The International Monetary fund (IMF) has cautioned Nigeria on the need to watch its foreign exchange depletion as the normalization of interest rates in the United States which is redirecting capital outflows is just in its earlier stages.
Nigeria and other emerging market nations have come under pressure since April with a combination of factors affecting emerging market since then.
Speaking at the launch of the global financial stability report, the Head of Emerging Economies Regional Studies Division in the IMF, Anna Ilyina, said it started with sharp appreciation in US dollar in the context of rising US interest rates adding that emerging markets are very sensitive to changes in external balancing.
She said those countries that have stronger economic fundamentals and policy frameworks and less external financing have been really less affected.
IIyina said: “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.”
Speaking on the plans by Nigeria to continue to borrow from the international market despite huge debt profile, Tobias Adrian, Financial Counsellor and Director at the IMF, said the Fund has 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,” he said.
Adrian added: “International borrowing will need to be balanced with stability objectives. So, 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 a 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.”
At the briefing on fiscal monitors, the Deputy Director in the IMF’s Fiscal Affairs Department, Paolo Mauro, said the Fund sees revenue as crucial priority for the country, particularly, increasing non-oil revenue.
He said: “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.
“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.”