IMF Staff Completes 2016 Article IV Mission to NigeriaPress Release No. 16/72
February 24, 2016
An International Monetary Fund (IMF) team, led by Gene Leon, visited Abuja and Lagos during December 14-17 and January 10–25 to conduct the 2016 Article IV consultation. Discussions focused on assessing the economic impact of the sharp decline in oil prices and policies for addressing near-term vulnerabilities, as well as structural reforms to promote sustained inclusive growth and reduce poverty.
Following the conclusion of the visit, Mr. Leon issued the following statement:
“Nigeria is facing the impact of a sharp decline in oil prices. Due to its dependence on oil revenues, the general government deficit doubled to about 3.3 percent of GDP in 2015, despite a sharp reduction in public investment. Exports dropped about 40 percent, pushing the current account deficit to an estimated 2.4 percent of GDP. With foreign portfolio flows slowing significantly, reserves fell to $28.3 billion at end-2015. Foreign exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves have impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies. Coupled with fuel shortages in the first half of the year and lower investor confidence, growth is estimated to have slowed to 2.8 percent in 2015 (from 6.3 percent in 2014), weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. Inflation increased to 9.6 percent in December (up from 7.9 percent in December 2014), above the CBN’s medium term target range of 6 – 9 percent.
“With oil prices expected to remain low for a long time, continuing risk aversion by international investors, and downside risks in the global economy, the outlook remains challenging. The authorities’ policy response has focused on seeking to support growth, while preserving international reserves. The draft 2016 budget envisaged, appropriately, a significant shift in the composition of fiscal spending toward capital investment while increasing the allocation for a social safety net. At the same time the CBN has eased monetary conditions.
“In light of the significant macroeconomic adjustment that is needed to address the permanent terms-of-trade shock, it will be important to put in place an integrated package of policies centered around: (i) fiscal discipline; (ii) reducing external imbalances; (iii) further improving efficiency of the banking sector; and (iv) fostering strong implementation of structural reforms that will enhance competitiveness and foster inclusive growth.
“Growth is projected to improve slightly to 3.2 percent in 2016 but could rebound to 4.9 percent in 2017, supported by an appropriate policy package that would, for example, enable priority infrastructure investments. The general government deficit is projected to widen somewhat before improving in 2017, while the external current account deficit is likely to remain flat at 2.3 percent of GDP. Growth in credit to the private sector is projected to recover from the slump in 2015, aiding the increase in activity. Key risks to the outlook include lower-than-budgeted oil prices, shortfalls in non-oil revenues, a further deterioration in finances of state and local Governments, and a resurgence in security concerns.
“Establishing medium-term fiscal policy goals that support fiscal sustainability is a priority. In particular, measures should be implemented to boost the ratio of non-oil revenue to GDP, including from improvements in revenue administration and broadening of the tax base; rationalize spending; adopt safety nets for the most vulnerable; and foster enhanced accountability and an orderly adjustment of sub-national budgets.
“Eliminating existing macroeconomic imbalances and achieving sustained private sector-led growth requires a renewed focus on ensuring the competitiveness of the economy. As part of a credible package of policies, the exchange rate should be allowed to reflect market forces more and restrictions on access to foreign exchange removed, while improving the functioning of the interbank foreign exchange market (IFEM). It will be important for the regulatory and supervisory frameworks to ensure a strong and resilient financial sector that can support private sector investment across production segments (including SMEs) at reasonable financing costs. Staff is supportive of the authorities’ ongoing efforts to promote targeted and core infrastructure (in power, integrated transport network, housing); reduce business environment costs through greater transparency and accountability, promote employment of youth and female populations.
“Steadfast implementation of structural reforms is key. Adopting a sound Petroleum Industry Bill, including by applying the Anti-Money Laundering/Combating the Financing of Terrorism framework, will help strengthen the regulatory framework for the oil sector. Emphasis should be sustained on doing “more with less” to improve the efficiency of public sector service delivery and create an enabling environment to attract investment.
“During the visits, the team met with Vice President Professor Yemi Osinbajo, Finance Minister Kemi Adeosun, Minister of Budget and Planning Udoma Udo Udoma, Central Bank of Nigeria Governor Godwin Emefiele, senior government officials, and representatives of the private sector. The team would like to thank the authorities and private sector representatives for the open discussions and for their hospitality.”