The International Monetary Fund (IMF) has concluded an Article IV consultation with the Nigerian government and has welcomed the notable reforms undertaken in the fiscal sector, including the removal of a fuel subsidy and steps to implement cost-reflective tariff increases in the power sector.
The IMF states that Nigeria’s economy had been hit hard by the Covid-19 pandemic. Following a sharp drop in oil prices and capital outflows, real gross domestic product (GDP) is estimated to have contracted by 3.2% in 2020.
The country’s headline inflation rose to 14.9% in November 2020, which marked a 33-month high, reflecting core and food inflation increases emanating from supply shortages due to the lockdown effected to curb infections, alongside the land-border closure and continued import restrictions.
The unemployment rate reached 27% in the second quarter of the year, with youth unemployment at 41%.
The Nigerian authorities acted swiftly to adopt a pandemic-related support package equivalent to 0.3% of GDP in the 2020 revised federal Budget despite limited fiscal space.
External vulnerabilities owing to lower oil prices and weak global demand have increased, with the current account remaining in deficit in the first half of 2021.
In April 2020, Nigeria received IMF emergency financial assistance of $3.5-billion under the Rapid Financing Instrument to help cushion the impact of the pandemic.
The IMF notes that socioeconomic conditions have deteriorated, with rising food inflation, elevated youth unemployment and mass protests in October last year, and says surveys show worsening food insecurity with a significant impact on the vulnerable.
Risks are tilted to the downside and include the resurgence of the pandemic, security situation and unfavourable external environment.
Capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities.
On the upside, recovering oil prices and the completion of the Dangote oil refinery could catalyse more domestic crude oil production and boost growth.
The IMF executive directors agreed with the thrust of the staff appraisal. They commended the authorities for the measures taken to address the health and economic impacts of the Covid-19 pandemic which have exacerbated pre-existing weaknesses.
Looking ahead, the IMF’s directors emphasised the need for urgent policy adjustment in Nigeria and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.
They further stressed the need for significant revenue mobilisation to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures with higher tax rates awaiting a more sustained economic recovery.
They also highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.
The IMF directors noted that multiple rates, limited flexibility and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.
Further, the IMF observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase.
In the medium term, the monetary policy operational framework should be reformed and the central bank financing of the budget deficit phased out in order to reduce inflation.
While welcoming the resilience of the banking sector, the IMF directors also called for continued vigilance to contain financial stability risks. They noted that Covid-19 debt relief measures for bank clients should remain time-bound and limited to those with good pre-crisis fundamentals.
Lastly, the directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.
In addition, they encouraged strengthening governance and anticorruption frameworks, including compliance with Anti-Money Laundering/Combating the Financing of Terrorism measures.
The directors also welcomed the country’s ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.