Remarks by Nenadi Usman
The minister of finance Mrs Nenadi Usman and the CBN Governor Professor Charles Soludo on Saturday had an interactive session with Nigerian journalist at the press centre, Suntec City, Singapore the Venue of the ongoing IMF meeting. During the interaction the minister and the CBN governor explained the mission of the Nigerian team to this year’s World Bank meeting
On preparation of the Nigerian team for the meeting
Minister
Basically, today (Saturday), we had three key meetings. The first meeting we had in the morning was with the Executive Director of the representing the African Group 1 constituency of the IMF, Mr. K.B Ngulu. There, we talked about the issues that arose in Mozambique about a month ago where we discussed issues bothering on voice and quota for African countries within the Breton Wood institutions.
The second meeting we had was with the Managing Director of the IMF, Mr. Rodrigo de Rato and his team. It wasn’t just Nigeria but some select African countries. Basically, he talked about how escalating oil prices in the world affect both the importing and oil producing countries. I believe you all know that the higher the prices of crude oil, the more complicated issues are and the more challenges countries have to face, whether they oil importing or oil exporting countries.
We also had a meeting with the President of the African Development Bank, Mr. Donald Kaberuka. It was a follow up briefing to the “Financing for Development,” conference we had in Abuja in May where we invited African finance ministers and the Chancellor of the Exchequer, Gordon Brown, who made a very powerful speech about the need for African countries to look towards costing their plan for education for the next ten years.
Professor Charles Soludo
These meetings are bi-lateral and are preparatory to the major meetings with the IMF/IFC and the Development Committee meetings which would soon be coming up here.
The major issue of the meeting with the IMF MD today is that rising oil prices has its challenges to all countries in the world, both the importers and the exporters, Nigeria inclusive. We have got our own challenges as well and we not just managing the oil prices we are managing the positive shocks. Also the consequences that it would have on our own economy, our own finances and macro-economic balances. There are the positive as well as the negative aspects as well. And I think that message came out very clearly. The Honourable Minister of Finance eloquently outlined how Nigeria is coping with what you might call the positive oil price shock – in terms of the crude oil price based the fiscal aspect, the savings of excess crude and how we have over time subsidised the imports of oil which is going to be reviewed in the coming years. And also the accumulation of surpluses especially in the area of expenditure, to special projects especially power as it were and that other sectors such as agriculture have also been doing well. But of course, managing the positive shock – macro-economy, it is not a tea party, especially since we are also importing oil. But we try to make a relatively better success of it compared to what was obtained in the past. In the previous oil boom era, we didn’t manage to get the economy growing positively compared to what we have now, I think we have learnt some lessons, we were not able to save in those times. But for now, I would say so far so good.
Would you say that managing the oil shock is the major agenda of Nigeria’s meeting with the IMF this year. Prior to this year, Nigeria’s major thrust was always for debt forgiveness and now that a major chunk of these debts have been written off, what is our policy thrust for now?
Nenadi
I don’t think that the management of the oil shocks is our own baby or our main thrust at this meeting. No. I think the of the Managing director of the IMF is discussing with countries because for oil importing countries, most of them get assistance to run their budget from the Bank (World Bank) and with increase in oil prices, naturally, they would have bigger budget deficits. I am sure you would know that once you increase the pump price of petrol for example, it affects the prices of food – almost everything is affected. So, he looked at it vis-√†-vis exports that will come out of Africa such as cotton and other agricultural products. He even talked about other metals like nickel, gold, Iron, ore that are being exported out of Africa and looked at the prices of those things and at the end of the day, he tried to strike a balance but it just wouldn’t balance because the prices of oil has risen so much and that makes nonsense of all other things and increases the budget deficits for those countries.
But for us, we would not want to come here and talk about the increases in the price of oil because it has its positive sides to us even though it has its negative aspects as well. Among the negative aspects is that expectations are very high at home because Nigerians feel that the moment you are selling oil at the world market, at about $60 or $70 per barrel, it means you should use more money in the country to provide more services, build more infrastructure and the likes. But they forget that the more money you pump into the system to build more infrastructure and to provide more social services, the more there would be the level of liquidity, the more there would be higher inflation, interest rates would also be affected and at the end of the day, they are the same people who would scream and say, oh! things are not going well again. So, you have to strike a balance between these critical needs and issues.
This is why, as the CBN Governor said, we have introduced the oil price-based fiscal rule, which means that no matter how much we are selling oil in the world market, we have our benchmark to be used for budgeting for oil in any particular year. For this year you know we used $35 per barrel.
Would you say we have been able to manage our oil resources very well madam?
Another thing is that we have so far been able to manage our earnings from oil. We have not allowed our huge earnings from oil to flood the system. We have worked very carefully on the medium term expenditure framework and we have gotten it right. We didn’t even stop there, we have deepened and strengthened the system by introducing the medium term sector strategy which when you add it to the medium term expenditure framework, it works beautifully together.
This is because it ensures that apart from looking at the big picture, we also are looking at different sectors and it ensures also that whatever you spent last year is complemented by your spending this year and it will be complemented by our spending next year so that you don’t just spend on different issues. It therefore allows you to coordinate and harmonise in a way that at the end of the day, your spending makes a lot of meaning for the people of the county.
How do we strike a balance between capital inflows to Africa, and managing local economies especially with the high oil prices since the IMF fears that in some of the African countries, fiscal authorities do not moderate the kinds of inflows, which could be harmful to the countries exchange rate?
Soludo’s
It’s a double-edged sword and what I must say about the Nigerian exchange rate is that so far, we are mindful of the possible ‘harmful’ effects of huge capital inflows especially in a flexible exchange rate regime. What that would definitely do normally is to lead to a rapid appreciation of the local currency, that’s what it does. And if you have a very rapid appreciation of the currencies – like swinging from one extreme to the other, especially if you are not sure whether the shock is permanent, if it reverses tomorrow then, you may go back to depreciation and so on and so forth. You don’t want exchange rate swings going to rapid appreciation because that also can have its own harmful effects. It hurts your capacity to diversify your economy especially into the exporting sector. It also carries with it a fiscal burden because much of our revenues are denominated in dollars, which you have to monetise. I believe it has got its own deleterious effects and so you are cautioned to maintain a key balance. And I must report that so far that has been our story. We have not allowed extreme volatility in exchange rate and you can see that even while our exchange rate is appreciating, it is appreciating gracefully so to speak – getting down within a track and we have managed that fairly within a band by not allowing extreme fluctuations. So, we have since taken care of fears of the IMF against Nigeria, which is number one.
The second is that – just to remind you that under the Policy Support Instrument (PSI) of which we must also give Nigeria a credit – that this is actually Nigeria’s own idea which has now been adopted and is being exported by the IMF as an instrument of surveillance to other countries – where they took our own reform programme and used it as the benchmark to monitor us. This is the first time it has happened and under that all these things about sound macroeconomic framework are detailed out and we have kept pace with the way it was stated under the National Economic Empowerment and Development Strategy (NEEDS) and even done much better than we have programmed it.
And if I may wrap up, I need to remind us about what the Honourable Minster had earlier said about our issue. Yes, for us locally, managing oil money is a challenge which so far so good and as you would see, when the latest PSI report is released, the IMF gave us a clean bill of health. I mean we have done very well on target. There are challenges moving forward but the important point for our constituency because Nigeria represents the Africa Group 1 Constituency and the IMF also seats on the Development Committee of this Group countries and the key issue that would probably come up at the meetings is the issue of voice and representation for African countries in the IMF and the World Bank decision making process.