An International Monetary Fund (IMF) staff team, led by Jesmin Rahman, has disclosed that exchange rate and monetary policy reforms, increased revenue mobilization, and structural reforms will help to unlock Nigeria’s growth potential.
The team conducted a virtual mission from October 30 to November 17, 2020, in the context of the 2020 Article IV Consultation with Nigeria.
This is according to the End-of-Mission press release on the 2020 Article IV Mission to Nigeria by International Monetary Fund (IMF) staff, posted on the IMF website yesterday, 11th December 2020.
Considering that Real GDP is contracting, inflation is increasing, and external vulnerabilities remain large; the team, at the conclusion of the mission, concluded that major policy adjustments embracing broad market reforms are needed.
Issues highlighted by the team
- The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy.
- Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment.
- Supply shortages have pushed up headline inflation to a 30-month high.
- The outlook is challenging under current policies.
- Inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range.
- Fiscal deficits are projected to remain elevated in the medium term.
Government actions highlighted by the team
Recognizing the gravity of the situation in the country,
- The Federal Government adopted a revised budget in July, which removed fuel subsidies and prioritized spending to make room for a support package including higher subsidies on CBN credit intervention facilities and regulatory forbearance measures to ease debt service in affected sectors.
- The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households.
What they are suggesting
- Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path.
- A durable solution to Nigeria’s recurrent BOP problems requires re-calibrating exchange rate policies to reduce BOP risks, instil market confidence and facilitate private sector planning.
- Significant revenue mobilization – including through tax policy and administration improvements is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.
- The mission noted this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term.
- Further steps are needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership.
- There might be a need to withdraw liquidity or raise rates if BOP and inflationary pressures intensify.
- While the banking sector has been resilient, thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.
- On the structural front, the approval of the power sector recovery program financing plan, the ratification of the African Continental Free Trade Area (AfCFTA), and the completion of key road projects are positive steps. Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential.
What you should know
- The International Monetary Fund, IMF, promotes international financial stability and monetary cooperation. It also facilitates international trade, promotes employment and sustainable economic growth, and helps to reduce global poverty.
- The IMF’s primary mission is to ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries and their citizens to transact with each other.
- The IMF End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.