The African Development Bank will help Nigeria to overcome its recession but the oil producer should increase taxes and lift hard currency curbs to ease the dollar shortages choking Africa’s biggest economy, its president said.
The West African nation has been hammered after a plunge in oil revenues, which make up 70 percent of national income, eroded public finances and currency reserves needed to fund imports.
“Nigeria is too big to fail. The African Development Bank (AfDB) will rally strongly around Nigeria to overcome its recession,” the bank’s chairman Akinwumi Adesina said in an interview late on Monday in London.
In a first step the lender’s board was expected to grant a $1 billion loan at a rate of around 1.2 percent, which Nigeria could use to plug its 2016 deficit of 2.2 trillion naira ($7.1 billion). Nigeria has been trying for months to borrow abroad to fund a record budget to get the economy back on track.
“They have a liquidity problem,” said Adesina, a former Nigerian agriculture minister. “We want to make sure Nigeria gets resilient.”
Nigeria had agreed on several reforms such as increasing its value-added and corporation taxes to offset a loss of oil revenues, he said, adding that the tax-to-GDP ratio was 4 to 5 percent, less than other countries in the region at around 15 percent.
But the government should also lift hard currency curbs imposed by the central bank, Adesina said.
The restrictions effectively ban the import of almost 700 goods Nigeria wants to make at home such as cement or basic food. Dozens of factories across sectors have been forced to close as they cannot import raw materials.
“In our view it would be better to have gradual (customs) tariffs as opposed to (forex) restrictions,” he said, adding that such a move would end the pressure on the naira.
Nigeria abandoned its currency peg in June hoping to attract more inflows. But with hard currency curbs still in place, few foreign investors are willing to put their money to work there, and those who need hard currency have to pay a 40 percent premium on the black market.
Attracting investment was the only way for the central bank to lower its interest rates. “The interest rate is way too high,” Adesina said. “You cannot drag the economy out of recession with those interest rates.”
In September, the central bank left its benchmark rate at 14 percent, resisting calls from the government to lower borrowing costs.
The bank would also fund development projects for around $750 million in the near future. The AfDB is expected to lend Nigeria a total of $4.1 billion over 2016 and 2017, and more than double that to some $10 billion by 2019.
He also said the bank was ready to release a loan of $1.5 billion to Egypt once Cairo requested it. Egypt had agreed in December a $1.5 billion programme with the AfDB to be disbursed over three years.
(Reporting by Karin Strohecker and Ulf Laessing)