April 30, 2020
VOL Editor
Nigeria, for the first time in its history, has tapped the International Monetary Fund (IMF) for a loan, showing the severity of the damage inflicted by the Covid-19 induced slump in crude oil prices on Africa’s largest economy.
The IMF approved Nigeria request for emergency financial assistance of US$3.4 billion to meet the urgent balance of payment needs of the country stemming not only from the crash in crude oil prices but the outbreak of the COVID-19 pandemic.
The loan is classified under the IMF’s Rapid Financial Instrument (RFI), which is given to member countries without the strings and conditionalities attached to a typical IMF formal programme.
It’s therefore different from a full-fledged IMF programme or Extended Fund Facility (EFF) which Egypt, for instance, took in 2016 to solve its macroeconomic challenges.
Nigeria has never borrowed from the IMF be it in form of RFI or EFF. Nigeria has consistently turned down IMF bailouts of any kind until now.
Nigeria’s current President Buhari was the same one in charge in 1983 when the IMF first offered financial assistance to the country.
A mountain of unpaid debts to service and repay following the oil price decline made the IMF’s offer difficult to resist but Buhari rejected the Funds prescriptions which included reducing the role of the state in the economy, cutting trade protectionism and devaluing the naira which was then pegged at 1: US$1.
The economy continued to deteriorate and by 1985, Buhari was oustered by Ibrahim Babangida, who quickly re-opened talks with the IMF and World Bank.
Babangida would eventually turn down the option of an IMF loan even though he did implement some of the Fund’s conditionalities under the Structural Adjustment Programme (SAP) from devaluing the currency to loosening import bans.
To fund and supervise the SAP, Babangida tapped the World Bank, whose intrusiveness and oversight of government finances, the area most in need of reform, was less severe and conditional than that of the IMF.
As the structural adjustment began to bite, jobs were lost, the currency continued to fall, and the slogan SAP saps Nigerians became familiar. Babangida blamed its failure on the World Bank and IMF, even though there was no IMF programme, leading to a longstanding resentment of an IMF programme by Nigerians.
Why did Nigeria finally take an IMF loan?
The $3.4 billion may not come with the strict conditionalities of an IMF programme but it remains a loan which Nigeria must pay back if it is to continue being one of the member countries of the IMF.
The near-term economic impact of COVID-19 is expected to be severe, while already high downside risks have increased.
Even before the COVID-19 outbreak, Nigeria’s economy was facing headwinds from rising external vulnerabilities and falling per capita GDP levels. The pandemic along with the sharp fall in oil prices has magnified the vulnerabilities, leading to a historic decline in growth and large financing needs.
The loan is supposed to help meet Nigeria’s balance of payment gap which economists project at $9 billion this year.
That amount would pile pressure on an already thinning external reserves which is at a near four year low.
What $3.4bn loan inflow does for Nigeria
The money will provide much needed liquidity support to respond to Nigeria’s urgent balance of payment needs.
Bloomberg recently reported that foreign investors had some cash trapped in the debt market. The inflow from this loan could go a long way in ensuring these set of investors can now exit the country.
The loan will also help limit the decline in the external reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing and mitigating the economic impact of the pandemic and of the sharp fall in international oil prices.
The money will ease some pressure on the foreign exchange market which has witnessed dollar shortages lately. The parralel market rate weakened to a near three-year low of N450/$ this week as the dollar scarcity bites with reports of foreign investors dollars trapped in the country.
The $3.4bn inflow could see the CBN resume its dollar interventions in the FX market which it had suspended to conserve scarce dollars thereby creating room for the naira to appreciate in the coming weeks. To what extent the naira strengthens will depend on how aggressive the CBN intervenes.
Too small to make a big difference
The question most economists are having to answer at this time is whether the IMF loan significantly eases Nigeria’s economic pain.
Sergei Lanau, an economist at the IMF took to Twitter Wednesday to say the amount may be too little to be of significant impact on Nigeria.
We think Nigeria will face an external financing gap this year,Lanau said on Twitter. Easy unconditional IMF loans for emergency situations (RFI) are too small to make a big difference.
Reserve drains or more devaluation to compress imports appear more likely, Lanau added.
Although Nigeria expects another $3.5billion in multilateral loans from the World Bank and Africa Development Bank (AfDB), it is the view of some analysts that the IMF facility will only serve as a short term relief for a dollar thirsty Nigeria which may have bigger problems than $3.4 billion can solve.
Even if the country succeeds in tapping the entire $6.9 billion in seeks in multilateral loans it could still face a balance of payment deficit of as much as $2 billion.
Another economist, Omotola Abimbola, an analyst at Lagos-based investment bank, Chapel Hill Denham, said the IMF loan will improve FX liquidity in the interim but whether that is sustainable in the long term is another thing entirely.
Nigeria’s current account deficit is quite large and the IMF loan will not be able to finance it entirely which means it will not completely solve all the structural problems we have, Abimbola added.
Alternative way out
Ten economists polled by Business day urged the government to take a full-fledged IMF loan, incentive diaspora inflows and boost exports.
There are two things signing up for an IMF programme does for the country at this time.
First is we (Nigeria) get more money to fix the balance of payment deficit and second is it inspires foreign investor confidence in the economy which then helps slow the pace of foreign outflows from Nigeria,one economist who spoke on condition of anonymity said.
A money manager who spoke to Business Day echoed similar thoughts.
Nigeria’s needs around $10bn for starters and should be talking to the IMF for a loan of this size or atleast a Stand-By Facility which would help engender investor confidence and somewhat slow the rate of portfolio outflows which would help ease our balance payment problem,the person said.
The other alternative will be to tap the Eurobond market and that will be too expensive at this time given the risk aversion in the market, the person said. Raising debt from the local market is another alternative but the government will be wise to avoid debt that overburdens its already high interest payment to revenue ratio.
An IMF loan comes at zero interest and should be preferable at this time but its lack of popularity among Nigerians could serve as a hindrance to taking this option even though it makes economic sense,the money manager added.
Taking an IMF loan is a politically popular decision in Nigeria. Many Nigerians detest an IMF programme because of the conditionalities that the fund will force the country to implement in return for its cheap money.
The matter that some of those conditionalities will inadvertently help put the economy in better shape by curbing the excesses of the government from wasteful consumption subsidies to the overbloated costs of running the government, one Lagos-based economist said.
We are resisting an IMF bail out, but time will tell if we really have a choice, another economist said.
Another way to manage the country’s balance of payment crisis will be to further incentivise the inflows of diaspora remittances, according to Bode Agusto, founding managing director of Agusto Consulting.
Diaspora remittances has formed a sizeable chunk of dollar inflows into Nigeria since 2014, averaging $21 billion. It is estimated that remittances hit a six-year high of $25 billion in 2019 but that could cool to $20billion this year as the Covid-19 pandemic hurts the incomes of Nigerians who reside in the principal sources of inflows- the US and UK.
Another option on the table for Nigeria is to boost exports, particularly non-oil exports. This way it diversifies its source of foreign exchange inflow away from oil exports, which account for some 90 percent of foreign exchange earnings.
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