An International Monetary Fund (IMF) staff team led by Amine Mati, Senior
Resident Representative and Mission Chief for Nigeria, visited Lagos and
Abuja from September 25 to October 7, 2019 to discuss recent economic and
financial developments, update macroeconomic projections, and review reform
implementation. At the end of the visit, Mr. Mati issued the following
statement:
The pace of economic recovery remains slow, as
depressed private consumption and investors’ wait-and-see attitude kept
growth in the first half of the year at 2 percent, a rate significantly
below population growth. Headline inflation has fallen, reaching its lowest
level since January 2016, helped by lower food price inflation.
“Spurred by one-off increases in imports, the current account turned into a
deficit in the first half of 2019 after three years of surpluses. Gross
international reserves have fallen to below $42 billion at end-August 2019,
mainly reflecting a decline in foreign holdings of short-term securities
and equity. The exchange rate in various windows remained stable, helped by
steady sales of foreign exchange by the Central Bank of Nigeria (CBN).
“Carryover from 2018 to 2019 helped increase public investment spending in
the first half of 2019, but revenue underperformed significantly relative
to the budget target in the first half of 2019. Over-optimistic revenue
projections have led to higher financing needs than initially envisaged,
resulting in overreliance on expensive borrowing from the CBN to finance
the fiscal deficit. Federal Government interest payments continue to absorb
more than half of revenues in 2019.
“The outlook under current policies remains challenging. Growth is expected
to pick up to 2.3 percent this year on the strength of a continuing
recovery in the oil sector and the regaining of momentum in agriculture
following a good harvest. Revenue initiatives planned under the 2020
budget—including a VAT reform that increases the rate, introduces a minimum
registration threshold and exempts basic food products—will help partially
offset declining oil revenues and the impact of higher minimum wages, thus
keeping the overall consolidated fiscal deficit elevated. The current
account’s shift to a deficit is expected to persist while the pace of
capital outflows continues to weigh on international reserves. Inflation
will likely pick up in 2020 following rising minimum wages and a higher VAT
rate, despite a tight monetary policy.
“A comprehensive package of measures—whose design and implementation will
require close coordination within the economic team and the newly-appointed
Economic Advisory Council—is urgently needed to reduce vulnerabilities and
raise growth.
“The increasing CBN financing of the government reinforces the need for an
ambitious revenue-based fiscal consolidation that should build on the
initiatives laid out in the Strategic Revenue Growth Initiative. A tight
monetary policy should be maintained through more conventional tools.
Managing vulnerabilities arising from large amounts of maturing CBN
bills—including those held by non-residents—requires stopping direct
central bank interventions, the introduction of longer-term government
instruments to mop up excess liquidity and moving towards a uniform
market-determined exchange rate.
“Banking sector prudential ratios are improving. However, new regulations
to spur lending—which has recently increased—should be carefully assessed
and may need to be revisited in view of the potential unintended
consequences on banks’ asset quality, maturity structure, prudential
buffers and the inflation target. Continued strengthening of banks’ capital
buffers would enhance banking sector resilience.
“Structural reforms, particularly on governance and corruption and in
implementing the much-delayed power sector recovery plan, remain essential
to boosting prospects for higher and more inclusive growth.”
“The team held productive discussions with senior government and central
bank officials. It also met with representatives of the banking system, the
private sector, and international development partners. The team wishes to
thank the authorities and all those it met for the productive discussions,
excellent cooperation, and warm hospitality.”
