Abebe Aemro Selassie, IMF’s director of the African department, spoke at a news conference on Friday, focusing on the firm’s regional economic outlook for the year.

At an investors’ forum on April 19 in Washington, Wale Edun, finance minister and coordinating minister of the economy, said Nigeria’s tax-to-GDP ratio is low because citizens are not paying their taxes.

The tax-to-GDP ratio is essentially a comparison between the amount of tax collected in a year relative to a country’s GDP, which is the total output of goods and services in a period.

A higher percentage of the tax-to-GDP ratio implies that a nation can take care of its expenditures or primary spending without expanding debt.

While Nigeria’s public debt is racing toward the N100 trillion mark at N97.34 trillion in the fourth quarter (Q4) of 2023, its tax-to-GDP ratio stagnates at 10.86 percent.

Speaking on the economic challenges in Nigeria at the news conference, Selassie said the current government inherited very difficult microeconomic conditions.

“Huge imbalances were being masked by a lot of controls, which were not effective either,” Selassie said.

The IMF executive said the federal government has been pursuing policies ‘that we think are broadly in the right direction”.

‘NIGERIA SHOULD DIVERSIFY ITS ECONOMY’

He said the financial firm has also advised Nigeria on what an ideal mix of policies would be like. “We have many reports on this,” Selassie said.

“I think Nigeria, first and foremost, needs to diversify its economy. Second, this also applies to the resources that the government relies on, which are excessively dependent on oil and not enough on non-oil revenue.

“In a country like Nigeria, Africa’s most populous country, with all of those development spending needs, we think it’s problematic that tax revenue to GDP is only 8 to 9% when it should be much higher, so that more resources can be spent on building universities, on building infrastructure.”

On the monetary and exchange rate concerns, Selassie said it is important to have a system that is broadly reflective of supply and demand conditions. “I think that’s the direction which the government has moved,” he said.

‘WHY WE SUPPORT SUBSIDY REMOVAL’

Nigeria had ended its subsidy on petrol in May 2023, and the IMF had on many occasions expressed support for the policy.

The multilateral lender asked the federal government to completely phase out petrol and electricity subsidies in the country on February 12.

“The reason why we counsel against such generalised subsidies, it’s very simple: It tends to be highly regressive, meaning the benefits of such fuel subsidies tend to accrue to the richer people than the poorer people,” Selassie said.

“So, it’s people that are driving these large cars with big houses, when they receive subsidised fuel. They’re the ones benefiting relative to the poor and vulnerable in Nigeria.

“The people of Nigeria pay for subsidies and it’s the poorer segment of society that actually are losing out. That’s why subsidy reform is important.”

Selassie said the resources could instead be used to improve conditions for poorer people instead of accruing to richer people.

He said the IMF applauds the steps the government took to reduce the extent of subsidies.

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Cardoso spoke during an interactive session with Abebe Aemro Selassie, the International Monetary Fund’s (IMF) director of the African department, on Wednesday.

The event, a part of programmes at the ongoing IMF and World Bank annual meetings in Washington, focused on Nigeria’s foreign exchange (FX) market reforms.

For weeks, the gap between the local currency and the dollar has continued to shrink as the naira sustains its rally against the greenback in the FX market.

The latest appreciation was recorded on April 17, with the naira trading at N1,050 per dollar at the parallel section of the market.

The rally was extended at the official side with a 6.56 percent gain to N1,072.74/$ on the same day, up from N1,148.14 traded on April 16.

But while the naira continues to appreciate, Nigeria’s foreign reserves are dwindling, dropping to $32.29 billion on April 15 — the lowest level in over six years.

As a result, the currency’s recovery — described by some market watchers as “sudden and artificial” — has sparked debates regarding the fundamentals backing its appreciation; with some suggesting that the regulator is defending the naira from the reserves.

To “defend” a currency is to manage the exchange rate of such currency to reach a desired level.

Participating in the FX market, creating a fund to fend off volatility, or setting a fixed exchange rate with a foreign currency, are a few ways governments defend their currencies.

Governments can also use reserves to defend against speculation.

‘IT’S COUNTERINTUITIVE, AGAINST OUR PHILOSOPHY’

Speaking on the issue in the United States, Cardoso said doing this would be counterintuitive, stressing that the apex bank does not “intend to defend the naira”.

“As much as I have read in the recent few days, some opinions with respect to what is happening with our reserves, and the central bank defending the naira, if you think back to what our overall policy and philosophy have been, you can see is counterintuitive,” he said.

“What we’re encouraging is for the markets to be willing buyer, willing sellers, price discovery and ultimately, I perceive a future where central banks will really not need to intervene, except in very, very unusual circumstances.

“What is important to us is that there’s sufficient liquidity in the market, which I’ve spoken about here today, and that will continue.

“So, as long as we have a vibrant currency market, why do we need to go in there to intervene? We don’t need to.

“I can understand that, especially at the outset, there have been a few cases where the bureau de change (the BDCs), there was a need to get that segment going.

“And small amounts of money, relatively tiny amounts of money, have gone into that to catalyse that happening because it’s important that individuals have access to funds to send their kids abroad and do things which are important — health, etc.

“So, it’s important not to keep them out of the mainstay. But in terms of intervention, frankly, that’s really not our intention at all.”

‘$600 MILLION CAME INTO THE RESERVES ACCOUNT’

Cardoso said the reduction in the country’s reserves is due to the payment of debts, and not defending the naira.

“What you see with respect to the shifts in our reserves, is the shifts that you will find in any country’s reserve situation where, for example, debts are due and when certain payments need to be made, they’re made because that is also part of keeping your credibility intact,” he said.

“Other times, money comes in and, you know, takes it up again, and if you watch the next couple of days, I think between yesterday and today, we had about 600 million that came to the reserves account.

“All I will say is that we are looking towards ensuring that we have a market that operates on its own: willing buyer, willing seller, and price discovery. That’s where we’re going to be.”

The CBN governor reiterated that the shift “in our reserves has little or nothing to do with defending any naira,” stressing that it is not the regulator’s objective to do so.

In October 2023, the CBN said it would boost liquidity in the FX market by intervening “from time to time.”

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Taking the visiting IMF chief through some of the initiatives of the current administration, the Minister said the President Muhammadu Buhari administration is doing everything to make Nigeria productive in every aspect.

This, she said, would be achieved by shifting emphasis to the development of infrastructure, which had been neglected by previous administrations.

According to her, with a population of about 180 million people, Nigeria has no choice but to be productive, saying this can only be achieved through infrastructure.

She recalled that “The allocation for capital projects in 2015 budget was just 10 per cent while the recurrent was 90 per cent which had been the case in the past six to seven years.”

She assured that the Federal Government is working with the private sector, and justified Nigeria’s deficit budget, saying there is no problem with running a deficit budget as long as it is done with emphasis on capital project financing.

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