Truth IMF told us

The International Monetary Fund this past weekend told us some truths about our Nigerian economy. Some are sweet, some not so sweet. In summary, the Fund told us one or two things to cheer, but a lot more to worry about. Even the one that we can cheer about is conditional.

“If the authorities succeed in developing and implementing a comprehensive reform agenda, the medium-term outlook would be much improved.,” the Fund said in its report on Nigeria, dated February 9. It means that if the reforms do not succeed, the outlook faces a potential degradation.

On the more important and perhaps more crucial point, the Fund told us that we have actually been going down the hill in our quality of life. It declared that per capita growth in Nigeria has stalled, poverty and food insecurity are high, exacerbating the cost-of-living crisis now rocking the nation.

To demonstrate this, IMF showed us how our per capita GDP (that is, the amount each of us Nigerians would get if the total value of money is shared equally every year) has been falling from an actual value of $2,202 in 2022, to an estimate of $1,699 last year, to a projection of $1,219 this year and $1,271 in 2025.

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The same scenario follows in the country’s external sector, specifically the gross foreign reserves. These are projected to fall from $36.6b in 2022 to $27.9b last year, to a projection of $23.8b this year, before inching up to $26.3b next year. The $36.6b of 2022 gave us an import cover of six months, according to the Fund. With that, our monthly import bill stood at approximately $5.5b that year.

Applying this to the projected figure for 2024 will give us an import cover of just 4.33 months, obviously a deterioration. Generally, the higher the number of months of import cover, the better. Lower months of import cover could lead to levels of vulnerability, just in case foreign exchange inflows, which are already shaky, experience more instabilities.

Nigerians are hungry! This is no longer news, given the steep rise in prices of everything, especially food. The pockets of protests that have taken place in a couple of cities and states recently also testify to this. The Fund captured this, telling us that as many as 25 million Nigerians (13% of the population) are “food insecure”.

Indeed, the IMF presented us with a mirror image of our country. With widespread poverty and rising food insecurity, social demands for government support are growing, it noted. But the ugly side of this image is that “Low revenue collection hampers the provision of services and public investment’.

The Fund commended the government for commencing the reforms, the two most important legs being the fuel subsidy removal and the deregulation of the foreign exchange market. And just as the global financial regulator admitted, the result of the reform, or the degree to which it will achieve its objectives, is a probability. There is no certainty to it. This also includes the time it may take for the results to begin to manifest.

What is clear from the recent trajectories of most economic indicators and arising also from the Fund’s statement, is that Nigerians are likely to experience more doses of bitter pills. For example, it acknowledged that the CBN is refocusing on price stability as its core objective and has taken initial steps to tighten financial conditions. Yet the following statement foreshadows what the next phase is likely to look like: “A sustained tightening cycle is needed to bring down inflation. This, together with rebuilding confidence in the CBN, will help stabilise the naira, and mitigate risks of an inflation-depreciation spiral”.

Continuing, in a definitive declaration, the IMF said: “Continuing to raise the monetary policy rate until it is positive in real terms would be an important signal of the direction of monetary policy”. The Monetary Policy Committee of the central bank meets later this month. Is the IMF here telling us what to expect?

The Monetary Policy Rate is already at 18.75 per cent, while headline inflation ended 2023 at 28.92 per cent. We do not yet know the January figures. However, it would be interesting to know how much the monetary authorities can push to raise the MPR beyond its current level without sacrificing the growth objective.

Clearly, the authorities in this situation find themselves in a tight corner that offers them very little space to manipulate the interest as a policy variable, except perhaps in the downward direction. The search for a real positive interest rate in this high-inflation environment is a credible objective from the point of view of savers, investors, and lenders. Without a real interest rate savers and lenders will simply be labouring for the borrowers.

Yet, such an excessively high nominal interest rate will ultimately hurt everyone. It will hurt the borrowers, who in the current business environment have very few investment opportunities that will yield returns to compensate for such a high cost of funds; and the consumers, who will also obviously be squeezed more as prices rise higher.

Price stability is important. Indeed, it is a key function of the central bank. Yet growth is also important because without it today’s stable price level will be destabilised by the stagnation of tomorrow. In today’s world, growth is no longer taken as only a quantitative phenomenon measured just in figures.

Rather, such outcomes of policy decisions of government are described as Growth Plus Development, and include a measure of the wellness of the individuals that make up the population. It includes the number and quality of meals they eat in a day. It also includes the types of houses they live in, both in the city and the countryside.

Therefore, let the authorities show us which one they want, by their choices and preferences.