Nigeria’s economic outlook faces significant risks from the covid-19 pandemic trajectory, oil price uncertainty, and security challenges, the International Monetary Fund (IMF) has said.
The global lender noted this in its report on the latest Article IV consultation with Nigeria during which its team of economists visited the country to assess and discuss economic and financial developments with the authorities.
The Nigerian economy is recovering from a historic downturn benefitting from government policy support, rising oil prices and international financial assistance.
Despite the recovery in oil prices, implicit fuel subsidies and higher security spending are dampening positive impacts as the federal government fiscal deficit widens to N6.39 tn for 2022, representing 3.46% of GDP.
The IMF, therefore, sees the strong need for major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.
The IMF, however, commended the authorities’ proactive management of the COVID-19 pandemic and its economic impacts but highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks.
Buhari’s government succumbed to pressures and postponed the removal of petrol subsidies by 18 months after the Finance Minister, Zainab Ahmed announced earlier in the year of plans to eliminate it by July 2022.
This has raised further concerns that the budget deficits would widen further when the N3trillion planned fuel subsidy for the year is accommodated.
Moreover, the consolidated government revenue-to-GDP ratio at 7.5 percent remains among the lowest in the world.
As contained in the report mailed Monday night, the IMF urged the removal of untargeted fuel subsidies, with compensatory measures for the poor, transparent use of saved resources, further of strengthening of social safety nets.
It also called for a significant domestic revenue mobilization, including further increasing of the value-added tax rate, improving tax compliance, and rationalizing tax incentives.
After registering a historic deficit in 2020, Nigeria’s current account improved in 2021 as well as gross FX reserves, supported by the IMF’s SDR allocation and Eurobond placements in September 2021. Gross FX reserves stood at $39.98bn as at February 3, 2022.
The Central Bank of Nigeria, last May devalued the naira by 7.6% against the dollar in an effort to migrate towards a single exchange-rate system for the local currency.
Though the IMF welcomed the removal of the official exchange rate, it recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favorable conditions.
“The exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy,” the IMF recommended.
It further considered it appropriate to maintain a supportive monetary policy in the near term, with continued vigilance against inflation and balance of payments risks. But authorities must stand ready to adjust the monetary stance if inflationary pressures increase.
The Bretton Woods Institution also recommended strengthening the monetary operational framework over the medium term—focusing on the primacy of price stability—and scaling back the central bank’s quasi-fiscal operations.
It also welcomed the resilience of the banking sector and the planned expiration of pandemic-related support measures.
While it believes that the newly launched eNaira could help foster financial inclusion and improve the delivery of social assistance, it also thinks that close monitoring of associated risks will be important. In this regard, further efforts to address deficiencies in the AML/CFT framework was encouraged.
Notwithstanding the authorities’ proactive approach to contain COVID-19 infection rates and fatalities and the recent growth improvement, socio-economic conditions remain a challenge.
Also, levels of food insecurity have spiked and the poverty rate is estimated to have risen during the pandemic.
The IMF emphasized the need for bold reforms in the trade regime and agricultural sector, as well as investments, to promote diversification and job-rich growth and harness the gains from the African Continental Free Trade Agreement.
Improvement in transparency and governance are also crucial for strengthening business confidence and public trust.
It also called for stronger efforts to improve transparency of COVID-19 emergency spending and noted Nigeria’s capacity to repay the Fund as adequate.
It however, stressed the need to address data gaps to allow timely and clear assessments of reserve adequacy.