IMF Article IV: Nigeria’s Outlook Challenging, Forex Reforms Needed

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•Says real GDP contracting, inflation increasing, external vulnerabilities remain large

Festus Akanbi in Lagos and Ndubuisi Francis in Abuja

The International Monetary Fund (IMF) yesterday returned a gloomy verdict on the Nigerian economy for 2020, declaring that the nation’s economic outlook is challenging.

The multilateral institution, which recently conducted its 2020 Article IV Consultation with Nigeria, said the country’s economy “is buffeted” from side to side by a cocktail of issues including the uncertainty over the COVID-19 pandemic, low oil prices, capital outflows and balance of payment challenges.

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.
The IMF team, led by Ms. Jesmin Rahman, conducted this latest virtual mission between October 30 and November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria.

The IMF, in a statement made available to THISDAY on its findings, said: “The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks.

“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.”
In its estimation, the IMF said supply shortages have pushed up headline inflation to a 30-month high.
It said: “Under current policies, the outlook is challenging. Real GDP is projected to contract by 3¼ per cent in 2020. The recovery is projected to start in 2021, with subdued growth of 1½ per cent and output recovering to its pre-pandemic level only in 2022.”

The IMF report, which acknowledged the efforts of the Central Bank of Nigeria (CBN) to rein in inflation, however, maintained that despite an expected easing of food prices, inflation is projected to remain in double-digits and above the CBN’s target range.

“Following a significant decline in revenue collections – from levels that were already among the lowest in the world – fiscal deficits are projected to remain elevated in the medium term,” the report stated.

Recognising various policy measures put in place by the federal government, the Bretton Wood Institution still believes there is need to put in place more broad market reforms in order to address the pressing balance of payment pressures in Nigeria.

The report stated: “The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households. But more needs to be done.
“Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path.

“A durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning. The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.

“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.”

The IMF also wants the CBN to hands off budget financing, saying, “The mission welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term. This could 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.”

It, however, welcomed fiscal transparency measures introduced to facilitate tracking and reporting of budget emergency funding.
Recall that the federal government had created new budget lines with information on monthly expenditures using emergency funding posted on the Ministry of Finance’s Transparency Portal.

The Bureau of Public Procurement has also issued guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting Portal has been publishing related procurement contracts.
The IMF said further steps are needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership.

According to the IMF: “The mission agreed 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.

“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. 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.”

The IMF called for more regulatory actions to forestall future financial stability risks. It noted: “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.
“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations.

“The minimum loan to deposit ratio should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients. “Regarding financial inclusion, the mission welcomed notable progress in narrowing gender and regional gaps in access to financial services, including through fostering financial literacy, agency banking and use of fintech.

“On the structural front, the approval of the power sector recovery programme 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.”