IMF raises red flag over Nigeria’s economy again
The International Monetary Fund (IMF) has again raised the red flag over Nigeria’s economy, saying the country faces significant risks from the COVID-19 pandemic trajectory, oil price uncertainty, and security challenges.
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 trillion for 2022, representing 3.46 percent 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 plans to eliminate it by July 2022.
This has raised further concerns that the budget deficits would widen further when the N3 trillion 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.
In order to reduce debt sustainability risks, the executive directors of IMF on Monday called on the Nigerian government to consider significant domestic revenue mobilisation, including further increasing the value-added tax (VAT) rate, improving tax compliance, and rationalizing tax incentives.
Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said “I totally disagree with this proposition as increasing VAT to raise revenue will only compound the burden on the current taxpayers.”
He said the focus should be on increasing the tax base and not the rate. The Federal Government doesn’t just have a revenue problem, but also a spending problem. The limited resources are not applied efficiently in the productive segments that will attract income in the future.
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 of February 3, 2022.
The Central Bank of Nigeria, last May devalued the naira by 7.6 percent 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 e-Naira 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 Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) framework were encouraged.
Notwithstanding the authorities’ proactive approach to contain COVID-19 infection rates and fatalities and the recent growth improvement, socio-economic conditions remains 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 the 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.