The liberalization reforms
introduced into any repressed financial system is supposed to work in the
following ways. First free interest rates especially after a long-time of being
kept low by regulation, this move tends to encourage higher level of savings.
In the face of increased savings all the investment projects at the margin can
now find funding. What is more-with freedom of entry into the system the
increased competitions is supposed to ensure that the interest rates are kept
within reasonsable limits. The liberalization reforms that brings a financial
sector is expected to transform the traditional sector (Patrick 1966) by making
large available (which for instance can transform a traditional subsistence
agricultural implements, sellings etc). and also making available technical
expertise.
The
freedom of credit to move is supposed to promote efficiency in resource use, as
credit is expected to move in response to the rate of return on it in a given
sector. this is in contradistinction to the previous movement of credit to
supposedly socially desirable sectors but that are not able to provide the
expected rate of return. As productive sectors access funds, productivity is
expected to rise, output is expected to rise the rise in output is expected to
bring down prices.
The
increasing deepening and expansion of the financial system is expected to lead
to increased variety of financial instruments not only in the banking subsector
but also in the capital market. Financial deepening can be measured using
several kinds of indices, a few of these are: the ratio of the growth rate of
broad money (M2) to that of the gross domestic product; ratio of
Total banking assets to GDP, Gross Savvings in the economy to GDP as well as
Gross Domestic Investment to GDP as well as the Interest Rate Spread (i.e the
difference between lending rate and deposit rate). The more deepened the
financial system the more expanded the level of output and the rate of growth
of output are supposed to be.
A
look at the Nigerian economy since the onset of liberalization reforms in 1986,
especially financial sectors reforms, which started in 1987 really give cause
for concern. As shown in section 1 tables 2 and 3 all of the macroeconomic indicators
after the first three years of reform seem to have taken a plunge downwards.
For instance the real GDP growth rate which used to be in the order of 2.8% to
3% in the 1980 – 1987, climbed as high as 8.20% by 1990. However from 1991 it
started a steady plunge downward which reached its lowest ebb by 1994 when it
hit the 1.33% mark. Thereafter the
economy struggled to improve but could not. For the rest of that decade up to
the new millennium the real GDP growth rate did not reach the IMF/WB recommended
5%, nor the millennium development Goals of 7% nor the Asian countries
performance of 9%. Inflation climbed down initially from its 2-digit level to
get as low as 7.5% in 1990, but by 1995 the season of mass bank failure and
general distress in the financial system, inflation rose to be as high as in
different sectors of the economy to as low as 6.6% by 1999, since the new
millennium however it has started an upward rise again.
As
for financial deepening the result of our analysis shows that midway into the
era of reforms the earlier results of increased financial deepening started to
reverse itself. The table below shows the pre-Reform and post reform level of
financial deepening in Nigeria
using some of the includes of financial depending.
In
its editorial of 30th July 2001 the financial times (FT) warned both
the International Monetary Fund (IMF) and the executive arm of the Government
of Nigeria (GON) against “perpetuating a façade of reform”. According to the FT
editorial, in the last one year, “the government of President Olusegun Obasanjo
has pretended to reform its economy, and the IMF has pretended to monitor the
process. For the sake of Nigeria,
and for the credibility of the IMF and the World Bank, it is time to call a
halt to this policy of pretence.
Discussions
between the IMF and the executive arm of the GON have always been shrouded in
secrecy. This secrecy has left important stakeholders that include business
leaders international investors, labour movement, the press, general public, academia,
and even legislators in the National Assembly guessing about key economic
policies.
This
has tended to heighten economic uncertainty and bred strong distrust towards
the IMF in the country. Many have often openly blamed the nation’s economic
woes on wrongful advice from the IMF. The secrecy has also tended to undermine
the accountability of the executive arm
of government to the generality of Nigerians, and also to the National
Assembly.
The
two chambers of the National Assembly have openly dissociated themselves from a
few economic policy announcements by the executive arm in the last couple of
years. The unilateral increase of the pump prices of the petroleum products in
May 2000 and the executive campaign for “deregulation” or “liberalization” of
the downstream sector in 2001 are a couple of examples.
In
both instances the executive arm clearly saw no need to for accountability at
least to the National Assembly before announcing economic policy changes that
could have far reaching effects on the lives of Nigerians. In both instances,
there has been stout resistance from the assembly, labour and generality of
Nigerians. In the case of the first example the executive was forced to reverse
its decision by a nationwide strike action by workers, who received open
support from a good number of state governors. In the case of the second
example, the executive has been forced to soft-pedal and get inputs from
Nigerians before deciding on the best course of action.
The
IMF was widely accused of pushing the executive into the steps taken in both
cases, making a few to suggest that the IMF was undemocratic in its
disposition. The IMF has largely ignored the criticisms of its role in Nigeria by
domestic stakeholders. Although it also now tries to carry the national
assembly along in appreciating some of the suggestions it makes to the
government, it has not pushed it to the point of making public the full details
of its discussion with the executive.
The
executive arm on its part has often openly denied the influence of the IMF on
many of its questionable and politically risky economic policy intentions.
Eager to clear itself of the FT accusation of pretence in its relations in Nigeria, the
IMF sought and got the consent of the Obasanjo administration to publish in
full the IMF Staff Report on discussions with the GON. The reports were
released on he IMF web site on the 6th of August 2001, so that the
readers can make their own judgment.
Thus,
whatever fears the GON had in restraining the IMF from publishing the full
details of its discussions with the IMF can now be dispelled. The nation is in
a position to know what policies the IMF urged, why, which ones were sensible
or right, and which ones were not.
The
public disclosure of the full discussions between the IMF and Nigeria is a
healthy development. We note that while the reports published by the IMF are
useful, they do not have much more than post-mortem values. It would have been
better if the key agreements and critical benchmarks had been made public ex-ante,
with the IMF and the GON ready convince Nigerians of the rationale behind
proposed reform measures until Nigerians consciously accept or reject them. It
is cowardly to hide key reform measures from public debate and undemocratic to
try to force such down the throat of innocent Nigerians. Little surprise that
the report is more or less a catalogue of economic policy filatures.
Their
discussions and proposed agreements before they are signed. That will increase
accountability of the executive arm to the nation and foster public debate that
will enable the nation to buy in. the knowledge that everybody is watching will
also lead to more sensible policy suggestions from the IMF. Finally, once the
entire nation become the watchdog of the executive arm with respect to the
agreed benchmarks, there will be a higher level of compliance of the GON with
credibly agreed reform measures, as the government will find it politically
difficult not to comply.
Nigeria joined
the IMF on the 30th of March 1961. From 1987 to date, the country
has a total of four standby arrangements (SBA) with the IMF: Jan. 1987 to Jan
1988, Feb. 1989 to April 1990, Jan. 1991 to April 1992, and August 2000 to
August 2001.
Each
arrangement usually involves a credit line from the IMF and a set of policy
reform measures that GON should put in place. Nigeria has never drawn down on any
of the four loans. Successful completion of the SBA is usually needed to secure
debt rescheduling from the country’s creditors. This is why the SBA is important
to the GON. The IMF now has a senior Resident Representative in Abuja since June 2000,
assisted by a Deputy Resident Representative since August 2000. with their
presence in the country, Nigeria has benefited from a series of far-reaching
technical assistance from the IMF through the instrumentality of the benchmarks
stipulated in the SBA Two of the most striking ones are the Certification of
Due Process for Capital Expenditure and the Review of the 2001 capital
expenditure project .
Of
the 14 benchmarks that the Nigeria
was expected to meet between September 2000 and March 2001, the country only
met four. The other ten are yet to be met.
The
Nigerian government argues that the remaining benchmarks will be met if the SBA
is extended. In spite of serious doubts about the ability of the Nigerian
government to meet the remaining
benchmarks, the IMF has extended the termination data of the current SBA from
August to October 2Q01. If the IMF is satisfied at the end of the extension,
discussions will start on a successor 3 year arrangement that should enable the
country to qualify for generous debt rescheduling from the various creditors,
plus a genuine possibility of debt reduction.
VIEWS THAT IMF
NEED TO RECONSIDER
One would readily commend the IMF for urging
the government to undertake measures that will increase transparency and
accountability in the use of budgetary resources (due process tests, review of
capital projects etc). urging the government to establish legal and
institutional arrangements for successful completion of the privatization of
key utilities is also a good idea.
Some
of the suggestions and comments of the IMF on fiscal and monetary arrangements
in the country are however strongly objectionable. The IMF suggested the
following: Imposition of an absolute cap on government spending. It would have
been more sensible to focus on the structure government spending, and
encouraging the government to spend in such a way to stimulate a higher level
of economic activity. What is undesirable are increase in direct spending by
the government. Incidentally, government. Incidentally, government now has a
lot to spend, given the proceeds of privatization and commercialization, which
must be added to the mini oil boom.
But
private spending is not only stagnant but have been contracting, reflecting the
impact of resources extracted from the economy by the government. These are
currently being spent on questionable projects. Ensuring that these funds are
transferred back into the personal through higher pay for government workers
would appear a more sensible line of action. This would stimulate output
infrastructure bottlenecks through accelerated privatization will still
required sustained local demand to work. Purchasing power has been weak and increased
pay in the public sector is a way of reviving spending to stimulate a non-oil
sector growth. The prospects for the region are promising. With the expansion
in global output set to continue, IMF country teams are projecting that,
barring shocks, most countries will grow faster in 2011 than in 2010: for the
median country, growth is set to increase by more than ½ a percentage point
between the tow years, and in aggregate, average economic growth fro the region
is expected to be 5½ percent in 2011 compared with just under 5 percent this
year. It is important to note, however, that this assumes that no country will
have negative growth in 2011. the diversity in experience and prospects between
different countries in sub-Saharan Africa can
be effectively conveyed by considering the five countries that have performed
least effectively over the last three years. Boxes 1.1 and 1.2 show the main features
of these countries’ backgrounds, policies, and economic developments.
THE PROSPECTS
AND CHALLENGES IN THE FIVE LARGEST ECONOMICS
The
five largest economies (South Africa,
Nigeria, Angola, Ethiopia,
and Kenya)
account for two-thirds of the region’s output and just under half of its
population. The group is also quite diverse, comprising a middle-income oil importer,
two oil exporters (one of which is also now middle income) and tow low-income
oil importers in the last two countries are quite different – about US$330 in Ethiopia and US$840 in Kenya. This
diversity mirrors the heterogeneity of the region. All told, therefore,
prospects in these five countries should be a useful proxy for trends in the
region. All told, therefore, prospects in these five countries should be a
useful proxy for trends in the region.
Among
the five, only South Africa
went into recession in 2009. it felt the impact of the crisis particularly
strongly both because of its stronger trade and financial linkages and because
the crisis hit the country after economic growth had already started
decelerating. The effect was quite brutal, leading to the loss of about 1
million jobs. Angola
was also affected heavily by global developments, particularly the volatility
in oil prices, and growth decelerated from more than 13 percent in 2008 to
under 1 percent in 2009. the other three countries fared much better. In Nigeria and Kenya,
growth actually increased slightly; whereas in Ethiopia the marginal fall still
left growth at almost 10 percent.
The
five countries are set to grow on average by some 5 percent this year and 5½
percent in 2011, playing off the global recovery. But this will require
addressing the following challenges:
In
South African, the growth momentum, after three quarters of acceleration,
showed signs of tapering off in the percent projected for 2010-11. in this
context, the key for macroeconomic policy is to strike the right balance
between supporting the ongoing recovery and strengthening policy buffers,
including external reserves. Reforms to improve the effectiveness and
efficiency of labor and product markets could help to raise potential growth
and to make such growth more labor intensive.
In Nigeria, strong
non-oil growth in recent years, in particular in agriculture, looks set to
continue. GDP growth of about 7½ percent
is projected for 201-11. with growth at potential, it will be important to
ensure that fiscal policy is appropriately countercyclical to avoid overheating
the economy and to replenish the oil savings account improvements in
infrastructure and business environment can further increase Nigeria’s growth potential.
In Angola, the
government’s adjustment program, supported by an IMF stand-by arrangement, has
largely succeeded in restoring macroeconomic stability, following the initially
destabilizing effects of the 2009 oil price production. Large government payment
arrears to domestic contractors and suppliers have weighed on output in the
non-oil sector; resolution of these arrears will be needed if growth objectives
are to be realized. Further fiscal consolidation is also needed to strengthen
the external position and fully stabilize the economy.
In Ethiopia, the
economy has recently enjoyed strong and broad-based growth, including rising
contributions from the service sectors and industry. Macroeconomic imbalances
heightened sharply in 2008-09, but a strong tightening of monetary and fiscal
policies since late 2009 has helped reduce inflation to single digits and
rebuild international reserves. Exchange rate adjustments have also helped. GDP
growth of 8-8½ percent is projected for
2010-11. monetary policy has been recast to support demonetization. Structural
reforms and liberalization will be
needed to improve the business environment and secure a robust supply response
from the private sector.
In Kenya, a fine
line should be followed between maintaining the recovery through further fiscal
stimulus measures and ensuring that there are no risks to debt sustainability.
Similarly, monetary policy will need increasingly to be directed toward
inflation objectives. Although growth is recovering well, it is expected to
stay.
Sub-Saharan African’s growth performance has kept
pace with or surpassed that of other developing regions through the global
downturn. In particular, sub-Saharan Africa’s performance has most closely
paralleled that of developing Asia in having
avoided a contraction in output (Figure 1.6). certainly, some countries in both
region ser hit very hard (South Africa
in sub-Sahara Africa and Malaysia
in developing Asia, for instance). But, no the
whole, most centuries in these regions escaped with a slowdown in growth in
2009 rather than a recession. They are also enjoying a fairly robust rebound in
activity through 2011. It is only in 2011 that the profiles of the projections
for the two regions part, with growth in developing Asia set to decline slightly;
while growth in sub-Sahara Africa is projected
to increase moderately.
While
our central scenario remains very much for the global recovery to be
particularly well, downside risks to the global recovery have heightened in
recent months. This begs the question, how will region fare if there is a
hiatus in the global recovery?
The
July 2010 World Economic Outlook update included estimates of the possible
growth impact of heightened financial stress and contagion as a result of
mounting sovereign risk. Assuming shocks to financial conditions and domestic
demand in the euro area as large as those experienced in 2008, the illustrative
model simulations suggested that would growth next year would be reduced by
some 1½ percentage points relative to the baseline – that is, global growth
just below 3 percent rather than the 4¼
percent currently projected for 2011.
Under
such a downside scenario, projected growth in sub-Saharan Africa
for 2011 would drop from about 5½ percent to 4 percent. About half of this drop
would stem from an assumed cutback in oil production as oil exporters respond
to lower OPEC quotas. Growth in oil-importing countries would be about ¾ of a
percentage point lower than in the central scenario. Within this group,
countries heavily dependent on exports to and tourist receipts from Europe would be hit particularly hard. The impact on
their external balances, however, would be mitigated by a reduction in import
growth, as demand growth slows, and by much lower oil prices. Assuming only limited
responses in government spending, fiscal balances in oil-importing countries
would generally deteriorate by less than 1 percent of GDP, but some oil
exporters could experience a significant slowdown in global growth would be to
dampen growth in the region quite markedly, and delay further the effort to
rebuild policy buffers.