Despite the strong Foreign Portfolio Investment (FPI) recorded by Nigeria in recent times, the International Monetary Fund (IMF) Thursday warned that the country is vulnerable to any protracted capital flows reversal.
The Director, African Department, IMF, Antoinette Sayeh stated this during the launch of the multilateral institution’s Africa Regional Economic Outlook titled: “Keeping the Pace,” in Lagos.
According to her, without significant policy measures, a prolonged negative oil price shock or a permanent real Gross Domestic Product (GDP) growth shock could undermine the progress that had been made in achieving macroeconomic stability in Nigeria and other African countries.
Specifically, she advised that given Nigeria’s position, it was important for the country to take timely policy actions to be able avert future sustainability problems that could arise from such shocks.
“The main sources of risk are commodity price risk and the reversal of capital flows which has increased significantly in the region over the years. Portfolio inflows have gained traction in some countries and mostly in frontier countries like Nigeria,” Sayeh added.
Continuing, the IMF official stressed the need to strengthen fiscal consolidation in the country, saying that fiscal balance for 2013 and 2014 in Nigeria was projected to remain around 1.8 per cent of GDP, almost the same as in 2012.
However, in the short-term, the IMF recommended that countries in the region focused on rebuilding “the depleted fiscal buffers by reducing fiscal deficits. Also, external balance should be kept under control.”
“In the medium term, there is need to improve the business environment, develop capacity, promote economic diversification as well as infrastructure,” Sayeh added.
In her presentation, the Deputy Governor, Economic Policy, Central Bank of Nigeria (CBN), Dr. Sarah Alade, said the country could exceed the 7.4 per cent growth forecast for 2014 by the IMF with ongoing reforms in the country such as the power reform.
She argued that a lot of the risk and challenges in the country were being tackled by the fiscal and monetary authorities.
Alade explained: “In terms of the inflow, what we done at the central bank is that we monitor this daily. We have access to what comes into the country everyday. We don’t only monitor, we also want to know whether it is short-term investment or what we classify as medium-term or long-term.
“We do have a lot of the FDIs coming in as long-term investment, but for portfolio investments, what we do is to assume that everything that comes in under FPI is short-term. We treat these inflows as if, when we wake tomorrow, the money will no longer be there.
“We have also looked at our banks to see how exposed they are to FPIs because we don’t want another banking crisis. So we look at them and we stress them to ensure that whenever a capital reversal takes place, the system will stand.”
However, in his presentation, the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane insisted that the Nigerian economy was even more vulnerable to shock than it was in 2007, 2008 and 2009.
According to him, then the reserve level was higher and the threshold for adjustment then was also lower.
“In that case even when oil price went down all the way to $38 per barrel, the Nigerian economy was able to weather the storm. I think today the threshold for adjustment is much higher.
“Therefore I believe that the economic managers will have to much more aggressive and proactive in terms of preparing for changes and upcoming volatility in price, volatility in production as well as volatility in security issues that could arise in the electoral cycle which we are going into,” Rewane advised.