crash

Christine Lagarde is clearly a diplomat in addition to being the managing director of the International Monetary Fund (IMF). After meeting Nigerian President Muhammadu Buhari in Abuja this week, she scoffed at suggestions that she had come to negotiate an IMF loan for the country, hit by a major revenue shortfall caused by plummeting oil prices.

‘Frankly, given the determination and resilience displayed by the presidency and his team, I don’t see why an IMF programme is going to be needed,’ AFP quoted her as saying. She also said it was not her place ‘to approve or comment on’ Buhari’s new 6.08 trillion naira (US$30.5 billion) budget.

Nonetheless the IMF would undertake a review and audit, ‘to really assess whether the financing is in place.’ It would also examine ‘whether the debt is sustainable, borrowing costs are sensible and what must be put in place … to address challenges.’

The outcome of that investigation would clearly be tantamount to a fairly explicit commentary and approval or disapproval of the budget, despite Lagarde’s reassurances to the contrary. And she had one important word of advice for Buhari even before the IMF undertook its review – to be more flexible in managing Nigeria’s exchange rate regime.

The central bank has so far resisted calls for a devaluation of the naira and last year spent billions of dollars defending it, but Lagarde warned that policy was depleting foreign reserves and hurting the population. Analysts have interpreted her remarks as signalling an imminent devaluation.

Lagarde also offered what was in large part a counsel of perfection; that Nigeria should find other sources of revenue to mitigate the huge loss of income caused by the falling price of oil, upon which the government depends for more than half its budget. Buhari, who was elected last March on a ticket to put Nigeria’s chaotic finances in order, has in fact announced ambitious plans to do so, including a major clamp-down on the country’s notorious corruption and by plugging other financial leaks.

That could explain the Nigerian telecommunications regulator’s decision to fine South African mobile telephone company MTN an astonishing US$5.2 billion (later reduced on appeal to US$3.9 billion) for failing to disconnect five million unregistered SIM cards last year. The journal Africa Confidential has suggested this fine should be seen against the background of MTN allegedly transferring US$400 million a year in transfer fees from its Nigerian subsidiary to a tax-free entity in Mauritius.

Whether Nigeria will be able to make up for the loss of oil revenue with just these monetary and fiscal measures is doubtful, though, without a major diversification of the economy away from oil. The IMF has offered help Nigeria diversify.

But that tall order is of course what Nigeria and all of Africa’s many other resource-rich economies are supposed to have been delivering for decades, with almost no success. The focus which Lagarde’s visit placed on the continent’s largest oil producer at the start of the year was appropriate because Nigeria’s challenges epitomise those of the continent.

This week, Aly-Khan Satchu, head of Rich Management, told the BBC that the Africa Rising story was in peril because of the collapse of global commodity prices; some by as much as two thirds. And that in turn was caused by the sudden slowdown in the Chinese economy.

Satchu said the consequent collapse of the currencies of several African countries dependent on single resources – such as Nigeria’s naira, Zambia’s kwacha and Angola’s kwanza – had not been fully registered elsewhere on the continent. He said an investor who had put US$100 into Zambia at the start of last year would have taken out US$14 at the end of it, because of the plunge in the copper price and the collapse of the stock exchange.

Buhari at least has a plausible, if ambitious, plan to try to mitigate the loss of oil revenues. Whereas Angola’s José Eduardo dos Santos, as Satchu pointed out, is simply gambling recklessly by borrowing heavily against a future rebound in oil revenues to finance the deficit.

Satchu said African policymakers appeared not to have digested the implications of China’s slowdown and the collapse of its stock markets (which plummeted again this week). They should be taking up South African President Jacob Zuma’s prescription of greater beneficiation, of adding value to raw materials before export.

In other words, they should be industrialising. Though whether South Africa – also suffering badly from the commodity slump – is much of an example is debatable. As Rick Rowden observes in an article just published in Foreign Policy magazine, South Africa is also suffering badly from the end of the commodity super-cycle.

He remarks – with a mixture of told-you-so satisfaction and regret – that events are now vindicating his unpopular 2013 prediction that ‘Africa’s growth would not be real, lasting, or beneficial for its people until it was based on industrialization rather than exporting raw commodities.’

He notes that with the plunge in oil and commodity prices, and the slowdown in China’s purchases, GDP growth rates across the continent were in steep decline and the IMF had cut its 2015 forecast for growth in sub-Saharan Africa from 4.5% to 3.75%.

Rowden’s own diagnosis is that Africa has gone badly wrong by following the free-market dictates of the IMF, World Bank and other Western advisers. Instead they should have been – and should still be – doing what the Western nations themselves did to get rich, and that is industrialising behind protective walls.

Whether that is the right advice; or whether instead African countries have failed to industrialise because they have never properly implemented the so-called ‘Washington Consensus’, for example by making their countries much more attractive to foreign investment – is debatable in itself.

But either way, they failed to re-invest the windfalls from the 15-year commodity super-cycle to diversify and industrialise their commodities. This, compounded by drought, may make 2016 the first of the truly lean years.

This article was first published by the Institute for Security Studies.

Please click here for the link to the Institute for Security Studies website.

 

 

 

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