Building Economic Stability on IMF Reforms: Lessons from South Asia for Sub Saharan African Countries.

By Chinedu Okoye

Introduction

This paper is intended as a commentary on the recent policy recommendations by the International Monetary Fund (IMF). The policies include the abolition of petrol and electricity subsidies. We find that, as painful as these reforms may seem, they align with similar situations in the past for South Asian industrial giants today.

These countries have achieved significant economic success, so we draw points from two articles addressing the challenges of Sub-Saharan African economic growth.

Points from the IMF suggestions are taken from the works of Nan Li, Diaa Noureldin (April 10, 2024), and Tobias Adrian, Fabio Natalucci, Jason Wu (January 31, 2024), in relation to a sustainable pathway to economic growth amidst productivity challenges and a tight monetary environment.

IMF Suggestions and Observations on Management of Resources:

The success of more advanced Emerging Market (EM) countries in achieving accelerated economic growth and development in the past two decades was a result of:

1. Prudential Policies: To mitigate external pressures, Asian economies have built up reserves over the last two decades. Efficient reserve management is essential because policies geared toward industrial development—export and long-term capital inflows (Foreign Direct Investments) that boost reserves—have a time lag. 

In the interim, a model of exchange rate that best mitigates currency risks and provides long-run stability is essential for growth. In June 2023, the current Central Bank leadership abolished the costly fixed exchange rate policy in favour of a managed float more effective of market realities. 

2. Credibility of the Government: Advanced EM countries have built credibility with sound economic policies on the monetary and fiscal sides. With laws that ease businesses and policy frameworks that enable growth, these Asian giants have transformed their economies into industrial hubs, attracting local and foreign investments. 

Nigeria, and indeed Sub-Saharan African countries would need to build credibility similarly, using industrial, trade, and fiscal policy to forge alliances, and build mutually beneficial investment partnerships on a foundation of stable and trustworthy economic environment to encourage investments in key sectors. 

3. Essential Reforms: Nigeria and other SSA countries need to enact fiscal reforms to improve resource allocation efficiency and enhance the marginal efficiency of capital. This means spending on development projects (business support programs, transportation, and electricity, etc.). 

These Asian giants made the most of available resources [revenue and debt] to achieve their economic objectives—industrial development. The reforms should prioritize spending on infrastructural projects and human capital development, with support for strategic industries.

4. Negotiating Lines of Credit: Frontier markets (to which Nigeria and most SSA countries belong) were advised to strengthen engagements with their creditors and rebuild financial buffers. 

This comes with the realization of the debt burden facing African countries and the challenge it poses to the economy in that high-interest rates limit governments' ability to intervene or spend on capacity-building projects. 

5. Innovative Project Financing: The debt portion of the Nigerian budget, as with most African countries, is a huge limitation and an impediment to growth, which is already tepid. The government would need to be creative as much as it needs to be prudent, when contemplating financing strategies. 

Public Private Partnerships, and the commoditization of Public infrastructure are sustainable strategies. The former provides risk sharing, mitigating losses for both parties. The latter provides a source of income that could be used to finance debt costs incurred if any, and maintenance of the facility. 

Both strategies have been combined in the past in Lagos; the Lekki-Epe Expressway in Lagos was financed by an $85 million loan from the African Development Bank (AfDB). Under the PPP model. The federal government provided additional support which was in the agreement. More recently the Federal Government, though it's Ministry of Works, is implying a similar model for the Lagos-Calabar Coastal Road. 

On Increasing Growth Rates

Growth rates are forecasted to slow to just above 3% by 2029 following the five-year projections in the IMF world economic outlook. High-interest rates "put debt sustainability at risk" and restrict both public and private investment. 

To return to previous growth rates, the IMF posited that governments would need to explore intervention policies and leverage emerging technology to enhance the efficiency of factors of production.

Falling Growth Rates and Total Factor Productivity:

Labor and capital are drivers of growth, but more importantly is the efficiency with which these two resources are employed (total factor productivity in the private sector, and marginal efficiency of capital in th public secr)

There has been a "factor productivity drag" over the years. Total factor productivity has been on a steady decline in the two decades leading up to COVID. This has been a major driver for the decline in real output from 2001-2019. 

The Fund asserted that increasingly inefficient resource allocation has been a major reason for this decline in productivity and real output. And Zero Equilibrium attribute the same for Marginal efficiency of capital as a hindrance to Africa and Nigeria's stalled growth. 

Due to demographic pressure, the working-age population in low-income countries is likely to increase going forward, whereas the opposite is expected in China and most advanced economies. 

This presents an opportunity for Nigeria and other SSA Countries to leverage on their relatively young working age population with innovative policies and reforms that enhance skill acquisition.

Important Factors Affecting Growth Rates:

Of the factors listed in the report, two stand out as the most important for Sub-Saharan African countries: structural reforms and public debt overhang. Structural reforms are projected to add the most to global growth.

African countries have the most work to do in this regard. They also have the most to benefit. Public debt overhang is the most impeding factor on SSA economic development and growth.

IMF Suggestions and Federal Government Policy Moves

The IMF's suggestion to Nigeria on eliminating subsidies is meant to address inefficient spending and reduce fiscal deficits. Essentially, the country needs to make the most of its resources, channeling its available funds (government debt and revenue) towards growth enhancement. 

Negotiating with creditors on debt is aimed at securing deficit financing at the lowest possible cost. But all these depend largely on the credibility of the government, as investor confidence is necessary for capital inflows in the form of foreign direct capital.

So far, the government has taken necessary steps regarding monetary policy, in pursuit of exchange rate and price stability. This has seen a reasonable amount of capital inflows from foreign portfolio investments, most of which were bound for T-bills and bonds. 

On the fiscal side, electricity tariffs are being phased out, and the Minister of Finance is taking a balanced approach to government finance, placing much-needed emphasis on revenue generation.

Efficiency over Reduction

Much emphasis hasn't been placed on reducing the cost of governance, as the budget of Nigeria and most SSA countries is affected by inflation and so is not really excessive. 

The budgetary allocations to certain items may be excessive in some cases and insufficient in others. So, resource allocation efficiency should be the focus regarding public spending.

Zero Equilibrium Remarks

Nigeria would have to improve institutional efficiency and government credibility with reforms in critical sectors, especially the financial sector, education, and healthcare. 

This should be alongside intangible and/or policy infrastructure to incentivize businesses. Finance is crucial to stimulating investment activity, given that banking exposure to the private sector is not supportive of growth. Education and healthcare strengthen the young demography and weaponize the large labor force for economic advancement.

However, some reforms might need to be paced or phased out. An example of the need for the is the fuel subsidy removal which was somewhat reversed even though it is more controlled under the new framework. 

In the same vein, a rush to cut electricity subsidies might cause more harm than intended, negating all progress made thus far. Efficient resource allocation is the first step to industrial development and economic growth. The government needs gradual, consistent moves in this regard. This is the first step towards instilling confidence.

Final Overall Remarks:

In summary, taking from the IMF playbook, for development amidst a tight monetary environment, high debt, and reduced total factor productivity, Nigeria and Sub-Saharan African countries would need to:

- Build credibility

- Secure credit support to reduce the debt overhang effect on growth

- Enact structural reforms, overhauling the budget to allocate financial resources to the most critical sectors: oil and gas, power, education, healthcare, transportation, agriculture, and finance

- Balance out deficit financing with revenue generation.

Sources/ Recommended Further Reading;

- Tobias Adrian, Fabio Natalucci, Jason Wu

(January 31, 2024). Emerging Markets Navigate Global Interest Rate Volatility. IMF Publications.

(https://www.imf.org/en/Blogs/Articles/2024/01/31/emerging-markets-navigate-global-interest-rate-volatility)

- Nan Li, Diaa Noureldin (April 10, 2024). World Must Prioritize Productivity Reforms to Revive Medium-Term Growth. IMF Publications. (https://www.imf.org/en/Blogs/Articles/2024/04/10/world-must-prioritize-productivity-reforms-to-revive-medium-term-growth)