Sending flares to the world

In medieval Europe besieged cities would fire distress flares high into the air in the hope of attracting help from allies. Modern nations do much the same thing during times of financial stress, only their methods have become more sophisticated over the past 600 years. Thus we read today of Nigeria’s attempts to put together a package of nearly US$7.0bn to tide it over the current crisis. According to the report, US$3.4bn is to come from the International Monetary Fund (IMF), US$2.5bn from the World Bank (WB), US$1.0bn from the African Development Bank (AfDB), and a further US$150.0 million from the Nigerian Sovereign Investment Authority (NSIA).

One question hangs over this line-up. The IMF? The IMF exists for interventions in times like these: but it is not famous for treating Nigeria with kid gloves. It usually likes countries to float their exchange rates and to introduce deep supply-side reforms.  So it is important to review recent IMF thinking on how to react to the crisis.

A recent IMF paper states that roughly one third of the outstanding debt of emerging markets is overvalued, with the result that – given repatriation of private-sector funds to safe havens – many countries will experience problems financing themselves.  In fact, the IMF notes, the investor appetite for emerging market risk is not driven by country-specific factors but by common external factors. And many countries will face problems servicing their debt, let alone raising more of it. Therefore, from the outset, there appears to a strong case for intervention regardless of country-specific circumstances.

Another argument from the IMF is that pumping liquidity into the US banking system is of limited use in the global context. This looks like a paradox when one considers the size and reach of the global US dollar network. But the problem is that a lot of hard currency lending, including US dollars, takes place from outside the US, in particular from Europe. And Europe has not seen – yet – the kind of liquidity surge seen the US. (Indeed, the European Union appears to be divided by the familiar fault line running between the Mediterranean countries and the more prosperous ones in the north.) So a large increase in US dollar liquidity in the US is not the answer to emerging countries’ problems. This again looks like a case for intervention.

Nigeria might make market-friendly reforms even though the IMF seems not to be demanding them. It has been announced that fuel subsidies will be cut, though it remains open to question whether this would still hold if oil prices rose back above US$50.00/bbl. In this regard is seems odd that the first move was to cut the regulated price of petrol (known locally as Petroleum Motor Spirit, PMS) as keeping the price up would have created a buffer between oil prices and the consumer. Another move was the Central Bank of Nigeria’s decision, on 20 March, to move its reference rate in the principal foreign exchange market, the NAFEX market (also known as the Importers and Exporters Window), from N366/US$1 to N380/US$1. But this only a small degree of liberalisation, in our view, and maintains the managed exchange rate as opposed to a free float. So Nigeria’s liberalising moves are a few seeds in the air, so far.

And the IMF, and the World Bank and the AfDB, are addressing the threat posed to emerging markets in general, and Nigeria in particular, by the coronavirus pandemic. They are not addressing the problems caused by the associated fall in oil prices. If oil prices do not recover to a comfortable level – for Nigeria’s public finances – of over US$50.00/bbl, there is no reason to think that Nigeria’s funding allies will treat it a crisis. There can be no distress flares sent up into the sky to solve that problem.