Nigeria may require more policy implementation as much as it needs the approved $3.4 billion emergency loan request from the International Monetary Fund (IMF), the appraisal report by IMF shows.
While acknowledging the fact that COVID-19 outbreak is having a severe impact on Nigeria as downside risks have heightened, the IMF’s document for Fund’s Request for Purchase Under the Rapid Financing Instrument report for Nigeria advised that the country would require greater domestic policy action and full utilization of the authorities’ toolkit.
“Any continuous increase in domestic infections that would delay economic normalization would lead to a longer disruption in economic activity. Under such a scenario, economic growth would fall even more sharply, and the fiscal and external financing needs would be larger, straining available financing,” IMF said in the document released on Wednesday, adding that it could lead to spillovers through the rest of the real and financial sectors that could generate additional fiscal costs in some adverse scenarios.
After a four-day videoconference discussion between staff team of the IMF and Vice President Osinbajo; Minister of Finance, Budget and National Planning, Ahmed, Central Bank Governor Emefiele and other senior government officials, the Washington-based institution said in the document that it has approved the $3.4 billion in emergency financial assistance to Nigeria under the Rapid Financing Instrument to support the authorities’ efforts in addressing the severe economic impact of the COVID-19 shock and the sharp fall in oil prices.
Read also: Nigerias COVID-19, oil price crash and fiscal crisis calls for a more fundamental response
Stating that Nigeria is exposed to large uncertainty around the external environment, such as the risk of over-supply in the oil market and fast-evolving decline in international oil prices—exacerbated by steep discounts for unsold oil cargoes faced with the risk of a prolonged global COVID-19 outbreak, the lender of last resort gave the following recommendations.
Fiscal policy
According to the IMF, a substantial part of the shock would need to be accommodated through Nigeria’s budget.
“Staff encourages the authorities to urgently present a supplementary budget to parliament reflecting the oil revenue shortfall, higher health spending, and an additional targeted and temporary package to protect the businesses and households impacted, particularly because of the large size of the informal sector (60 percent),” IMF said in the document seen by BusinessDay.
Meanwhile, Nigeria’s projected deficit embedded in the 2020 budget jumped to N5.2 trillion or 3.67 percent of GDP, even after the Federal Government slashed its already passed budget and revenue projections in line with new economic realities.
The new budget indicated a total of 20 percent cuts on the capital projects amounting to N312.820 billion.
“In addition to the measures in the COVID-19 crisis intervention Fund, measures could include an extension of filing dates and making use of installment payment arrangements as well as further scaling-up of social transfer programs,” IMF said.
Monetary Policy
IMF staff said it supports the central bank’s caution in easing monetary policy, because of potential inflationary pressures arising from the exchange rate and food supply shocks.
“Given the uncertainties, however, the situation needs to be monitored closely and adequate liquidity provided if necessary,” IMF said.
The Fund warned that a sharp increase in outflows, potentially leading to an overshoot in the exchange rate, would pose a dilemma. It also stated that while “tightening of monetary policy may still be the first-best policy response, it could further damage economic activity. In such a situation, all available policies should be considered.”
Financing
The staff of the IMF team urged the speedy adoption of new borrowing limits to allow additional bond issuance at still favourable rates. It cited that the pension funds have extra liquidity now that they can no longer use to purchase high-yielding CBN bills because of regulations introduced in October 2019.
“Results of the last bond auction show strong demand, with an average cover ratio of 4.7 times and the 30- year bond receiving the strongest demand at 7 times the offer at auction,” the Fund said.
Exchange-Rate Policy
With falling reserves, IMF said it welcomed the recent steps taken by the CBN to allow greater flexibility in the Investors & Exporters (I&E) rate and narrow differences between various FX windows.
“With the spread across the various exchange rate windows now very narrow, this is also a good moment to immediately move to full and formal unification,” IMF said, adding that the CBN can, for example, converge all foreign exchange windows to the I&E window.
It explained that the critical step to ensuring a well-functioning market would be helped by the CBN’s calibration of its foreign exchange sales in the market at a level commensurate with protecting central bank reserves while taking into account low international oil prices and reduced FX demand.
“A unified and more flexible exchange rate will be an important shock absorber, especially in turbulent times— with CBN FX interventions limited to smoothing large fluctuations in the exchange rate,” IMF said, adding that rationing of foreign exchange—such as occurred in 2015, with damaging consequences—must be avoided as it would hamper trade and investor confidence, hence further delaying the economic recovery once the crisis passes
Financial Sector Policies
While acknowledging its supports of the CBN’s current bank-by-bank approach to assess risks from COVID-19, the international organization said banks’ capital and liquidity buffers should remain the first line of defence, which in the case of Nigeria means that supervisors could temporarily allow banks to drop below the minimum capital requirement (currently 15 percent for large banks, which is significantly above the Basel II 8 percent requirement).
“To be able to withstand large liquidity shocks, the CBN should intensify its monitoring of banks’ liquidity, particularly in foreign currency, and release the high effective CRRs as needed,” IMF said.
The staff team also supported the CBN in having banks consider temporary restructuring of loan terms but caution that such relief should be provided only to fundamentally sound borrowers.
