The IMF Boss, Ms. Chrisitine Lagarde arrived in Nigeria on Monday, 4th January, 2015 for a 4-day visit in which she met with the Executive and Legislative arms of government. Ms. Lagarde shared her thoughts on possible ways to deal with the current challenges facing the economy -- most especially the dwindling government revenue, foreign exchange pressure and huge infrastructure deficit. As against suspicion that the IMF boss is in the country to rope Nigeria into an IMF program along with its unpopular conditionalities, Ms. Lagarde stressed that her visit was only to offer advice and reaffirm the support of IMF to the Buhari led government. While noting the fact that the resilience demonstrated by Nigerians as seen in the outcome of the 2015 general election buttresses the country's ability to overcome the challenges ahead. Nonetheless, she emphasised the need for the managers of the economy to "Act with Resolve, Build Resilience, and Exercise Restraint".
On revenue mobilization, the IMF Chief recommended widening the tax base as a way of improving government revenue in the face of lower oil prices while augmenting compliance and collection efficiency. Notwithstanding, she noted that the current VAT rate in Nigeria in relation to peers within the ECOWAS community shows that Nigeria currently has the lowest VAT rate hence suggested an increase in VAT as a measure to boost tax revenue. While we reason along the viability of an upward adjustment of VAT which is a consumption tax, we believe this should be done only after exhausting the option to enhance compliance and collection mechanism to broaden the current tax base.
We align with the position of the IMF (The Fund) on the need to build resilience by making careful decision on borrowing. With a budget proposal to invest borrowing solely into capital spending, most especially in power, infrastructure, housing and transportation, we believe the Presidency is on the right track. However, effort must be put in place to ensure that implementation is given a special attention to deliver the "Change Agenda" of the government. Furthermore, the plan to increase foreign borrowing to N900.0bn or US$5.0bn may be met with challenges requiring a significant risk premium if FGN does not take urgent steps to improve the perception of the domestic economy and its macro outlook. Lenders (especially in the Eurobond market) would likely demand a higher risk premium if macroeconomic risk persist. In the domestic capital market, higher demand for funds by FGN can be absorbed although marginal rates at the monthly bond auctions would trend higher relative to the low rates since October on the back of improved liquidity in the financial system.
The IMF's position on the management of the naira was not surprising given the pressure on the level of the naira in the parallel market which has amplified the calls for further devaluation of the naira. The IMF MD advocated for more flexibility in the management of the local unit in order to stem the rout on the naira as the capacity of the CBN to defend the naira wanes (depleting external reserves). Thus, we imagine that the CBN may need review its position on the pricing of the naira going forward.
In conclusion, the visit of the IMF Boss seemed timely as we expect this to give policy makers an opportunity to review their stance on critical issues in the economy within the context of global perception as the country makes hard choices in 2016.