The International Monetary Fund (IMF) downgraded its 2020 growth outlook for Nigeria from its initial 2.5 percent to 2 percent on the back of plunging oil price fuelled by the Coronavirus outbreak.
For an oil-dependent nation like Nigeria, the continued spread of Coronavirus could mean additional shock for Africa’s most populous nation as the decline in global oil demand and the consequent fall in prices may throw the country’s 2020 revenue projection in disarray.
“Under current policies, the outlook is challenging. The mission’s growth forecast for 2020 was revised down to 2 percent to reflect the impact of lower international oil prices,” the IMF said in a statement on Monday after concluding its Article IV consultation to Nigeria.
The growth cut by IMF was earlier predicted by BusinessDay after it conducted a survey in January.
When a country joins the IMF, it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, and to provide the IMF with data about its economy.
The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability, and culminates in regular (usually annual) comprehensive consultations with individual member countries.
The consultations are known as “Article IV Consultations” because they are required by Article IV of the IMF’s Articles of Agreement.
During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.
According to Amine Mati, senior resident representative and mission chief for Nigeria, the pace of economic recovery in Africa’s largest economy remains slow, as declining real incomes and weak investment continue to weigh on economic activity.
“External vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals,” Mati said.
The increased dollar sales by the Central Bank of Nigeria to defend the naira in the face of high dollar demand by foreign portfolio investors exiting the nation’s fixed income market has been the key culprit responsible for the country’s continued decline in external reserves.
The reserves, which have maintained a downward trend in the last eight months, fell to N37.23 billion as of 13 February 2020, data from the CBN show.
If Nigeria is going to contain its vulnerabilities, IMF said major policy adjustments would be necessary to build resilience and unlock growth potential. Thus, the international lender of last resort pointed at the following areas for immediate attention.
Non-oil revenue mobilisation
According to the Washington-based agency, non-oil revenue mobilisation, including through tax policy and administration improvements, remains urgent to ensure financing constraints are contained and the interest payments to revenue ratio are sustainable.
“Recourse to central bank overdrafts should be limited and the mission supports the authorities’ plans to use the low domestic yield environment to front-load their financing requirements,” IMF recommended.
Further tightening of monetary policy
Further tightening of monetary policy is needed to contain domestic and external pressures arising from large amounts of maturing CBN bills, IMF said, even if it has to be done through more conventional methods.
The fear of a further spike in inflation regime forced the CBN to undertake a moderate tightening stance at the first monetary policy meeting of 2020, leading to the raising of banks’ cash reserve ratio (CRR) by 500 basis points, from 22.5 percent to a new level of 27.5 percent.
The rate at which the prices of good and service increase in Nigeria (inflation) jumped to 21-month high in January 2020 fuelled mainly by food price which is as a result of the border closure.
Figures by the National Bureau of Statistics (NBS) put Nigeria’s inflation rate (all items year on change) at 12.13 percent in January, highest since April 2019.
The mission also reiterated its advice on ending direct central bank interventions, securitising overdrafts to introduce longer-term government instruments to mop up excess liquidity and moving towards a uniform and more flexible exchange rate.
“Removing restrictions on access to foreign exchange for the 42 categories of imported goods would be needed to encourage long-term investment,” Mati said.
Banking system vulnerabilities
While the mission welcomed recent efforts to reduce legacy non-performing loans, it stressed the need for banking system vulnerabilities to be addressed.
“The introduction of risk-based minimum capital requirements would also help strengthen bank resilience. Notwithstanding the significant increase in lending, concerns about shortened maturity, asset quality and conflicting monetary policy signals call for revisiting the minimum lending to deposit ratio directive,” IMF said.
In its bid to improve lending to the real sector of the Nigerian economy, the CBN upwardly reviewed, for the second time last year, deposit money banks’ portion of minimum loanable deposits to 65 percent.
The decision, which is subject to quarterly review, was informed by appreciable growth in the level of the banking sector’s gross credit following the pronouncement of a 60 percent minimum Loan-to-Deposit Ratio (LDR) in July 2019, the apex bank said in a recent circular seen by BusinessDay.
Border closure
According to IMF, Nigeria’s border closure will continue to have significant economic consequences on the country’s neighbours.
“It is important that all involved parties quickly resolve the issues keeping the borders closed – including to stop the smuggling of banned products,” IMF said.
Without any formal notice, President Buhari on August 20, 2019 ordered the closure of land borders aimed at curbing smuggling activities, especially of rice.
Six months and counting, businesses in Nigeria and other neighbouring West African countries have raised expectations that the Federal Government would finally agree with its neighbours to reopen the borders to genuine import and export trade.
Since the closure, business owners in Nigeria, Benin Republic, and Niger that depend on cross-border trade to survive have been seriously affected following their inability to carry out their legitimate businesses.
The Federal Government had earlier scheduled 31 January 2020 as the deadline for the first phase of the Joint Security Operation ‘EX-SWIFT’ Response, but weeks after the deadline there has not been an update on the closure, an indication that there will likely be an extension.
Structural reforms
In terms of structural reforms, particularly on executing the much-delayed power sector recovery plan, IMF said “implementing the anti-corruption and financial inclusion strategy, and addressing infrastructure and gender gaps, remain essential to boosting inclusive growth”.
Launched in 2012, the National Financial Inclusion Strategy (NFIS) by the CBN has a target to include 80 percent of Nigerian adults into the formal financial cycle but the recent data by EFInA put Nigeria’s financial inclusion rate at 63.2 percent, meaning as much as 36.6 million or 36.8 percent of adults still lack access.
This leaves an exclusion gap of 16.8 percent. Data by World Bank revealed that Nigeria has financial inclusion gender gap at 24 percent as of December 2017.
The IMF applauded the Nigerian authorities and welcomed the steps that have been taken so far. The measures to boost revenue through the adoption of the Finance Bill and Deep Offshore Basin Act and improve budget execution by adopting the 2020 budget by end-December 2019 were some of the measures cited by IMF.
“The tightening of monetary policy in January 2020 through higher cash reserve requirements to respond to looming inflationary pressures is welcome. Progress on structural reforms—particularly in Doing Business, finalizing power sector reforms, and strengthening governance—is commendable,” Mati said.
ENDURANCE OKAFOR
