IMF Staff Concludes Visit to Nigeria
IMF News, October 8, 2019
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Bibliographic details
- Published: October 8, 2019
Mission overview and context
- Press Release No. 19/368; mission visited Lagos and Abuja from September 25 to October 7, 2019.
- End-of-Mission statement reflects IMF staff views and does not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.
- Statement attributed to an IMF staff team led by Amine Mati, Senior Resident Representative and Mission Chief for Nigeria.
Key macroeconomic findings
- Growth
- Growth in the first half of the year was 2 percent, a rate significantly below population growth.
- Outlook under current policies: growth is expected to pick up to 2.3 percent this year driven by a continuing recovery in the oil sector and regaining momentum in agriculture following a good harvest.
- Inflation and prices
- Headline inflation has fallen, reaching its lowest level since January 2016, helped by lower food price inflation.
- Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy.
- External sector and reserves
- The current account turned into a deficit in the first half of 2019 after three years of surpluses, spurred by one-off increases in imports.
- 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).
- Capital outflows are weighing on international reserves and the current account’s shift to a deficit is expected to persist.
- Fiscal situation and public finances
- Carryover from 2018 to 2019 helped increase public investment spending in the first half of 2019.
- Revenue underperformed significantly relative to the budget target in the first half of 2019; over-optimistic revenue projections led to higher financing needs than envisaged.
- Elevated fiscal deficits rely on central bank financing, 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.
- Banking sector and financial stability
- Banking sector prudential ratios are improving.
- Lending has recently increased; new regulations to spur lending should be carefully assessed for 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.
- Policy implementation and structural issues
- Structural reforms on governance and corruption and implementation of the 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, representatives of the banking system, the private sector, and international development partners.
Projections and policy implications
- Growth projection: pick up to 2.3 percent this year.
- Inflation projection: likely to pick up in 2020 following rising minimum wages and a higher VAT rate.
- External balances: current account deficit and continued capital outflows expected to weigh on international reserves.
Urgent policy recommendations (coherent, coordinated package)
- Fiscal policy
- Implement an ambitious revenue-based fiscal consolidation that builds on the initiatives laid out in the Strategic Revenue Growth Initiative.
- Stop overreliance on central bank financing of the government.
- Monetary and exchange rate policy
- Maintain a tight monetary policy through more conventional tools.
- Stop direct central bank interventions that complicate managing vulnerabilities from large amounts of maturing CBN bills (including those held by non-residents).
- Introduce longer-term government instruments to mop up excess liquidity.
- Move towards a uniform market-determined exchange rate.
- Revenue and tax measures
- Implement planned revenue initiatives under the 2020 budget, including a VAT reform that increases the rate, introduces a minimum registration threshold and exempts basic food products, to partially offset declining oil revenues and the impact of higher minimum wages.
- Financial sector measures
- Carefully assess and, if needed, revisit new regulations to spur lending to avoid weakening asset quality and prudential buffers.
- Continue strengthening banks’ capital buffers.
- Structural reforms
- Prioritize governance and anti-corruption reforms and implement the power sector recovery plan to boost inclusive growth prospects.
- Coordination
- Design and implement the comprehensive package with close coordination within the economic team and the newly-appointed Economic Advisory Council.