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IMF charges Nigeria to use external reserves judiciously

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By Emeka Anaeto & Babajide Komolafe, in Bali, Indonesia

•Lists measures to increase tax revenue
•Says borrowing should be balanced with stability objectives

The International Monetary Fund yesterday called for judicious use of Nigeria’s external reserves in defending the naira against the outflow of foreign portfolio investment triggered by rising interest rate in the United States and other advanced countries.

Zainab Ahmed

IMF’s Head, Emerging Economies Regional Studies Division, European Department, Anna Ilyina made this call in Bali, Indonesia, while commenting on the impact of rising interest rate (monetary policy normalisation) on Nigeria and other emerging economies.

From peak of $47.798 billion on July 5th, Nigeria’s external reserves dropped by to $43.61 billion, due to increase dollar sales by the Central Bank of Nigeria (CBN) in its bid to defend the naira in the face of increased demand for dollars by foreign portfolio investors exiting the nation’s debt market in a bid to take advantage of rising interest rate in the United States.

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Anna recommended flexible exchange rate and judicious use of the nation’s external reserves to the Nigerian authorities as the appropriate policy response to the monetary policy normalisation,

She said: “Nigeria and other emerging market nations have come under pressure since April. A combination of factors has basically affected emerging market since then. 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 in external balancing.

“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.

“In terms of policy responses, of course flexible exchange rate is the first line of defence.  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.

“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.”

Lists measures to increase tax revenue

In another development, the IMF has advocated increase tax audit, electronic filling of tax return, blocking of leakages and corruption as measures needed to boost the nation’s tax revenue.

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Deputy Director in the  IMF’s  Fiscal Affairs Department,  Paolo Mauro  listed these measures while speaking at the press briefing on the IMF’s Fiscal Monitor report for 2018.

He said: “Indeed, we do see revenue as crucial priority for the country, particularly, increasing 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.

Nigeria, others should balance with stability objectives

On his part, Tobias Adrian,  Financial Counsellor and Director at the IMF, stressed the need for Nigeria and other emerging economies to balance their borrowing activities with stability objectives.

He said: “We have seen in recent years increase in countries that issue debt in international capital market. That’s a good thing for development. When debts are raised for infrastructure projects, it is good.

“But international borrowing will need to be balanced with stability objectives. So, the 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 slow down 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 the 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.”

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