Different growth projections have been made for Nigeria’s fragile economy for 2021, after it showed a weak 0.11 percent rebound in the fourth quarter of last year.
The World Bank projects that Nigeria’s fragile economy could grow by 1.8 percent in 2021, the International Monetary Fund foresees a 1.7 percent growth, while the authorities, betting on figures from the National Bureau of Statistics appear confident of some 3 percent expansion.
The different growth projections anticipated to be driven by rise in oil exports and domestic demand, basically hinge on how global efforts to contain the COVID-19 pandemic intensifies.
But the outlook, obviously face high level of uncertainty – with the latest coming from the World Bank, which fears that Nigeria’s economic recovery is being threatened by slowed reforms.
Interestingly, Nigeria’s economic recovery is expected to underperform those of other oil producers, but an unexpected shock to oil prices could threaten the modest growth projected.
There are concerns that high inflation, currently at 17.93 percent, according to the latest numbers from the National Bureau of Statistics, as well as high unemployment at 33.3 percent would continue to exacerbate macroeconomic risks, while activity in the tertiary sector will not fully normalize unless COVID-19 is contained.
GDP per capita is projected to continue declining because the economy is forecast to grow more slowly than the population.
These are contained in the World Bank’s latest Nigeria Development Update (NDU) in which the Bretton Woods institution urged deliberate reforms, without which Africa’s largest economy may sink deeper and could only manage a 1.1 percent growth for 2021.
Launched both virtually and physically in Abuja on Tuesday, Nigeria Development Update (NDU) is a World Bank report series produced twice a year that assesses recent economic and social developments and prospects in Nigeria, and places these in a longer-term and global context.
The NDU also provides an in-depth examination of selected policy issues and medium-term development challenges in Nigeria.
It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Nigeria’s evolving economy. This year’s report is titled “Resilience through Reforms”.
In 2020, Nigeria experienced its deepest recession in four decades, but growth resumed in the fourth quarter as pandemic restrictions were eased, oil prices recovered, and the authorities implemented policies to counter the economic shock.
Those policies helped Nigerian economy, not only navigate through a difficult recession but helped soften the -3.2 percent earlier growth projection at the beginning of the pandemic to a modest -1.8 percent reported by the end of the year.
With the economy ravaged by the impact of the COVID-19 pandemic, the government carried out several long-delayed policy reforms, often against vocal opposition.
The government began to harmonize exchange rates; eliminate gasoline subsidies; started adjusting electricity tariffs to more cost-reflective levels; cut nonessential spending and redirected resources to COVID-19 responses at both the federal and the state levels; and also enhanced debt management and increased public-sector transparency, especially for oil and gas operations.
By creating additional fiscal space and maximizing the impact of the government’s limited resources, these measures were critical in protecting the economy against a much deeper recession and in laying the foundation for earlier recovery.
But Nigeria would need to intensify several critical reforms, which threaten nascent recovery, according to the World Bank.
“In the baseline scenario, Nigeria’s economy is expected to grow by 1.8 percent in 2021. Despite the current favorable external environment, with oil prices recovering and growth in advanced economies, reform slippages would hinder the renewed economic expansion and undermine progress toward Nigeria’s development goals.
“In a risk scenario, in which the government fails to sustain recent macroeconomic and structural reforms, the pace of economic recovery would slow, and GDP growth could be just 1.1 percent in 2021.”
The World Bank is concerned that with recent peak in oil prices, fuel subsidies have also re- emerged, and that a reversal of fiscal consolidation efforts on the revenue side is an especially threatening risk.
The real concern is that failure to sustain the reform momentum would threaten both macroeconomic sustainability and the government’s policy credibility and would further limit the government’s ability to address gaps in human and physical capital—all of which would discourage private investment.
The bank also anticipates that slow growth would put more pressure on the financial sector: nonperforming loans (NPLs), which have yet to reflect the impact of the COVID-19 shocks due in part to regulatory forbearance granted by the Central Bank of Nigeria (CBN), would likely rise as forbearance is withdrawn.
Moreover, with heightening insecurity in the country, a tepid or uneven recovery could exacerbate social tensions, which would further dampen investor enthusiasm and could lead to political instability, and more conflict.
High inflation rates are worsening poverty and depressing economic activity. Driven by a steep increase in food prices, since September 2019 headline inflation has risen dramatically.
Although inflation showed a decline to 17.93 percent in May 2021- the second straight deceleration in two years, it is still the highest in four years.
In contrast to previous inflationary episodes in Nigeria, the current trend arises from multiple demand and supply shocks, compounded by policy distortions and the exigencies of the pandemic.
On the supply side, a combination of unfavorable weather, insecurity and conflict, and pandemic-related shocks affecting food production and market access are pushing food prices up.
Trade restrictions, including the closure of land borders in August 2019, have also pushed up prices for both food and nonfood consumer goods. On the demand side, the lack of a credible monetary anchor encourages firms and consumers to expect shock-induced price increases and incorporate their expectations into their investment and consumption decisions.
The impact of higher inflation is severe: In 2020, rising prices alone—even without incorporating the direct impacts of COVID-19 on welfare—may have pushed an estimated 7 million Nigerians into poverty.
The World Bank believes that a sequenced program to protect the lives and livelihoods of poor and vulnerable Nigerians— with immediate attention to reducing inflation—is vital to sustain the recovery.
In the latest edition of the Nigeria Development Update titled “Resilience through Reforms”, the World bank proposes near-term measures to curb inflation while protecting the poor and supporting the recovery.
The Bank sees a strong correlation between high Poverty levels and high inflation which the later exacerbating the former. The headline inflation rate reached a four-year high in March 2021, and in 2020 food prices accounted for 63 percent of the total increase in inflation.
Most of the food that households consume is purchased rather than self-produced, even among poor agricultural households in rural areas; at 22.28 percent in May, food-price inflation has become a major threat to purchasing power and household welfare.
“Food insecurity is more widespread than it was before the COVID-19 crisis, and in November 2020 about 56 percent of households reported that adults had skipped meals in the previous 30 days,” according to the update.
“Expanding social protection programs to provide time-bound support will alleviate the immediate effects of inflation.
“Over the long term, however, the Nigerian authorities need to address the sources of inflation through a mix of monetary, exchange-rate, fiscal, and trade policies, complemented by reforms that support job creation.”
Consequently, the World Bank recommended three policy priorities, including reducing inflation by adopting policies to support macroeconomic stability, inclusive growth, and job creation; protecting poor households from the impacts of inflation; and facilitating access to sustainable financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.
But accomplishing these goals would require a big push in areas as varied as
exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection.
Consequently, the World Bank is urging authorities to make the Nigeria Autonomous Foreign Exchange (NAFEX) rate which is now the anchor rate for all formal foreign exchange (FX) transactions- more flexible in order to reduce real exchange rate misalignments, boost Nigeria’s competitiveness, and narrow the spread between the NAFEX rate and the parallel market rate, with a positive effect on inflation dynamics.
The bank has also urged government to fully reopen land borders to trade and strengthen regional cooperation in combating smuggling, facilitate imports of staple foods and medicines by removing them from the list of FX restrictions, and replace import bans with tariffs that align with the ECOWAS Common External Tariff.
The World Bank also thinks that it is now critical for Nigerian policy makers to review all FX and import restrictions currently applied to nonfood goods and assess the pros and cons of replacing them with tariffs. It also advised against adding any products to the list of import and FX restrictions; while also controlling oil-related inflationary pressures by reducing gasoline smuggling.
As Fiscal Policy measures, the Bank wants government to help control growth of the money supply, establish mechanisms to monitor and report the federal government’s stock of CBN overdrafts.
It also thinks it would be important to identify more flexible options for borrowing to finance the federal government deficit, eliminate the fuel subsidy, which benefits only the rich, and also design a sequence of reforms to mobilize domestic non-oil revenue in a way that does not affect recovery of the economy, such as increasing “sin taxes,” charging fees for electronic money transfers, rationalizing tax expenditures, removing loopholes in tax laws, and improving tax compliance by building up revenue administration.
The Central Bank of Nigeria (CBN) must also clearly define monetary- policy priorities and objectives, with price stability specified as the primary goal; resume naira- denominated open-market operations (OMOs) based on a transparent issuance schedule, and signal to markets that OMOs will use short-maturity securities to control banking system liquidity.
In the report, the World Bank further cautioned the CBN to cut down subsidized lending to medium and large corporates, expanding the scope for commercial banks to intermediate funds at a risk-adjusted lending rate, and phase out excessive reliance on the cash-reserve ratio as a high-frequency liquidity control tool and an instrument to finance quasi-fiscal CBN operations.
Options to raise revenues in this present time of crisis are also critical, including tax revenues which the bank say are necessary to run essential services, provide security to citizens, help tackle hunger and poverty, and deliver critical health and education services.
According to the report, “Nigeria may be Africa’s biggest economy but at just 4 percent it has Africa’s lowest tax-to-GDP ratio.
“Together the COVID-related economic slowdown and the steep fall in oil prices in 2020 brought into clear focus the need to increase non-oil revenue even when investment, jobs, and growth also need to increase.
“This calls for a carefully calibrated set of policy and administrative measures that can grow revenues without discouraging investment. That rules out any increases in traditional ad valorem taxes like the value-added tax but it does afford an opportunity to fully apply tax policies already adopted and reform tax administration to seal compliance gaps.”
Focusing on low-hanging, revenue-yielding fruits could yield substantial gains including; increasing “sin taxes,” charging fees for electronic money transfers, rationalizing tax expenditures, removing loopholes in tax laws, and improving tax compliance with more disciplined revenue administration.
The World Bank believes that an efficient implementation of these measures could raise Nigeria’s tax-to-GDP ratio to about 7 percent and bring in as much as N10 trillion in the next three years.
In the longer term, fundamental reforms of the tax system will be necessary to stimulate post-pandemic investment and economic growth.
“As Nigeria tries to “build back better” after the COVID crisis, a more strategic approach to revenue mobilization will also be necessary: not just taxing more, but taxing better; not just how much to collect, but how to collect, what to collect, and from whom.”
