Remove subsidies, fix revenue generation to drive growth – IMF
If Nigeria must alter its long-running lacklustre growth path, it would need to give priority to reforms in fiscal, exchange rate, trade and governance, according to the International Monetary Fund (IMF).
According to the Staff Concluding Statement of the 2021 Article IV Mission released by the IMF on Friday, Nigeria’s economic outlook is for a subdued recovery.
While the Washington-based international financial institution expects a 2.6 percent GDP growth for Africa’s largest economy this year, and projected to remain between 2.6-2.7 percent per annum over the medium term, it said: “It is just above the population growth rate, implying stagnant per capita income in the medium term.”
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. The latest IMF Article IV Consultation with Nigeria took place in the period November 3 – 15.
The IMF Article IV document states that on the immediate front, Nigeria’s fiscal and external imbalances require the removal of regressive fuel and electricity subsidies, tax administration reforms and installing a fully unified market-clearing exchange rate.
“Over the medium term, moving away from inward-looking policies through trade, monetary and foreign exchange reforms, enhancing public trust through governance and fiscal transparency reforms, and improving welfare through job creation and agricultural reforms are priorities,” it said.
The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act. In addition, it said the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed.
“Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation. Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources,” the Washington-based firm said.
According to the mission, significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path.
Despite much higher oil prices, Nigeria’s general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022, according to the IMF.
“There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle,” IMF said.
Over the medium term, IMF projected Nigeria’s fiscal deficits to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026 if it doesn’t take bold revenue mobilization efforts.
“General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing,” it projected.
To unleash the growth potential brought by the African Continental Free Trade Agreement (AfCFTA), IMF said Nigeria would need to prioritize a more open trade regime.
While IMF acknowledged the fact that the Nigerian government is committed to implementing the AfCFTA and is working to enhance trade facilitation through increased use of technology it said, the trade regime continues to, however, remain protective and restrictive with numerous products prohibited from FX access for imports, including basic necessities and food items, high tariff and non-tariff barriers, and difficult trade logistics.
The mission recommended decisive actions to reduce barriers to trade and reliance on import substitution.