At the just-concluded IMF/World Bank Spring Meetings, the Minister of Finance and the Coordinating Minister of the Economy, Dr. Okonjo-Iweala and the Acting Governor of the CBN, Dr. Sarah Alade took time off their back-to-back meetings with global financial leaders and officials of the IMF/World Bank to brief the press on what transpired at the various sessions of the global financial caucus meetings. In fact, Okonjo-Iweala spent just about 30 minutes with the media before rushing to attend a session she co-chaired with the World Bank President saying it would be rude for her to stay back while the World Bank President waits for her to come in.
Here are excerpts of the briefing.
What was the focus of this year’s Spring Meetings?
The focus of this year’s spring meetings has been to look at the global economic recovery, the groups of countries and what needed to be done by each set, either for them to strengthen their positions and make sure that whatever the circumstance, they are able to prevail with a strong economy under the present global economic circumstances.
The good news is that recovery is on; the global economy is recovering. The recovery in the US seems to be stronger but the one in the Euro zone is seen as quite fragile.
The reason for the fragility is that they are going through what may be termed an extended period of low inflation. Low inflation is not regarded as a good thing. It means that the demand for goods and services are suppressed and there is almost the fear of deflation.
Why recovery in Europe is fragile:
Falling prices in Europe, as happened in Japan, if these countries start suffering from continuous low prices, internally-driven demand for goods and services will be low and that would mean that the chances of those countries’ economies recovering will either be slower or reversed. The message is that yes, recovery is on, there is fragility particularly in Europe and therefore, countries have to look at this and strengthen their positions.We are worried about growth without impact on lives of Nigerians
The second reason for the fragility:
The other thing happening in the US is tapering. The gradual withdrawal or easing out of the liquidity the US authorities are putting into the US economy is an issue. This implies that the era of low interest rate is over in the US. This has a very important implication for Nigeria as a country as it will have impact on portfolio investment flows, as well as impact on Nigeria Eurobond.
How participants reacted to Nigeria rebased GDP
For us, the Nigerian delegates, we came into the Spring Meetings strong; we came at the time Nigeria just announced its rebased GDP and this was very favourably accepted, particularly as the institutions themselves participated in the work and also the quality control. The fact that Nigeria now has a better measurement of its GDP, and the base is stronger, was well received.
It elicited a lot of interest among participants and even some private sector operators who were coming to say ‘talk to us about it,’ told us they “are interested in investing” and one of them is Bumberg Green. They said they have already sent a team to Nigeria that is working with the Minister of Agriculture to make Nigeria the hub for grain and cold storage. They want to invest $250 million.
They were looking around countries in Africa to see where they could set up the hub. The fact that Nigeria now has the largest economy in Africa is making them feel that the hub should be in Nigeria, if we handle this well, and that decision is made. So we met them here with the Minister of Agriculture. That is just an example of interest the rebased GDP is generating at the Meetings.
Nigeria has strong economic fundamentals:
We also came into the meeting with very strong economic fundamentals, that also has played to our benefit. What do I mean? Our budget that has now been passed, even though they added a little, our fiscal deficit has moved from 1.9 per cent to 2.1 per cent of GDP.
I think our parameters look good.
What does the uncertainty in the global economy mean for Nigeria?
What does this mean to Nigeria, that is the uncertainty in the global environment? It means we must continue to build fiscal buffers, because they are telling us they are not sure which direction the Euro economy is heading, although the European Bank has said it will do the necessary, and if needed, inject more stimulus into the economy. They have told us that each country should build its buffer and it means Nigeria has to build its reserves and excess crude account, which is what we are doing, we have to maintain our macro economic framework, we must continue on that.
Sarah Alade cuts in:
For us at the Central Bank, we have talked about the quantitative easing. It has implications for Nigeria. Once we start rebuilding our reserves and excess crude account and get our policies right, we are on the right path. Throughout the Meetings, the emphasis was for emerging market economies to get their policies right.
What about Nigeria’s GDP/inequality in the country?
On Nigeria’s economic growth path that has been assessed as strong, we have been talking to participants and officials at the Meetings about inequality and job creation in Nigeria. I am very happy to announce that based on our own suggestions to the Fund (IMF) that we are worried about growth (without impact on the lives of Nigerians) and that we must have better quality growth. What I mean is growth that will create the jobs we need. Actually, they have launched some good work, several pieces of analytical work on how each country could cope with job creation, redistributive taxes through the budget.
Nigeria not alone in growth without jobs
Nigeria is not the only country in this, eventually all the emerging markets are suffering the same thing. Brazil, South Africa, Mexico, everybody. Mexico’s GDP is 4.1 per cent and they are suffering the same problem as Nigeria, Indonesia also. The Fund and the Bank are looking at these issues; the World Bank is coming to support Nigeria on how to build a social safety net programme to cater for those at the bottom end of the ladder. It is interesting that so many other countries are asking for the same thing and the Bank and the Fund are offering a series of suggestions on how to create more jobs.
Call for help to stop illicit financial outflows from Africa
We, group of African Finance Ministers also requested that the Bank and the Fund should look into the issue of illicit financial transactions. We have persisted in this demand and African Finance Ministers are saying based on a finding of a panel chaired by former South African President, Thabo Mbeki that about $50 billion a year is disappearing from the continent, we asked the World Bank and the Fund to talk to the receiving countries and help through capacity-building.
How the money is disappearing from Africa
How is the money going, it goes through those companies that should be paying taxes that are finding good ways to avoid taxes, something called transfer pricing, their profits are exported to jurisdiction where they pay less tax and we cannot tax them. Pricing through over-invoicing and under-invoicing of goods and services that they bring into our countries and corruption of officials in the continent especially as it relates to natural resources, almost every country in the continent has one mining activity or the other and the contracts are not favourable to us.
They will help in two ways; one is capacity, you need specialised skills to be able to deal with transfer pricing, over-invoicing and missed pricing and they are also to share information. Developed countries now have automatic tax information exchange; they get tax information automatically if you request, for people operating within their jurisdiction. We are not included; we are asking to be included so that developing countries can also get this information. And they should also help us with their authorities to repatriate identified illicit financial outflows.
World Bank announced that there is more funding amounting to about $52milllion now. Are they using these funds rightly for developing countries or pursuing policies that are making poorer countries poor?
First of all, let me preface this by saying that we are at a stage of our development. We are in control of what we want to do and we should not discuss this issue of promotion of ideology. If somebody comes to promote something you don’t believe in, you tell them to go away and say this is what I want to do. So, we do not feel that any country is coming to promote such in Nigeria.
The experience we have had is that we table what we want to do and if they are able to support us, they support us, and if they are not able and they have some other view, we tell them thank you very much and it has been working very well. So, with regard to the austerity, what I noticed in the IMF meetings is that they are not promoting austerity everywhere.
They are actually telling the Euro zone that they may need to ease off because of the expected low inflation. They are telling them they need to stimulate their economy more, that is not austerity. They were even criticizing the UK previously for pursuing austerity and telling them they need to promote the economy and stimulate it more. Then where they feel that the fundamentals are not strong enough, which is country specific, they can advise. So, basically, they are looking for places where the demand is still very low- to pump it up and where demand is high – to tighten it. So, that is the impression.
Secondly, the $52 billion you talked about is the IDA – the soft loan arm of the World Bank. They had replenishment. Recall that the last one was IDA 16, which I chaired when I was at the World Bank and we were able to get $49.6 billion. They’ve done a bit better this time ($52 billion) and they are going to use it to support the poorer countries. I believe that they are trying to do so based on the needs of those countries for infrastructure, health, education spending and to support good policies.
Those policies are on country by country basis and the country has to discuss with them. In our own (Nigeria’s) case, we don’t have any IMF programme, so, we are not in any kind of discussion with the Fund and we are not borrowing. So, the relationship we have with the IMF is based on policy issues. They’ve been very supportive of Nigeria. If you read the Articles 1V, which was concluded before this meeting, you will discover that the IMF feels that we are moving in the right direction.
The World Bank is also supporting us on the energy front. The World Bank Group is investing in Azura power plant in Nigeria. They are supporting transmission with $700 million. So, infrastructure, health and water are the areas they have focused on.
Dr. Okonjo leaves for her next meeting, CBN Acting Governor, Sarah Alade steps in:
Is the $50 billion financial illicit fund also affecting Nigeria and which areas are we prone to, since the country is now the largest economy in Africa?
The Minster has explained that these funds include transfer pricing for instance. When companies do transfer pricing, it means that when they import, they import at a higher price than they should have and when they are sending the money back, they send back more than they should have sent. So, it is across the continent, it not peculiar to Nigeria. This applies to different sectors of the economy and it has to do with over-invoicing and tax evasion. So, the $50 billion identified is for the entire African continent. What we have requested is for the World Bank’s cooperation in stopping it and our own capacity too to stop it when we know what is happening.
Is it not ironical that they are talking of low interest rates, while there is high interest rate in Nigeria. Also, we are keeping our foreign reserves abroad when we need it for our economy. What is the CBN doing to reduce interest rates so that entrepreneurs can have access to cheap funds?
We just talked about quantitative easing in the US. When the United States for instance, stops pumping in the money it is pumping into its economy, which has helped our economy stabilize, then there will be issues. That means foreign portfolio investors will withdraw their money from the Nigerian economy and invest it here (in the US). So, you need a high interest rate to attract portfolio investments into the country. That is why interest rates in Nigeria are high.
But that does not mean that we have not been trying to persuade the banks to also do things that will ensure that customers have lower interest rates. In terms of cost to accessing loans, CBN has gone ahead to do shared services with banks. CBN had partnered with banks to make sure that the cost of services they have, which would have been ordinarily passed on to customers, is becoming low. Banks now share back office facilities instead of each bank having its own. So, I think it’s a matter of time; we will see interest rates come down eventually.
But it is also important to say that before interest rates come down, fiscal buffers must be up. We will not be depending on portfolio investment or other inflows to run our economy. Once we have our Excess Crude Account (ECA) coming back up and we have the foreign reserves going up and a substantial part of those reserves belongs to us in the country, then we will not need to raise interest rate to attract portfolio investments.