IMF flags Nigeria’s fiscal risks as oil revenue trails budget

…Below-forecast oil output threatens 2025 budget

…IMF urges delay in VAT hike, praises bold reforms

The International Monetary Fund (IMF) has urged the federal government to rework its N54.99 trillion budget for the year to reflect a less favorable oil price environment, warning that the country remains vulnerable to external shocks despite recent macroeconomic gains.

In its latest Article IV Consultation with Nigeria, the IMF praised bold reforms undertaken by Nigerian authorities in the past two years, including the removal of fuel subsidies, cessation of central bank financing of fiscal deficits, and the liberalisation of the foreign exchange (FX) market.

However, the Fund emphasised that more effort is needed to consolidate recent gains and ensure they translate into broader benefits for the population, particularly amid growing downside risks.

“The 2025 budget needs to be recalibrated to lower oil prices,” IMF directors stated in report, emphasising the importance of maintaining a neutral fiscal stance that prioritises growth-enhancing investments.

The Fund warned that a drop in global oil prices or higher external financing costs could jeopardise Nigeria’s fragile recovery, strain fiscal buffers, and trigger exchange rate pressures.

The Fund further warned that implementing the N54.99 trillion budget without adjusting for more conservative assumptions could widen the fiscal deficit from 4.1 percent to around 4.7 percent, further adding to Nigeria’s debt burden.

Oil remains a cornerstone of Nigeria’s economy, accounting for the bulk of export and fiscal revenues. While recent improvements in hydrocarbon output have helped lift GDP growth to 3.4 percent in 2024, the IMF cautioned that this pace remains inadequate on a per capita basis.

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“Growth has been steady but too low in per-capita terms, and inflation remains high,” it said. Poverty and food insecurity, the report added, have actually risen despite the macroeconomic progress.

Looking ahead to 2025, the IMF projects similar GDP growth at 3.4 percent, buoyed by improved oil production, the commissioning of a new domestic refinery, and a resilient services sector.

In an alignment with Nigeria’s current interest rate stance, the IMF recommended that the Central Bank of Nigeria (CBN) maintain a tight monetary policy until inflation deceleration becomes firmly established.

Inflation has fallen significantly—from an average of 31 percent in 2024 to 22.97 percent year-on-year in May 2025—but it remains one of the highest globally. The Fund stressed the importance of keeping real policy rates positive to support price stability and exchange rate credibility.

Another key focus was Nigeria’s evolving FX regime, as the IMF commended reforms that have increased price discovery and liquidity in the FX market but flagged the urgent need to implement a more structured intervention framework.

In 2024, Nigeria saw a rebound in capital inflows and successfully re-entered the Eurobond market, reflecting improved investor confidence. Reserves also improved due to a current account surplus and stabilisation of the naira.

However, elevated external rollover needs mean the FX market must be agile, and intervention must be data-driven and transparent, according to the IMF.

On the fiscal side, the IMF welcomed the government’s recent tax policy reforms, describing them as “an important step towards enhancing revenue mobilisation and creating fiscal space for development spending.”

The Fund advised staying the course on fuel subsidy savings and administrative efficiency gains while enhancing budget execution and spending quality.

Read also: IMF backs Nigeria to delay VAT hike, says “you cannot tax poverty”

The IMF also focused on Nigeria’s financial sector, calling for more robust risk-based supervision of emerging areas like mortgage lending, consumer finance, fintech, and crypto assets.

While acknowledging the CBN’s recapitalisation drive and ongoing adoption of Basel III standards, the Fund warned that rapid growth in financial innovation demands tighter regulatory oversight.

It further welcomed Nigeria’s work in enhancing its anti-money laundering and counter-terrorist financing frameworks, while urging completion of reforms necessary to exit the FATF grey list.

Despite recent economic stabilisation, Nigeria continues to face deep structural issues, with the IMF pointing out that GDP growth, while positive, has not translated into broad-based improvements in living standards.

“Gains have yet to benefit all Nigerians,” the Fund noted, urging increased investment in infrastructure, education, health, agriculture, and climate adaptation.

It further emphasised the need to improve agricultural productivity and address security challenges was especially emphasised as critical to reducing fragility and food insecurity.

Widening fiscal gap

The IMF also warned of a widening gap between projected and actual oil revenues in the federal government’s 2025 budget, which could push deficit well beyond initial estimates.

The Fund said Nigeria’s budget was based on “optimistic hydrocarbon revenue projections, even before the price decline since April,” and stressed that the country’s persistent tendency to overestimate revenues is undermining its fiscal credibility.

In its 2025 budget, currently being implemented alongside that of 2024 (expected to now run till December this year), the federal government forecast an oil price benchmark of $75 per barrel, production at 2.06mbp and N41.81 trillion revenue projection, leaving a deficit of N13.08 trillion. But, till recently, oil price has hovered well below the benchmark, while production of 1.745mbd are still below budget forecast.

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Moreover, though government said it generated about N6trillion in revenues in the first quarter of 2025, it is still below some N10 trillion prorated for the year.

“Nigeria has a consistent habit of over estimating revenues,” the Fund noted bluntly.

Oil remains the bedrock of Nigeria’s public finances, but recent market dynamics and sluggish production levels have sharply diverged from budget assumptions.

Although the authorities have indicated plans to adjust the budget, the IMF said that in the absence of an officially revised fiscal framework or updated revenue targets, “projections of the fiscal stance and financing needs are uncertain.”

The Fund expressed concern that capital expenditure projections in the 2025 budget likely exceed actual implementation capacity, a recurring issue in past fiscal years. It warned that despite significant allocations—including $200 million to offset recent U.S. aid cuts to Nigeria’s health sector—poor execution and weak fiscal data could hamper outcomes.

To fix this, the Fund urged reforms to budget forecasting and public investment management, along with expenditure reviews to identify and prioritise high-impact projects. It also welcomed Nigeria’s recent steps to harmonise fiscal data across agencies, noting that poor data quality complicates policy decisions.

It also said that Nigeria’s 2025 financing strategy will need to be recalibrated if the government proceeds with current plans.

Experts differ

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), agrees with the IMF on the budget cut.

“Well, I think the IMF is correct. In order to ensure that we don’t incur too much deficit in the budget, in order to ensure that our debt is also sustainable, I think it makes a lot of sense to align our expenditure to our revenues.

“From that perspective, I will agree with the IMF that we need to align the budget to current realities. Well, as for the implications of a cut in the budget, projects may have to be stepped down if you cut the budget. And in any case, how much of the capital budget have we been able to implement over time? You know, for most of the years, most of the budgets dating back to even five to 10 years, I think we have done nearly 30 percent- 50% performance, especially on the capital budget.”

Ayokunle Olubunmi, head of Financial Institutions Ratings at Agusto & Co., noted that while the budget benchmark is set at around $75 per barrel, oil prices have recently averaged above $80 per barrel.

“Even though oil prices have dropped briefly in recent weeks, they have remained relatively high overall. The suggestion to cut the budget may be premature, especially considering that we haven’t even received the full revenue inflows yet,” Olubunmi said.

He pointed out that Nigeria has no strong history of cutting budgets in response to oil price fluctuations.

He emphasised the need for Nigeria to focus more on improving revenue generation rather than routinely cutting essential investments when oil prices fluctuate.