Although the low oil price, security threats and political vulnerabilities remain worrying factors for Nigeria’s fiscal outlook, the International Monetary Fund (IMF) has commended the country’s authorities for making progress in promoting economic diversification, as well as for the government’s macroeconomic response to collapsing export prices.

The IMF noted in a statement on Wednesday that additional policy adjustments and broader structural reforms would have to be implemented in the period ahead to reconstitute buffers, mitigate risks and meet pressing development needs.

Further, it said that tightening fiscal policy and allowing the exchange rate to depreciate, while using some of the reserve buffer, were appropriate responses to the recent fall in oil prices.

“Nonetheless, achieving fiscal targets will require a careful prioritisation of public spending and a cautious implementation of capital projects,” the IMF said.

It also highlighted the importance of improved budgeting at the level of State and local governments to help better manage fiscal adjustment.

Nigeria had a large and diverse economy that achieved a decade of strong growth, averaging 6.8% a year – now accounting for 35% of sub-Saharan Africa’s gross domestic product (GDP).

However, the trade surplus started declining in the second quarter of 2013 on lower oil exports, paired with continued strong growth of imports and gross international reserves falling.

While the economy was diverse, with services accounting for over 50% of GDP in 2013, and oil only 13%, the oil sector remained a critical source of revenue and foreign exchange. With limited fiscal and external buffers – $2-billion in the excess crude account and $34.25-billion in gross international reserves at the end of 2014 – the sharp decline in oil prices in the second half of last year underscored the challenging, yet compelling, need to address remaining development challenges.

The IMF noted that mobilising additional nonoil revenues was critical to opening up fiscal space and improving public service delivery over the medium term.  It also welcomed ongoing initiatives to strengthen tax administration and encouraged authorities to also rein in exemptions, keep tax rates under review, persevere with subsidy reform and improve the management of oil revenue.

NIGERIA VS OIL
On February 25, the Senate approved the third revision to the country’s 2015 budget, tightening the fiscal envelope by lowering the budget benchmark oil price to $52/bl.

“A sharp contraction of public investment and domestic demand is projected to reduce growth to 4.75% this year from 6.3% in 2014,” the IMF said.

It added that inflation was projected to rise to 11.5% by year-end, from 8% at the end of 2014, reflecting the pass-through from exchange rate depreciation.

The outlook was subject to downside risks, both external and domestic.

LONG-TERM GROWTH
The IMF emphasised that Nigeria’s longer-term prospects rested on lowering its oil dependency and strengthening the private sector’s participation in economic activity. “Lasting and more inclusive growth calls for improving the business environment, promoting youth and female employment and advancing human capital development,” it said.

It added that financial soundness indicators remained above prudential norms, but the concentration of credit risks and foreign currency exposures called for continued close oversight.

“Nigeria’s economic data are broadly adequate for surveillance. Nonetheless, the country is encouraged to further improve statistics, in particular as regards the balance of payments,” it concluded.