IMF DG., Christine Lagarde |
A
speech to the Nigerian National Assembly in Abuja by Christine Lagarde,
Managing Director of the International Monetary Fund on January 6, 2016: As
prepared for delivery
Introduction
Honorable
Speaker of the House, Honorable Members of Parliament, Honorable Members of the
Government, Ladies and Gentlemen, Good morning and Happy New Year!
I would like to
thank you for the gracious introduction, and Members of Parliament and the
people of Nigeria for their incredible hospitality.
I have been
looking forward to starting my new year here in Nigeria and I am grateful for
the special privilege to speak before this parliament.
My first visit
to Africa as IMF Managing Director was in late 2011, and the first country on
my itinerary was Nigeria. At that time, Nigeria was emerging from the 2008-09
commodity price collapse and the banking crisis that followed.
Since that
visit, Nigeria has been acknowledged as the largest economy in Africa with a
maturing political system. We saw a peaceful general election last year in
which, for the first time in Nigeria's history, there was a democratic
transition between two civilian governments. It was a strong sign of Nigeria's
commitment to democracy, to a new Nigeria.
At the same
time, the external environment has changed. Oil prices have fallen sharply;
global financial conditions have tightened; growth in emerging and developing
economies has slowed; and geopolitical tensions have increased.
All this has
come at a time when Nigeria is facing an urgent need to address a massive
infrastructure deficit and high levels of poverty and inequality.
So, Nigeria
faces some tough choices going forward. Nigerians, however, are well known for
their resilience and strong belief in their ability to improve their nation and
lead others by example. I firmly believe that Nigeria will rise to the
challenge and make the decisions that will propel the country to greater
prosperity.
As the great
Nigerian novelist Chinua Achebe once said: "If you don't like someone's
story, write your own." This is exactly what you are doing right now.
And let me
assure you that, as you go forward, as you develop your story, the IMF will
support your efforts.
Today, I would
like to offer my perspective--on your story and punctuate it with three R's:
resolve, resilience, and restraint.
I will first
identify the global economic transitions that are affecting Nigeria and the
region. I will then turn to the importance of managing the near-term
vulnerabilities facing Nigeria's economy. And, finally, share my thoughts on what might
help to achieve more inclusive and sustainable growth.
1. Global
economic transitions and implications for Nigeria and the region
So let me start
with the big picture. For more than a decade, growth in Sub-Saharan Africa was
driven by an extraordinary combination of improved policies, stronger
institutions, high commodity prices, and high capital inflows.
The region has
now entered a different phase, where commodity prices and capital flows are far
less supportive. We are in the process of updating our forecasts, but broadly
the IMF staff estimates that regional economic growth dropped from 5 percent in
2014 to about 3.8 percent last year, with only a modest recovery expected in
2016.
There is a
similar picture at the global level modest growth last year, with only a slight
acceleration expected in 2016. Emerging markets, which propelled global growth
after the 2008 global financial crisis, have slowed; advanced economies are
still recovering from the impact of that crisis; and financial markets remain
volatile.
In fact, both at
the regional and global level, growth is affected by three major economic
transitions. They include China's move to a new growth model, the prospect of
commodity prices remaining lower for longer, and the increasing divergence in
monetary policy in major economies, especially since the recent rise in U.S.
interest rates.
Understandably,
policymakers in this region are concerned because these transitions can create
spillovers through trade, exchange rates, asset markets, and capital flows.
For example,
spillovers are now affecting oil exporting countries, which generate about half
of this region's GDP. These economies, including Nigeria, are facing massive
pressures and challenging prospects.
Over the medium
term, oil prices are likely to remain much lower than the 2010-13 average of
more than $100 a barrel. Why? Because of the huge oversupply in global oil
markets. Think of the shale oil boom in the United States, and some
historically large producers such as Iraq and Iran coming back to the market.
Other factors include OPEC's strategic behavior and the drop in global demand
for oil, especially in emerging economies.
Already, lower
oil prices have sharply reduced Nigeria's export earnings and government
revenues. Both are likely to remain at depressed levels, reducing the space for
policy interventions to address Nigeria's social and infrastructure needs.
Private sector
investment will also be affected. Investor confidence about the outlook has
remained weak, and financing is likely to become more difficult and more costly
for everyone. With U.S. interest rates expected to continue to rise, albeit
slowly, the likelihood of capital outflows will increase, and exchange rate
pressures could mount as investors re-assess their appetite for risk.
More broadly,
Sub-Saharan Africa is also facing spillovers from geopolitical factors,
including the fight against Boko Haram. The threat of terrorism is very real
and never far from our minds. Having been in Paris during the November attacks,
I know first-hand the sorrow that so many Nigerians carry in their hearts.
In this region,
terrorism not only takes a human toll but it also makes public finances more
fragile. How? By widening budget deficits. Revenues are lower, including from
lower growth, and spending needs higher, including for security and for
supporting those impacted by the violence. One immediate downside is higher
financing needs that can crowd out other essential public spending.
This brings me
to my second topic. How can policymakers manage these near-term
vulnerabilities?
2. Managing
near-term vulnerabilities
Let me start by
underscoring the progress made in recent years. Nigerians have created a large
and diversified economy that has grown by about 7 per cent a year over the last
decade. This has been a remarkable achievement, a testament to Nigeria's
immense potential.
The outlook,
however, has weakened. Growth in 2015 is estimated at about 3.2 percent its
slowest pace since 1999 and only a modest recovery is expected in 2016. For a
country with a rapidly increasing population, this means almost no real
economic growth in per capita terms. On top of the slowdown, vulnerabilities
have increased. The ability to manage shocks is restricted by low fiscal
savings and reserves. And the weakening oil sector could stress balance sheets
and put pressure on the banking system.
Reduced
confidence and lower capital spending also impact the non-oil corporate sector.
Unfortunately, this sector looks less resilient today than during the downturn
of 2008-09. Companies that have increased their leverage and US-dollar debt in
recent years may now come under pressure as they face rising interest rates and
a stronger dollar.
Nigeria also has
a large regional footprint, and its fortunes affect that of its neighbors,
especially through trade. For example, it is estimated that a one percent
reduction in Nigeria's growth causes a 0.3 percent reduction in Benin's growth.
So what can
policymakers do?
I see an
immediate priority a fundamental change in the way 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 Nigeria's oil wealth, but what needs to be done so that Nigeria can
deliver to its people the public services they deserve--be it in education,
health or infrastructure.
This means that
hard decisions will need to be taken on revenue, expenditure, debt, and
investment going forward. My policy refrain is this:
Act with
resolve: By stepping up revenue mobilization. The first step is to broaden the
tax base and reduce leakages by improving compliance and enhancing collection
efficiency. At the same time, public finances can be bolstered further to meet
the huge expenditure needs. For example, the current VAT rate is among the
lowest in the world and well below the rates in other ECOWAS members--so some
increase should be considered.
Build resilience:
By making careful decisions on borrowing. Nigeria's debt is relatively low at
about 12 percent of GDP. But it weighs heavily on the public purse. Already,
about 35 kobo of every naira collected by the federal government is used to service
outstanding public debt.
Exercise
restraint: By focusing on the quality and efficiency of every naira spent. This
is critically important. As more people pay taxes there will, rightly, be
increasing pressure to demonstrate that those tax payments are producing
improvements in public service delivery.
Let me give you
examples of what I mean:
On capital
expenditure, the focus must be on high-impact and high value-added projects.
This is why the government is focusing on power, integrated transport (roads,
rail, air, and ports), and housing. These can help connect centers of activity
across the country and drive growth prospects.
On recurrent
expenditure, efforts should be made to streamline the cost of government and
improve efficiency of public service delivery across the federal and
sub-national governments. Transfers and tax expenditures should also be
addressed. For example, continuing the move already begun by the government in the
2016 budget to eliminate resources allocated to fuel subsidies would allow more
targeted spending, including on innovative social programs for the most needy.
Indeed, fuel
subsidies are hard to defend. Not only do they harm the planet, but they rarely
help the poor. IMF research shows that more than 40 per cent of fuel price
subsidies in developing countries accrue to the richest 20 per cent of
households, while only 7 per cent of the benefits go to the poorest 20 per
cent.
Moreover, the
experience here in Nigeria of administering fuel subsidies suggests that it is
time for a change. Think of the regular accusations of corruption, and think of
the many Nigerians who spend hours in queues trying to get gas so that they can
go about their everyday business.
At the same
time, we should not forget the huge challenges facing Nigeria's state and local
governments. These sub-national governments which account for the bulk of
social spending have only limited tools to manage the impact of declining oil
revenues. My message here is to manage better the smaller purse, while building
capacity to increase internally generated revenue.
The IMF can help
in that regard by providing technical assistance on public financial
management. We did so for the Kaduna State Government. We can explore how to
support states' efforts to undertake budget reform. I see another immediate
policy priority strengthen Nigeria's external position.
The essential
fact is that, given the structure of the economy, the massive fall in oil
prices which is expected to continue has changed the medium term foundations
for economic resilience. To be clear, the goal of achieving external
competitiveness requires a package of policies including business monetary, flexible
exchange rate and disciplined fiscal policies, as well as implementing
structural reforms.
Additional
exchange rate flexibility both up or down can help soften the impact of
external shocks, make output and employment less volatile, and help build external
reserves. It can also help avoid the need for costly foreign exchange
restrictions - which should, in any case, remain temporary. And going forward,
improved competitiveness from improved exchange rate flexibility and other
reforms will facilitate the needed diversification of the exports base and,
ultimately, growth.
This brings me
to my final topic, how can policymakers achieve more inclusive and sustainable
growth?
3. Achieving
inclusive and sustainable growth: The good news is that Nigeria is already, in
many ways, a 21st-century economy. Think
of the boom in mobile communications in a country where more than 140 million
cell phones are in use, nearly one for each Nigerian.
Think of the vibrant, home grown film industry
that has become the world's second-largest by output. Nollywood employs about
one million people who create films that are winning audiences across the
continent and beyond.
Think of the
growing number of innovative start-ups from fashion to software development that
are promoting Brand Nigeria. Indeed, the growth in services to about half of
Nigeria's output is a testament to the transformation that has begun, and which
needs to continue.
But we all know
that huge structural challenges remain, despite the many initiatives that are
ongoing. Let me highlight the conditional cash transfer scheme in Kano, where
poor households receive financial assistance linked to girls' enrolment in
schools. Overall, however, poverty and inequality still remain high, especially
in some parts of the country.
Women account
for about 42 percent of the total labor force which is comparatively low and
their literacy rates are well below that of men. Maternal mortality is
relatively high because of limited access to health care. Many women and
children are dying every day simply because they cannot get to medical
facilities fast enough.
With that in
mind, what are the key policy priorities? Invest in quality infrastructure,
make the banks work, and improve governance. Let me take each in turn.
The first: Act
with resolve to significantly improve transportation networks and power delivery
[i.e., generation, transmission, and distribution]. For example, Nigeria could
be exporting tomato paste--a staple of Nigerian cuisine--on a large scale, but
it imports about half of what it needs. This is why Nigeria needs to build more
roads and better rail networks, so that more farmers can bring their crops to
market.
Likewise, more
investment is needed in energy infrastructure in a country where too many
businesses and households regard their backup generators as their main power
source.
The second
priority: Build resilience by fostering a sound banking system. This will help
channel more savings into productive investments, especially in quality
infrastructure. To be sure, Nigeria's banks are generally well-capitalized and
more resilient than during the downturn of 2008-09. But they are beginning to
feel the impact of the growing vulnerabilities in the corporate sector. This
means rising non-performing loans, which will need to be carefully monitored
and managed.
The third
priority: Act with resolve in fighting against corruption. In his first public
speech after the election, President Buhari singled out corruption as a
"form of evil that is even worse than terrorism."
Corruption not
only corrodes public trust, but it also destroys confidence and diminishes the
potential for strong economic growth. At the global level, it is estimated that
the cost of corruption is equivalent to more than 5 percent of world GDP[1],
with over US$ 1 trillion paid in bribes each year[2].
Here in Nigeria,
important initiatives to discourage graft are underway and should be applauded.
Let me highlight the publication of monthly data on the finances and operations
of the Nigerian National Petroleum Corporation. This provides information on a
key sector, building confidence in transparency, and improving accountability
of oil revenues, for the benefit of all Nigerians.
Much more can
and needs to be done. Fighting corruption is a multi-year, multi-generational
struggle that must be won.
Conclusion
So let me conclude:
today your nation has embarked on a new journey. Nigeria is looking ahead,
while drawing strength from its assets, the richness and diversity of its
culture, the ingenuity of its people, and the belief in a better future.
Today
policymakers have the opportunity to address near-term vulnerabilities and
medium-term challenges with resolve, resilience, and restraint. Today the
"Giant of Africa" is walking with a spring in her step inspiring
others in the region and across the world.
As the great Nigerian
poet Ben Okri once said: "Our future is greater than our past".
Thank you.
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