per capita globally with $113,196 as at 2019, according to IMF data.
Switzerland ($83,716) and Norway ($77,975) make up the top three countries with the highest GDP per capita.
On the flip side, war-torn South Sudan ($275), Burundi ($309) and Eritrea ($342) make up countries with the lowest Per Capita GDP in the world. Nigeria ranks 138 with $2,222, behind Ghana with $2,223.
Five years of negative Per capita GDP
Nigeria’s relatively low Per Capita GDP, which paints a dim picture of the living standards in the country, has been worsened by five straight years of contraction.
The last time Nigeria had a positive Per Capita GDP was in 2014, as the economy has struggled since a lengthy collapse in global oil prices that began in mid-2014. When not contracting, the economy has grown at a tepid 2 percent rate compared to average population growth rate of 2.6 percent.
The economy grew 2.5 percent in 2015 before contracting by 1.6 percent in 2016. As oil prices recovered, the economy turned the corner on its first recession in a quarter of a century by growing 0.8 percent in 2017 and a 1.9 percent growth in 2018. In 2019, the economy grew 2.27 percent, capping five years of an economy that didn’t grow fast enough to create new opportunities for a rapidly growing population.
Make it another five years
Prior to the COVID-19 pandemic, the IMF predicted that income per head will continue falling for another three years until at least 2023.
However, with the pandemic, that forecast is grimmer. The trend of negative Per Capita GDP growth could last another five years, according to Jesmin Rahman, the International Monetary Fund’s (IMF) mission chief to Nigeria. That is worse than the initial projection.
“We are going to see the contraction in real Per Capita GDP pick up in the next five years,” Rahman says.
Rahman says it could take Nigeria at least three years before the economy grows at the modest 2 percent rate at which it expanded in 2019 prior to the COVID-19 pandemic.
Another five years of Per Capita GDP contraction is a painful squeeze for a country with gross domestic product per capita of just $2,222, meaning Nigerians will get even poorer than they are now for another five years as their incomes continue to shrink and the economy bleeds jobs.
It means more Nigerians will fall into a poverty pit. The IMF already projects that Nigeria would be home to 20 percent of the world’s poor people by 2030.
Another painful stretch of negative per capita GDP growth also means fewer people will be able to afford quality education for themselves and their children.
For instance, premium primary education alone in Lagos, Nigeria’s commercial capital, could cost anything between N700,000 ($1,944) to N1 million per annum ($2,777). That works out to an average of $2,360 (N849,600), higher than Nigeria’s per capita GDP of $2222.
Fewer people will also be able to afford quality healthcare in a country where the average life expectancy is just 53 years. Only four countries in the world have lower life expectancy rates and they are Sierra-Leone, Chad, Lesotho and Central Africa republic.
South Africa’s life expectancy is 63 years, at par with Ghana’s but lower than the World average of 70 years, according to United Nations World Population data.
Countries like Hong Kong, Japan, Singapore and have an average life expectancy of 83 years.
The job-seeker in Nigeria will also have fewer jobs to compete for with an even larger population of job seekers. Ibrahim may struggle to find a job for another five years.
Data from Jobberman, which recruits mainly white-collar employees and does not track those looking for non-skilled, blue-collar work, sees unemployment in the nation of more than 200 million soaring to 34 percent by the end of the year from 23 percent in 2019.
Other estimates suggest that the unemployment rate could hit 50 percent by 2021. The country’s unemployment rate quickened to a more than six-year high of 23 percent in 2019, the last time the NBS measured the rate.
Rising unemployment and higher inflation has meant the country’s misery index has deteriorated to be almost at par with failed countries from Syria to Lebanon.
As it stands, over 22 million employable Nigerians are out of work and another 15 million are underemployed. There’s little hope that the country can generate sufficient jobs for its people who are forecast to reach 400 million by 2050.
The last time the Nigerian Bureau of Statistics (NBS) published data on job creation it showed the economy added 187,226 new jobs in the third quarter of 2016 after adding 475,180 a year earlier.
As Nigerians get poorer over the course of the next five years, it may also mean more companies, especially small businesses, are at risk of failing as falling consumer purchasing power leads to a reduction in sales and revenues.
Though there is paucity of data on the failure rate among Nigerian start-ups, the one available estimate given by a Nigerian bank Stanbic IBTC claimed that over 80 percent of Nigerian start-ups fail within their first five years.
That will get worse if the economy continues to underperform population growth for another five years.
What experts say is the way out for sluggish economic growth
Rahman is IMF mission chief to Nigeria. She recommended a raft of fiscal policies that lift per capita GDP growth in Nigeria during a recent webinar hosted by the American Business Council.
Here is what she said: Nigeria has always been to me a fascinating country with huge potential; there’s nothing it doesn’t have. Nigeria has a huge population, and natural resources, yet this is a country that when you compare to its peers on social indicators and living standards, it is not where it should be.
Per capita income used to be $7,000 in mid-1980s since then it has gyrated in sync with oil prices. There are quite a few challenges Nigeria needs to tackle if this course is to be altered. At the current population growth rate of 2.6%, Nigeria’s population is projected at 400 million by 2050. The labor force is growing very rapidly much of which is getting absorbed in either the informal sector or not employed at all. Informal sector wages are very low. Basic literacy among the young population is also very low. Six of out ten out of school children are Nigerians so these are very sobering statistics.
When you look at poverty rate, it is around 40% and given the population projection, by 2030, the World Bank estimates that a fifth of the world’s poorest will be housed in Nigeria. When you add regional dimension, the situation is even scarier because you will the concentration of all of these low statistics in one part of the country.
To turn Nigeria’s population into human capital so the economy grows, Nigeria needs strong job growth and investment in social indicators; education, health and some of the very basic services.
My colleagues in the IMF did a basic estimate of how much it would cost the country to reach the SDGs and they came up with 18% of GDP which would come largely from government even though donor community would help. This reemphasises the importance of growth because without stronger growth to raise revenues, and without those revenues, it would be hard to provide for these very basic and much needed things.
The second challenge is to reduce the dependence on oil. In some ways the Nigerian economy has achieved diversification. Oil only counts for 10% of GDP and 1% of employment so you can say that’s a kind of diversification but the non-oil economy depends heavily on the oil prices through direct and indirect linkages and oil also accounts for 50% fiscal revenues and over 80% of exports. Oil is also important for FX inflows even though remittances help. Because of this, in order to have any form of meaningful diversification, Nigeria needs to move on these fronts as well: diversify fiscal revenues and exports in addition to diversifying GDP base.
Nigeria’s DNA is oil and unless diversification is seen on both fiscal and external fronts, this perception is unlikely to change and this perception needs to change if we are to avoid the big cycles.
Robertson, the global chief economist at Renaissance Capital, during a Financial Times summit as far back as 2018, said the country needs to grow by between 4-5 percent for per capita GDP to stop contracting.
“As Nigeria has grown at 2 per cent per capita since 1992, our medium-term base should be at least 4-6 per cent GDP growth,” Robertson said.
But Nigeria cannot match the 4-6 per cent per capita GDP growth of industrialising countries because adult literacy at 60 per cent is too low and electricity consumption is under half the minimum required level for sustained industrialisation, according to Robertson.
“To push headline GDP growth to 6.5-8.5 per cent would require an adult literacy campaign, a trebling of electricity consumption and a doubling of investment to GDP,” Robertson said.
Ashbourne, a senior emerging markets economist at economic consulting Capital Economics also shared the following views during the FT summit.
“The government needs to unlock private sector investment by improving the business environment and encouraging participation in the non-oil sector.
The country also desperately needs better infrastructure and reforms to the state-dominated oil sector.”
Razia Khan, chief Africa economist at Standard Chartered bank also had these to say: “Nigeria has all the necessary building blocks to achieve much faster growth. With its low base, youthful population and scale, a growth rate exceeds the rate of population growth should be easily achievable.
“It needs to develop more institutions that are more resilient than tends to be the case in typical resource economies, for example a tax base independent of oil and a banking sector that can meet the borrowing needs of the private sector. Nigeria has failed to make a transition away from being an oil economy.”
Omisakin is the Chief Economist and Director of Research & Development at the Nigerian Economic Summit Group (NESG). His views are as follows: “The effects of COVID-19 pandemic on global health and socio-economic conditions will remain for the foreseeable future.
“For Nigeria, economic policies have to remain broadly expansionary to hasten recovery. Implementation of the Medium-Term National Development Plans (MTNDP) and Nigerian Economic Stimulus Plan (NESP) will quicken the recovery in 2021.
“More focus should also be on improving the business environment through reforms.”