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Three things we learnt from IMF’s 2020 Article IV mission to Nigeria

The International Monetary Fund (IMF) expects Nigeria’s economy which has been severely impacted by the COVID-19 pandemic to contract by 3.4 percent in 2020, a 6-percentage point drop compared to pre-COVID-19 projections on the back of plunging oil prices.

Africa’s largest economy which was already experiencing falling per capita income and double-digit inflation became more vulnerable as the impact of the global pandemic exacted heavy toll on the economy which entered its second recession in five years in Q3 2020.

“Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high,” IMF said in a statement on Friday after concluding its Article IV consultation to Nigeria.

Under current policies, the outlook is challenging, according to the Washington-based organisation.

“Real GDP is projected to contract by 31⁄4 percent in 2020. The recovery is projected to start in 2021, with subdued growth of 11⁄2 percent and output recovering to its pre-pandemic level only in 2022, IMF said.

Despite an expected easing of food prices, the Mission said Nigeria’s inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range due to absent monetary policy reforms.

Following a significant decline in revenue collections- from levels that were already among the lowest in the world- IMF projects Nigeria’s fiscal deficits to remain elevated in the medium term. The Mission explains that there are significant downside risks to this near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria.

When a country joins the International Monetary Fund (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 Nigerian authorities have undertaken commendable and timely measures to counter the pandemic’s impact on lives and livelihoods. “But more needs to be done.”

While the IMF explained that exchange rate and monetary policy reforms are needed to address recurrent BOP pressures and raise the medium-term growth path, it recommended the need for increased revenue mobilization and structural reforms will help to unlock Nigeria’s growth potential.

Exchange rate

The IMF believes the durable solution to Nigeria’s recurrent BOP problems would be the recalibrating of the country’s exchange rate policies to reduce BOP risks. “instil market confidence and facilitate private sector planning,” it recommended.

While commending the adjustments in the official exchange rate made earlier this year and says they are steps in the right direction, the Mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.

The mission said it agrees with the CBN that the accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access.

“However, if BOP and inflationary pressures intensify, there might be a need to withdraw liquidity or raise rates.”

It explained that, given weak transmission and record low market interest rates, further cuts in the Monetary Policy Rate are unlikely to provide additional support to the economy, and thus, in the medium term, the operational monetary policy framework, along with policy strategy and communication, should be strengthened to establish the primacy of price stability.

“While the banking sector has been resilient thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans,” IMF said.

Revenue mobilization

Significant revenue mobilization-including through tax policy and administration

Improvements-is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities, according to the IMF.

“With high poverty rates and only a gradual recovery in prospect, revenue mobilization will need to rely initially on progressive and efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root,” it said.

The mission said it welcomes this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term and explained that it can be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.

“Further steps are needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership. The mission welcomed the recent submission of the Petroleum Industry Bill (PIB) to the Parliament. The Fiscal Framework chapter of the bill appropriately rebalances the government take in onshore/offshore production, with the aim of providing a fair share to the government while remaining attractive to investors,” it said.

Structural reforms

On the structural front, the approval of the power sector recovery program financing plan, the ratification of the African Continental Free Trade Area (AfCFTA), and the completion of key road projects are positive steps.

Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential.

“Moreover, it is critical to continue strengthening the anti-corruption framework and implement plans to improve the effectiveness of the AML/CFT framework,” it said.

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