January 11, 2016 - 10:26 PM EST
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Lagarde, the IMF and Us

Christine Lagarde, the Managing Director of the International Monetary Fund, visited

for four days in January 2016. Her visit was timely and decidedly beneficial. A combination of the crash in global crude oil prices and the entry into office of a new government headed by President Muhammadu Buhari has left
economy in search of new directions.

Against the background of a new budget for 2016 and controversial foreign exchange rate policies enacted by the Central Bank of

, an expert external eye is one of several contributions to the policy debate that can give President Buhari and his government much-needed perspective.

The Fund and


There is no need to get lost in a thicket of knee-jerk ideological opposition to the IMF in looking at Lagarde's visit.

is one of the 188 member countries of the Fund, at will and not at sufferance. While the Bretton Woods institutions (the IMF and the World Bank) certainly remain a tool of western global economic policy influence, the IMF has come a long way from the Structural Adjustment Programme (SAP)-era Fund of the 1980s and the 1990s, whose policy prescriptions were both controversial and of debatable benefit to many African countries.

... the IMF Managing Director's visit to

will serve to help create political consensus on the direction of the Nigerian economy going forward at a time when there were concerns about clarity of vision in the management of that economy. The visit and its timing were far from coincidence, in my view, and Buhari's government needed it. The federal government will likely find that its plans for external borrowing to fund the budget deficit will have to factor in several issues raised by Lagarde.

True, in many cases SAPs cut government spending on social infrastructure, such as health and education, in a bid to reign in fiscal outflows. The Bretton Woods institutions pressured African countries that adhered to their programmes and policy prescriptions to remove or reduce tariff barriers and open up their markets prematurely. One result was a remarkable de-industrialisation of the continent, as importation and sale of foreign manufactured goods became far more lucrative than domestic manufacturing. Today, the Bretton Woods sisters have acknowledged their policy prescription errors, in particular the cuts in social spending, and the IMF for one is now a much humbler organisation.

But it remains an essential institution. Its primary purpose is to ensure the stability of the international monetary system. It also carries out global economic surveillance and research, and produces authoritative outlooks on the global economy and those of individual member countries. Lagarde's high level visit to

, which will be followed by a more technical team from the Fund, can be seen in the context of the Fund's "Article IV Consultations" under which the Fund undertakes periodic consultations and assessments of the macroeconomic policies and environments of member countries and publishes reports. Its report, when positive, is seen as a confidence booster for the economy and its management. But in reality, the Article IV Consultations are far more determinative for African countries than for other regions because of the continent's weak positioning in the world economy.

Against this backdrop, we can now assess Ms. Lagard's specific comments on the Nigerian economy. I will focus on her statements on subsidies, revenues and expenditures, debt, and the exchange rate. Broadly, though, she struck the right notes, including strong support for the Buhari government's very necessary war against corruption.


Lagarde called for the removal of petroleum subsidies, saying they were hard to defend. She is right, and some of us have held this position for several years now. In an interview as a guest of CNN shortly after President Muhammadu Buhari's election victory in March 2015, I noted the economic implosion PMB would meet on taking office and argued that he must remove petroleum subsidies if he is to create fiscal space for his government. In an opinion article in the London Financial Times several months later, I again emphasised that the president was wrong to retain the subsidies. Petroleum subsidies have been a monument to waste and fraud, but remained for so long because Nigerian political leaders have allowed themselves to be intimidated by the populist but false argument that removing them would hurt the poor. The truth is that they help the rich far more than the poor. Lagarde's statistics that 40 percent of fuel price subsidies in developing counts are used by the richest 20 percent of households while only seven percent of the benefits go the poorest 20 percent, drives the point home sharply.

One of the many benefits of the oil price decline (yes, we needed this pain in order to focus!) is that it has helped President Buhari's government effectively remove the subsidy without too much political pain. The government should follow this policy direction with a complete deregulation of the price of petrol. Attempts to decree prices in a market economy will ultimately be futile, and it is better that prices find their natural levels as

refineries return to productive capacity and new ones are built.


The IMF leader said: "I see an immediate priority - a fundamental change in the way a government operates. What do I mean by that? The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of

oil wealth but what needs to be done so that
can deliver to its people the public services they deserve - be it education, health or infrastructure". This quote raises several issues, the first of which is philosophical. The remark reflects a shift in philosophical economic thinking in the IMF that has occurred in recent years - a recognition that social infrastructure such as education and healthcare matter as much as physical infrastructure for economic development, and the role of the state in providing such infrastructure as a public good. Is this a tacit support for the welfare state?

Whether or not it does, the comment also raises a second issue of whether moving from a "sharing" economy is enough, without addressing in depth the question of how to create the national wealth that will provide these infrastructures. Or does Ms. Lagarde presume that fiscal discipline and plugging leakages, raising the VAT as she recommends, and debt are enough to do the magic? For, surely, necessary as these measures are, they are not enough. They are all fiscal approaches to short and medium term sustainability, but they do not address the matter of the productive base of the economy - agriculture, manufacturing or factor endowments like extractive solid minerals? And that of how such a productive base can be made competitive, which is the real basis of the wealth of nations.

But we can pardon the omission. It was, after all, a short, high level policy and political visit. Nevertheless, the really hard choices facing

economy and its revenue base go well beyond fiscal management to the deeper ones of economic models and philosophy, how to organise and execute industrial policy, and the political economy of the present structure of the Nigerian federation.


Here, Ms. Lagarde was only cautiously supportive of the federal government's borrowing plans in the 2016 budget, which in any case were shrouded in generalities and need to be transparently and publicly explained with more specifics. The Buhari government's need for deficit financing for its ambitious budget in a time of economic contraction can be understood. But debt is a dangerous thing, not just because of questions of debt sustainability (the ability to repay on time and as required without severe stress on the government's ability to meet its obligations to its citizens) but also because the history of the quality, and thus impact, of spending of borrowed funds in

is not a happy one.

The Buhari government will need to move away from the economically unproductive practice of borrowing to pay salaries, which is what much of the "bailout" funds to

cash-strapped states will be used for. This is a merry-go-round of poverty. That
debt-to-GDP ratio is a relatively low 12 percent is cold comfort. More important is the statistic highlighted by Lagarde, "35 kobo of every naira collected by the federal government is used to service outstanding public debt".

The key to revolutionising the efficiency of government spending, whether revenues or debt, is to undertake a prior analysis of how and what each specific expenditure item will contribute to the nation's GDP. We do not know if this kind of analysis was done for the 2016 budget. This is what determines whether deficit spending will in fact jump-start the economy in a manner that creates output, not just exhaustive transfer payments for which no good or service or investment is exchanged.

The Naira Exchange Rate

This is the 800-pound gorilla in the room. Ms. Lagarde's call for a flexible exchange rate is supported by the facts on the ground in

today. The fixed exchange rate and wide-ranging forex restrictions adopted by the CBN have clearly created far more problems for the economy than they have solved, and in fact have weakened the country's external competitive position. This policy stance now appears unsustainable and needs to be reviewed. We did not need an IMF visit to realise that a fixed exchange rate that has created a new, booming industry of Abacha era-like arbitrage and is choking businesses to death, without addressing structural reforms (many of which are beyond the central bank's remit) required to create a more productive economy, will be difficult to continue.

A few, selected restrictions might remain necessary given the sharp drop in revenues from oil in what is still a monolithic revenue profile. But, even better would be a shift to a fiscal, industrial and trade policy approach in dealing with these challenges. High taxes on imported luxury goods that will generate revenue for government from those who must eat caviar, drink champagne and pick their teeth with imported toothpicks, combined with "smart protectionism", greater exchange flexibility, and incentives for local production and consumption of home-made goods would yield a better result without fundamental disruptions to what is now a market economy. In this context,

must now undertake a comprehensive review of various international treaties that it has entered into or is considering, that are fundamentally harmful to the national interest of promoting domestic manufacturing in
. The Common External Tariff of the Economic Community of West African States (ECOWAS), the European Partnership Agreement (EPA), which
must not enter despite many smaller African countries having been arm-twisted into doing so, and even the World Trade Organisation (WTO) Accession agreements, must be fundamentally reviewed, along with the implications of globalisation as an opportunity or a hindrance to true economic transformation.

I should mention that, in 2011, the CBN disagreed with the outcome of the IMF Article IV consultation suggesting that the naira was overvalued and needed to be devalued. The Bank put forward the usual arguments against devaluation - the conditions that could make devaluation advantageous (a productive manufacturing economy that exports processed products that could be made price-competitive by devaluation) did not exist in

. And a devaluation would stoke inflation in an import-dependent economy.

But the critical difference between then and now was that oil prices were in fact rising at the time, revenues were stable, and the temporary depletion in

reserves had ended, and
was in fact experiencing accretion to its reserves. This is certainly not the case today. Oil is today at less than $35 a barrel instead of an average of $100 in 2011, our reserves are less than $29 billion today versus $36 billion in 2011, and our firepower of fiscal savings is gone, at $2 billion in 2015. It is, quite simply, a different world now.


In conclusion, the IMF Managing Director's visit to

will serve to help create political consensus on the direction of the Nigerian economy going forward at a time when there were concerns about clarity of vision in the management of that economy. The visit and its timing were far from coincidence, in my view, and Buhari's government needed it. The federal government will likely find that its plans for external borrowing to fund the budget deficit will have to factor in several issues raised by Lagarde.

But nightmares, inspired by a dread of the international economic hit men of the 1980s and the 1990s, of the elegant French lawyer, former Minister of Finance of

, and former partner in the American global law firm of Baker & Mackenzie as an "undertaker" in wait for our economy to implode and activate IMF salvation measures are somewhat exaggerated. Perhaps it was to dispel this image that she took time out during her visit to go to an orphanage, demonstrating the milk of human kindness that runs in her veins!

We do not, however, need an IMF visit to get on with the task of digging ourselves out of the hole into which we got ourselves, and shift the fundamental basis of production and organisation of our economy. What we need is leadership, political will, strategy and discipline of execution, and an openness to new or other ideas that might be different from the ones we may hold dear - but which may in fact be unworkable.

Kingsley Chiedu Moghalu, a former Deputy Governor of the Central Bank of

(2009-2014), is Professor of Practice in International Business and Public Policy at The Fletcher School of Law and Diplomacy at Tufts University in Boston, USA. He is the author of Emerging Africa: How the Global Economy's Last Frontier Can Prosper and Matter (Penguin Books, 2014).

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Source: Equities.com News (January 11, 2016 - 10:26 PM EST)

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