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Nigeria: Unwinding the IMF Put Options - Oshikoya

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Wednesday, April 12, 2017 9:00a.m / Dr. Temitope Oshikoya**

The IMF recently released its Article IV Consultation Report on Nigeria. The Report recommends five main policy measures to reduce external vulnerabilities and promote sustainable growth: fiscal policy aimed at mobilizing non-oil revenue; raising interest rates with tight monetary policy; adopting a more flexible exchange rate regime; enhancing banking sector resilience; and implementing structural and institutional governance reforms. 

There are no surprises with these policy measures. They are standard and generic measures usually found in IMF’s Article IV Consultation Reports for most oil exporting countries. However, they provide context for which country specificities are then built upon. More importantly, the annual Article IV consultation is a very useful process for both the IMF and its member countries, in addition to the temporary financing facility and technical assistance that the IMF may provide to them. 

While the policy recommendation may not have sprung any surprises, what is surprising is how investors appear to have perceived the IMF’s roles as put options.  

Why the hysteria about Nigeria and the IMF from these utopian market participants? One obvious reason comes to mind. Investors have come to believe in the “IMF Put Options”, as global investors once widely believed in the “Greenspan put” in the 1980s and 1990s.  

The Greenspan put was a widespread perception that the U.S. Federal Reserve, under the then chairman Alan Greenspan would always bail stock investors out of their losing positions, by lowering interest rates and put a floor on how far stock prices could fall; thereby imparting put option value to equity valuation.  

For months, there has been a clarion call for Nigeria to go the way of Egypt: borrow substantially from the IMF and float the Naira. In one instance, Nigeria has been urged to seek temporary financing facility of as much as $20 billion from the IMF. The countries they select to compare Nigeria with tend to fade as quickly as trendy fashion fades. Some may have observed that before Egypt became the new bride, Kazakhstan was the darling of the financial analysts. As we earlier noted, however, while non-oil exports constitute 4% of Nigeria’s exports, they are 40% for Kazakhstan. Nigeria’s oil imports to total imports ratio is 25%, quadrupling that of Kazakhstan. Total revenue and non-oil revenue to GDP ratios in Kazakhstan are two and a half times those of Nigeria. Non-oil revenue as a ratio of GDP is five times that of Nigeria. 

Neither Naira free floatation nor IMF loan facility, however, is likely to happen any time soon. Market participants should get used to this. As the Punch noted in a recent editorial: “Countries that float their currencies get the fundamentals like capable infrastructure, strong institutions and business-friendly operating environment right; Nigeria lacks all this”. Our distorted economy today simply cannot survive a complete surrender to market forces: the “forces” here are manipulated and distorted by the rentier class.” In addition to the clarion call for Naira free floatation, portfolio investors appear to have been expecting an implicit guarantee through temporary balance of payment financing facility from the IMF along the lines of Egypt, even though it has become clear that Nigeria, with its over-dependency on oil export and revenue, has witnessed a permanent oil price shock. Thus, a short-term temporary financing facility from the IMF is not what is needed, but long-term financing coupled with permanent adjustment to address the structural, institutional, and infrastructural constraints impacting on productivity of the economy.  

In any case, of what good are the IMF put options, when the messages from the political authorities in Abuja clearly indicate that they will not be permitted. Our market participants seem to have forgotten that the IMF is, after all, an inter-governmental institution. The IMF can dialogue and consult with various stakeholders, it must ultimately deal formally with the government in its member countries. 

The IMF Article IV Report clearly demonstrates this fact: for each of the key policy issues raised by the IMF, the Authorities usually provide their own perspectives. The Authorities must also decide whether to undertake an IMF program, talk less of borrowing from the IMF. In essence, the IMF cannot impose its programs on governments in its sovereign member countries. It can only advise. 

The perceived IMF put is definitely not out of the money, but the Nigerian Authorities have clearly signaled that for now it is not in play. After all, General Electric is not waiting on the IMF before investing US$ 2billion in the Nigeria’s rail sector. For portfolio investors, when prices were rising, they privatize their profits, but they now want to socialize their losses with government borrowing from the IMF to prop up the financial markets.  Furthermore, as most banks are discovering, naira floatation is a two-edged sword: rising non-performing loans appear to outweigh temporary foreign currency translation gains. They are also discovering that they are not the only constituency within a multi-faced Nigerian society with a mixed economy that requires a balanced approach between the public and private sectors, market and the state. 

Investors should rather soberly concentrate on this as a matter of fact as well as on the traditional valuation yardsticks of book value, cash flow, dividends, and equity risk premia. They should stop salivating over the IMF put to bail them out. It is about time to unwind their perceived IMF put options! 

**Dr. Oshikoya is an economist and a chartered banker. 

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