As a result of interest rate normalisation in the United States and other advanced economies, the International Monetary Fund (IMF) yesterday advised the Central Bank of Nigeria (CBN) to ensure that it cautiously utilise Nigeria’s external reserves to guard against external shocks.
The Head, Emerging Economies Regional Studies Division at the IMF, Anna Ilyina, gave this advice while responding to a question during the unveiling of the Global Financial Stability Report, at the ongoing IMF/World Bank Annual Meetings in Bali, Indonesia.
She predicted further rate hike in the US and other developed economies, which may lead to increased outflows from Nigeria and other economies.
The advice came on the day the Minister of Finance, Mrs. Zainab Ahmed, said Nigeria accounted for 40 percent of African Export Import Bank (AFREXIM) loans, which has been put at $3.2 billion.
The United States Federal Reserve last week raised interest rate at the end of its Federal Open Market Committee (FOMC) meeting, raising concerns of increased turmoil in emerging markets (EMs).
Nigeria’s external reserves, which has been under pressure in the past few weeks, dropped to $43.610 billion as at Tuesday, against the $47.8 billion it was at the end of June
To this end, Ilyina said, “Given that we are still at the early stage of monetary policy normalisation in advanced economies, one can expect global external conditions and external balance conditions to remain challenging going forward.
“So, this is likely to result to protracted period of mobility of capital. In this situation, I will advise that foreign exchange reserves should be used judiciously.”
According to her, Nigeria and other emerging market nations have been under pressure since April.
This, she attributed to a “combination of factors.”
“It started with sharp appreciation in US dollar in the context of rising US interest rates and of course emerging markets are very sensitive to changes to changes in external balancing.
“So, that affected emerging markets asset class. But those countries that have stronger economic fundamentals and policy frameworks and less external financing have been really less affected.
“In the case of Nigeria, there is one important driver that always affects its economic condition and that is oil. Nigeria being an oil exporter is always very sensitive to changes in oil prices.”
She stressed the need for the central bank to work towards achieving a flexible exchange rate to guard against systemic risk.
“Allowing exchange rate to act as an external measure is healthy to adjust to external environment. Of course, forex intervention might make sense in certain circumstances.
“But then, one has to consider the growth in fundamentals, the level of reserves and other policy tools that might be more appropriate in country-specific circumstances.
“Another thing that I want to mention is that given that we are still at the early stage of monetary policy normalisation in advanced economies.
“So, one can expect global external conditions and external balance conditions to remain challenging going forward.”
On his part, the Financial Counsellor and Director at the IMF, Tobias Adrian, who noted that in recent years, countries have raised their debt profile, stressed the need for judicious utilisation of borrowed funds.
“Countries have to make sure that the level of borrowing is sustainable in the long run to be able to pay both the interest rate and principal, even if there is a change in situation. In the case of Nigeria, the optimism is more on oil prices and it is constrained by how much the favourable price can continue.
“It could decline at any time. We have some slowdown as financial conditions in recent months from emerging markets have tightened, which the country is inclusive.
“Of course, there is going to be quite bit of need for rollover of debts in 2020 and 2022 and much that the country can do so that the international market would allow the rollover in smooth fashion,” Adrian added.
Also speaking during the unveiling of the IMF’s Fiscal Monitor Report afterwards, the Deputy Director at the IMF’s Fiscal Affairs Department, Paolo Mauro, noted that increasing revenue should be a crucial priority for Nigeria, particularly, non-oil revenue.
“If one looks at the ratio of interest payments to revenue for Nigeria, that is quite high. And certainly, increasing revenue in the way in which one creates the space to do social spending, infrastructure and other types of spending that benefits economic growth.
“So, clearly, that is a priority. How does one go about it? We have been discussing over the years with the government. And we see the priorities in tax administration.
“But there are also aspects of tax policy that would help. So, certainly, in the tax administration, to increase the compliance rate something that could be done is to increase tax audit, to use e-filing to a greater extent, blocking leakages and corruption within the system. In addition, prioritisation of investments is important,” he said.
Meanwhile, the federal government has said Nigeria’s exposure to African Export Import Bank (AFREXIM), which has been put at $3.2 billion, represents 40 per cent of the pan African bank’s loan portfolio.
This revelation came as the government stated that N460 billion had been released for projects as part of the capital expenditure in the 2018 budget.
The Minister of Finance, Mrs. Zainab Ahmed, who made the disclosure while fielding questions from journalists after a meeting with AFREXIM team, at the ongoing IMF-World Bank annual meetings in Bali, Indonesia, said the Nigerian delegation discussed with the latter on a range of issues on the development of the economy.
Ahmed spoke in company with the Minister of Budget and National Planning, Senator Udoma Udo Udoma, and AFREXIM President, Mr. Okey Oramah.
Ahmed confirmed that Nigeria was a major shareholder in the bank, noting that the discussion at the meeting dwelled partly on the possibility of increasing the country’s shareholding and on the projects and programmes that the Cairo-based AFREXIM is supporting in Nigeria.
She said, “AFREXIM has a very large portfolio in Nigeria. About 40 percent of the bank’s portfolio is in Nigeria – support to the government but largely to the private sector.
“We have the need to increase our shareholding in the bank because there is a lot of value that we are getting from AFREXIM Bank.”
Ahmed, specifically, disclosed that, the meeting talked about the setting up of a medical park in the FCT, which is a discussion that had been going on for quite a long time. “There was also a discussion on the establishment of Quality Assurance Centres in Ogun and other parts of the country.
“We also discussed the setting up of Industrial Parks in collaboration with the Federal Ministry of Industry, Trade and Investment in three Centres – Lekki, Kano and one in Kaduna,” she said.
On free trade agreement, the finance minister explained: “Trade Agreements are not things that the government will just enter into without due consultations with stakeholders in the private sector. We need to discuss with the private sector and agree with operators in that sector before we join. The discussions have been going on but we have not reached a consensus. We need to reach a consensus before we agree,
“That discussion is being driven by the Ministry of Industry, Trade and Investment.”
Speaking on implementation of the 2018 budget, Udoma disclosed that, “The amount of capital releases as of today is N460 billion. We just need a resolution of the National Assembly on the Borrowing Plan then we can fund it even more.
“We are spending money on N-Power, School feeding, Trader Moni. We are conscious to meet the needs of the vulnerable.
Udoma explained that, “The president has sent a request to the national assembly to support borrowing for the 2018 budget. The national assembly has been on recess for more than two months, they didn’t do it before they left so now that they are back and they approve the borrowing plan, we will move quickly.
The minister expressed the optimism that the economy would grow by 2.1 per cent by end of this fiscal year. “By the end of this year, we will be growing by 2.1%, things are going well in Nigeria, not as well as we want to be, we are working hard to improve things. We are in stronger position than 2015. Our foreign reserves are $44 billion and we have a trading surplus whilst our imports are not increasing, we have been able to manage those imports. All the indices are positive.”
“However, we have to keep on growing, we are focused on working and are not distracted by electioneering. The president has instructed us to remain focused. We are happy IMF has spoken well about Nigeria,” he added.
In his contribution, Oramah confirmed that, “Nigeria is still a major shareholder in the bank, although, of recent, it had fallen back in terms of its relative position. That is why we have had this discussion with the Minister of Finance to see how Nigeria could return the position it was.
“We have gotten assurances that the government would look at it and we hope that Nigeria’s holdings would come to the levels that would reflect the size of the Nigerian economy,” he added.
Asked to give details of Nigeria’s government current holding, Oramah said, “The equity holding of Nigeria is a Nigerian affair. In terms of Nigerian government, it is number three, today. But they have always been number one or number two in the past. Egypt and Zimbabwe are now number one and two respectively.
In terms of business in Nigeria, the AFREXIM confirmed that, “We have exposure of more than $3. 2 billion.”
According to him, AFREXIM is supporting virtually all the banks in Nigeria in terms of lines of credit to be able to do export and import as well as in terms of supporting SMEs.
“We are also supporting many private businesses. We are into manufacturing and other activities. Beyond that we are also pursuing what I would call impacting initiatives. We have finalised arrangements to begin the development of a centre of excellence for health care because we want to see how we can begin to promote medical tourism in Nigeria.
“We want to develop a centre that will make it possible for Nigeria to have facilities to take care of complex diseases oncology, Haematology, cardiovascular and other complex diseases. That is a major project that we are working on.”