. Tasks Nigeria on bolder fiscal reforms
By Clara Nwachukwu
The International Monetary Fund (IMF) has warned that tightening of monetary policy alone cannot reduce rising inflation, saying there is a need for fiscal restraint to achieve this.
Rather than the CBN tightening policy, the IMF reiterates that “the policy mix matters,” saying: “Fiscal restraint will reduce the cost of bringing inflation back to target in a timely way, compared with the alternative of leaving monetary policy alone to act.”
This comes ahead of the outcome of the Monetary Policy Committee (MPC) meetings of the Central Bank of Nigeria (CBN), which ends today; wherein analysts expect more tightening measures to rein in galloping inflation which hit 21.09% in October.
Since May, the CBN policy committee has increased its benchmark interest rate by 400 basis points. During its meeting in September, the MPC already hiked rates for three consecutive times — Monetary Policy Rate (MPR) or interest to 15.5%, and cash reserve ratio (CRR) to 32.5% in an “aggressive policy normalisation of the economies.”
Focusing on global inflation in its IMFBlog, yesterday, titled: “How Fiscal Restraint Can Help Fight Inflation,” the Fund maintained that “Fiscal policy can ease the task of monetary policy in reducing inflation while mitigating risks to financial stability.”
While noting that monetary policy has the tools to subdue inflation, the Fund argued that “fiscal policy can put the economy on a sounder long-term footing through investment in infrastructure, health care, and education; fair distribution of incomes and opportunities through an equitable tax and transfer system; and provision of basic public services.”
…fiscal policy can put the economy on a sounder long-term footing through investment in infrastructure, health care, and education; fair distribution of incomes and opportunities through an equitable tax and transfer system; and provision of basic public services.
Fiscal reforms
Already in its “Nigeria: Staff Concluding Statement of the 2022 Article IV Mission,” last weekend, the IMF noted that “Nigeria fares poorly compared to peer countries in sub-Saharan Africa (SSA), in vital social spending on education and health.”
This, it said, is because “Public finance is under stress with elevated fiscal deficits, high debt servicing costs and public debt projected to increase over the medium term.”
It added that “Without bolder revenue mobilization efforts, costly fuel subsidies and rising debt servicing costs will keep overall fiscal deficits above 6 percent of GDP in the medium term raising public debt to about 43 percent of GDP by 2027.
“While still deemed sustainable, such a level of debt is projected to take up nearly half of GG (general Government) revenues in interest payments making the fiscal position highly vulnerable to real interest rate shocks.”
Fitch Ratings on November 11 had forecast Nigeria’s GG debt to increase to 34% of GDP by end-2022, and downgraded the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’, even as the Outlook remains stable.
The agency attributed the downgrade to “high debt service” amid “low oil production and the expensive subsidy on petrol,” which it said “will continue to stress already low government revenue levels,” and erode “the fiscal benefit of high oil prices in 2022.”
Consequently, the IMF called for fiscal transparency and “Stronger cash management and better coordination among key public institutions is needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts.”
It singled out the Nigerian National Petroleum Company (NNPC) Limited, and “recommended a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including through a financial audit.”
It noted that while the NNPC has been publishing its financial reports since 2019, “some gaps remain,” seeing as “uncertainties remain regarding the nature of tax write offs and fuel consumption volumes.”
As a result, the IMF advised policy alignment between the fiscal and monetary authorities, saying they “have a responsibility to provide strong protections to those in need.”
The Fund continued: “Faced with high food and energy prices, governments can improve their fiscal position by moving from broad-based support to assisting the most vulnerable—ideally, through targeted cash transfers.
“Because supply shocks are long-lasting, attempts to limit price increases through price controls, subsidies, or tax cuts will be costly to the budget and ultimately not be effective. Price signals are critical to promote energy conservation and encourage private investment in renewables.”
Stronger cash management and better coordination among key public institutions is needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts.
More rates hike
Fitch Solutions said it expects the CBN MPC to hike key rate and then leave it unchanged in 2023.
Fitch Solutions said: “We expect that inflation will continue to accelerate in 2022, ending the year at 22.0% year on year. Inflation will ease somewhat in 2023 but remain well above the bank’s 6.0-9.0% target range.
“Given policymakers’ recent hawkish turn, risks are weighted towards a more aggressive tightening cycle. At Fitch Solutions, we expect that policymakers at the Central Bank of Nigeria (CBN) will hike their key rate from 14.00 to 15.00%.
Fitch Solutions think MPC will take the rate to a new long-term high in late 2022. Two key factors underpin this view, adding that inflation in Nigeria will remain far above policymakers’ 6.0-9.0% target range.
The CBN MPC had retained rates between late 2016 and early 2019, despite inflation being consistently above target.
“…we expect that inflation will accelerate to 22.0% by the end of 2022. While we think that tighter monetary policy and the more gradual depreciation of the naira will cause inflation to ease in 2023, it will remain far above policymakers’ target.”
These projections confirm its earlier assessment in October that “Nigeria’s current account will flip from a short-lived surplus in 2022 back into deficit in 2023.”
Although it admitted that “Nigeria’s current account position improved in early 2022,” but it “does not think that this will last.” Nevertheless, it believes the CBN MPC is “now more focused on meeting their inflation target than in recent years.”
