By SEGUN FATUASE
The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with Nigeria, noting the recovery of the Nigerian economy from a historic downturn due to the ravaging effects of the COVID 19 pandemic
The report noted with regret that socio-economic conditions remain a challenge with a rising poverty rate, in spite of the proactive approach by the Nigerian government to contain COVID-19 infection rates and fatalities.
‘’The outlook faces balanced risks. On the downside, low vaccination rates expose Nigeria to future pandemic waves and new variants, including the ongoing Omicron variant, while higher debt service to government revenues (through higher US interest rates and/or increased borrowing) pose risks for fiscal sustainability’’, it added.
While the IMF Executive Directors commended the proactive management of the COVID-19 pandemic and its economic impacts of the Nigerian government, they however hinted that the outlook remains subject to significant risks, including from the pandemic trajectory, oil price uncertainty and security challenges.
The Directors however highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks. In this regard, they called for significant domestic revenue mobilization, including by further increasing the value-added tax rate, improving tax compliance, and rationalizing tax incentives. Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.
They welcomed the removal of the official exchange rate and 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. They noted that 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 report however warned that insecurity and its attendant wave of violence could derail the recovery process if the government wavers in its approach.
‘’On the upside, the non-oil sector could be stronger, benefitting from its recent growth momentum, supportive credit policies, and higher production from the new Dangote refinery. Nigeria’s ratification of the African Continental Free Trade Agreement could also yield a positive boost to the non-oil sector while oil production could rebound, supported by the more generous terms of the Petroleum Industry Act’’, it noted with optimism.
The Board was able to deduce that the Nigerian economy during the period, largely benefitted from government policy support, rising oil prices and international financial assistance.
It also noted that Nigeria exited the recession in 2020Q4 while output rose by 4.1 percent (y-o-y) in the third quarter, with broad-based growth except for the oil sector, which is facing security and technical challenges.
While the report noted that projected growth rose to 3 percent in 2021, it added that inflation rose sharply during the pandemic reaching a peak of 18.2 percent y-o-y in March 2021 and subsequently declined to 15.6 percent in December 2021 due to the harvest season and the reopening of land borders.
Unemployment rates however shot skywards towards the end of 2020 with indications that things might revert to pre-pandemic level , going by recent COVID-19 monthly surveys
The report also noted that despite the recovery in oil prices, the general government fiscal deficit rose to 5.9 percent of GDP in 2021, reflecting implicit fuel subsidies and higher security spending.
‘’Moreover, the consolidated government revenue-to-GDP ratio at 7.5 percent remains among the lowest in the world. After registering a historic deficit in 2020, the current account improved in 2021 and gross FX reserves have improved, supported by the IMF’s SDR allocation and Eurobond placements in September 2021’’, it noted.
The Directors considered it appropriate to maintain a supportive monetary policy in the near term, with continued vigilance against inflation and balance of payments risks. They encouraged the authorities to stand ready to adjust the monetary stance if inflationary pressures increase. Directors 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.
On the positive side, the directors commended the resilience of the banking sector and the planned expiration of pandemic-related support measures. They agreed that while the newly launched eNaira could help foster financial inclusion and improve the delivery of social assistance, close monitoring of associated risks will be important. They also encouraged further efforts to address deficiencies in the AML/CFT framework. Directors emphasised 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. Directors called for stronger efforts to improve transparency of COVID-19 emergency spending.
Directors noted that Nigeria’s capacity to repay the Fund is adequate. They encouraged addressing data gaps to allow timely and clear assessments of reserve adequacy.
