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The IMF Executive Board 2010 Article IV Consultation Report on Nigeria: Analysis and Implications for Economic Management

The IMF Executive Board 2010 Article IV Consultation Report on Nigeria: Analysis and Implications for Economic Management

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Home > News and Society > Economy > The Executive Board of the IMF 2010 Article IV Consultation Report on Nigeria: Analysis and Implications for Economic Management

The IMF Executive Board 2010 Article IV Consultation Report on Nigeria: Analysis and Implications for Economic Management

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Posted: 21 March 2011 | Comments: 0
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The IMF Executive Board 2010 Article IV Consultation Report on Nigeria: analysis and policy implications for economic management

Background

The International Monetary Fund (IMF) often engages in economic and financial research on a variety of factors to produce information on the economic performance of Member States for the purpose of providing policy advice from others. Under Article IV of the IMF Articles of Agreement, the IMF created a link to the members, the economic and financial data and information on the likely results of the major policy initiatives and actions of the Member States. A staff team report on the results is then transmitted to the Board, which serves as a basis for discussion submitted by the Board. At the end of the discussions, the views of the Board are summarized and the competent authorities of member countries. This exercise is usually on an annual basis.

On Friday, 11 February 2011, the Executive Board of the IMF, was the 2010 Article IV Consultation with Nigeria. Therefore, public information and data (PIN) No. 11/25 prepared and published by the IMF. PINs are issued as part of the IMF's attempt to promote transparency and access to IMF analysis and views on the economic and financial capacity of Member States for the duration of the review.

Summary of the IMF Report

Although the IMF report some of the efforts of the Nigerian authorities praised in 2010 and also explained that the economic outlook for Nigeria is positive, the report raised a number of key questions about the direction of the general economic management within a year. Among other things, the following conclusions from the contents of the IMF report to be made:

Nigeria has succeeded in weathering the global economic recession.
Nigeria has succeeded in its former national banking crisis quite well.
Nigeria had improvements in economic growth in 2010.
Nigeria's level of inflation in 2010 remains high (double digits).
Nigeria's foreign reserve position fell within a year.
The Central Bank of Nigeria (CBN) during the year focused more on exchange rate stability and low interest rates.
The CBN in the course of monetary policy even contradictory initiatives implemented.
That the Nigerian currency is overvalued.

Overcoming the global economic recession

The two most important factors that facilitate recovery Nigeria:

Strong foreign exchange reserve position
Low Sovereign Debt Portfolio

Nigeria had made harder by the global recession of the above factors were not working, or otherwise. An essential part of the international currency reserves were built years before the outbreak of the crisis through the prudent management of foreign exchange earnings. Nigeria had also negotiated a favorable settlement prior to the crisis of its large external debt from international multilateral financial institutions. It is obvious that even the strong foreign reserves position would have been overwhelmed when substantial debt obligations were required to simultaneously at the same time that the global economic crisis will offset its toll on the economy of the country.

Therefore, it is advisory that the reserve accumulation is a key priority of economic management is. In the same vein, the accumulation of public debt to be approached with great caution. It is important that a healthy balance between what you can safely state funds and the proposed debt to be maintained.

Successful management of the recent banking crisis

One of the remarkable achievements in the ongoing reforms in the banking sector will be achieved in Nigeria, the continued maintenance of confidence in the financial system. Despite the scale of high impact of the crisis in the balance sheets of the banks that provide confidence in the ability of the financial system as at once the cause remains. Concerted efforts by the Central Bank of Nigeria to the affected banks back to profitability has been largely successful redirect.

The establishment of the Asset Management Corporation of Nigeria and its recent purchase of bad bank loans has continued to increase confidence in the financial system. Attention now appears on the next phase of reforms in the banking industry consolidation, which may come in the form of mergers and acquisitions, acquisitions, or transfers will be concentrated.

It is also important to consider the costs for the successful management of recent banking crisis in Nigeria. In addition to direct costs in the form of the Nigerian banks appeal fund, which was injected into the banks concerned, the resulting high double-digit inflation at the end of 2010, part of the net effect of the crises. This, I believe, a form of indirect costs.

According to the National Bureau of Statistics (NBS) has published Nigeria's inflation rate stood at 11.8% in December 2010. The inflation rate increased to 12.1% in January 2011. Rising inflation tend to reduce the quality of life, ceteris paribus. The effects of the above analogy is that while the authorities have successfully managed to par the domestic banking crisis, people are still paying high and rising inflation.

In future, it is advisory, that the objectives of price stability by keeping inflation under control can be achieved much as an economic priority of the government are considered.

Improve economic growth

The improvement of the economic growth rate of real GDP is measured, a positive sign for the effect of the combined fiscal stimulus packages that were during the year 2010 and the multiplier effect of the stimulus packages implemented in recent years.

A central concern of this the question is whether it can be sustained given the current economic and infrastructural conditions, the high growth rates were achieved. can at a time when economic policy in favor of the tax scale to promote the economy, a realistic goal for the future economic growth is relevant. In future, emphasis probably resulted from a growth through tax incentives for growth through real productive economic activity led to shift.

High inflation in 2010

High inflation leads to higher living costs and hence a reduction in quality of life. High inflation reduces the value of fixed-income and one of the best ways to deal with it for the economic policy focus on price stability. Controlling inflation remains a key concern to all governments, because the nature of human development hits – the quality of life.

Depleted reserves

While it can be argued that factors such as the global economic crisis, helped to put pressure on the Nigerian currency, and this contributed to the depletion of foreign exchange reserves in Nigeria in 2010. It is inexplicable to rationalize the continued expenditure of extra-budgetary revenue from oil sales during the period.

A clear framework for setting up of foreign reserves should be implemented so that the nation can reap the full benefit from its natural resource endowments. Undoubtedly signals the establishment of the proposed Nigerian Sovereign Investment Authority is a positive effort in this direction.

CBN focus on exchange rate stability and low interest rates

Also during the exchange rate of Naira to remain an important priority, it is advisable to also focus on domestic price stability, since this is a crucial factor in the quality of life of citizens. Perhaps, is the institutional framework in order to achieve this objective are not fully developed. The process can be accelerated. Similarly, the goal of management should interest not only to the banking sector, but also focus on the general economy as a whole.

CBN conflicting monetary policy initiatives

With high economic growth rates and high levels of inflation, it was unwise to step up economic packages. The net effect is that the inflation rate is further increased. The Nigerian economy was already on the road to recovery with a strong growth statistics at the beginning of the year. The high inflation rate at that time a red flag should have served, and this should have led to a gradual withdrawal / reduction of the stimulus packages. In future, the monetary policy initiatives to be more clear, focused and coordinated.

If the Nigerian currency overvalued?

The IMF report noted that the directors noted the IMF staff assessment of the overvaluation of the Nigerian currency, and therefore recommended greater flexibility in exchange rate policy. The implication is that points out that the current exchange rate management system is rigid and does not make room for healthy competition for foreign exchange.

My view on this is that as long as the exchange rate of a currency (like the Naira in this case) is a market mechanism which is intended to offer buyers and sellers and accept offers, it is questionable to accept a different conclusion than the fair value of the relevant currency.

It is my view that the devaluation of the Naira can not be a wise choice for a country like Nigeria now. Nigeria currently imports more than it produces this drive the cost of imports, which ultimately lead to a higher cost of living and thus to translate a poorer standard of living for most of its people. Even the incremental benefits that may be incurred by the lower costs of exports can be wiped off exponentially due to inflation, that come when the currency is devalued.

Assuming that the production capacity in Nigeria has been sufficiently developed, could increase a cheaper cost of production and exports exit ramp leading to a significant increase in foreign exchange earnings. Assuming that Nigeria's crude oil and refined petroleum products to the markets then the world economy, could create this competitive advantage proposed by the devaluation economic advantage for the country. The benefits that best thought. However, this is not the case.

It is therefore advised that the restructuring of the economy and the promotion of their performance in all key areas of competitive advantage remains the best option for long-term economic growth and development.

Mr. Shafii Ndanusa is a Certified Public Accountant (ACCA, UK) and Fellow of the American Academy of Financial Management (FAAFM, USA). He holds a Bachelor of Science in Accounting and a Master of Business Administration with specialization in Finance. He wrote from Abuja. Nigeria. E-mail: shafii@accamail.com .

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Shafii Ndanusa –
About the author:

Certified Accountants (ACCA, UK) and Fellow of the American Academy of Financial Management (FAAFM, USA). He is an expert on public and private company financial management, business analysis / management, projects, advice and statistical analysis.

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Article tags:
artive iv , International Monetary Fund , IMF , Nigeria , Central Bank of Nigeria , CBN , Economic Management , recession , banking crisis , inflation , currency , devaluation , political consultancy , exports , imports , economic stimulus package , price stability , exchange rates

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