IMF calls for ambitious structural reforms of the Nigerian economy

…Recommends increased VAT, excise duties, removal of fuel subsidies and harmonisation of multiple exchange rates.

The International Monetary Fund has called on the Federal Government to implement ambitious structural reforms of the Nigerian economy to restore growth and reduce the vulnerability of the economy to oil price shocks.
The IMF emphasised that ambitious structural reforms are key to achieving a competitive, investment-driven economy that is less dependent on oil.

The fund recommended that “Priority should be given to improving infrastructure, enhancing the business environment, improving access to financing for small enterprises, and strengthening governance and anti-corruption efforts” noting that a “Timely and effective implementation of these measures would promote sustainable and inclusive growth.”

In the article IV consultation published on its website Friday, the IMF also called on the Federal Government to prioritise increasing non-oil revenue by raising “VAT and excise rates, strengthening compliance, and closing loopholes and exemptions” in order to boost revenues which are increasingly being swallowed up by debt servicing costs.

The IMF also called on the Federal Government to administer an independent fuel price- setting mechanism to eliminate fuel subsidies, strengthen public financial management, and develop a well-targeted social safety net that would also support the adjustment.

The Fund stressed the need to contain the fiscal deficit of state and local governments, including through improved transparency and monitoring. Nigerian states have largely struggled since crude oil prices crashed and more than 27 states are currently unable to meet their salary payment obligations regularly.

While commending the recent easing of foreign exchange restrictions, the IMF called on the Central Bank of Nigeria (CBN) to remove the remaining restrictions and multiple currency practices and unify the foreign exchange market in order to regain investor confidence.

“These policies should be supported by tighter monetary policy and fiscal consolidation to anchor inflation expectations and to limit the risk of exchange rate overshooting, as well as structural reforms to improve competitiveness.”

On the banking sector, the IMF recommended stronger regulatory oversight, enhanced contingency planning, and strengthening resolution frameworks, while undercapitalised banks should be encouraged to recapitalise.

While welcoming the recent launch of the Federal Government’s economic growth and recovery plan, the Fund notes that the outlook for the Nigerian economy remains challenging if current economic policies are sustained.
“Under the policies being implemented in early 2017, the outlook is challenging, with growth expected to remain flat and macroeconomic imbalances to persist. Downside risks include further delays in implementing reforms, an intensification of militancy activities, and worsening global risk aversion. If action is delayed further, risks of a disorderly exchange rate adjustment will increase.”

Even though Nigeria is not seeking any form of funding from the IMF, its recommendations will influence the ongoing negotiations with the World Bank for a US$1.4 billion facility as the World Bank may insist some of the IMF recommendations are implemented if they are to release the money to the country.

Analysts at the Financial Derivatives company, FDC are forecasting that Nigeria’s headline inflation will decline for the second month to 16.4%.
The likely drop in the rate of inflation is being attributed to further waning of the 2016 base year effects.
The government’s office of statistics NBS is expected to release the official inflation data next week.
According to a note put out Friday by FDC, “the reasons for a moderation in the price level in March are not farfetched.
“February/March 2017 was the period when the CBN’s aggressive intervention in the forex market forced a major appreciation in the Naira (13.5% to N392) and has fed mildly into retail prices.
“However, more significantly is the steep decline in the price of diesel from a peak of N260 to N195 at the wholesale level.”
There could be better news next month for those keenly watching Nigeria’s inflation trend as the 90-day transmission lag effect of the recent CBN’s forex policy which has brightened the prospect of the local currency and cut cost as well as manufacturer’s inventory cycle “may have delayed some of the pass-through effect of raw material and finished goods cost reduction.” FDC said.
The full impact of these policies will become manifest in the months of April and May.