IMF Staff Completes 2020 Article IV Mission to Nigeria
IMF News, December 11, 2020
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- Published: December 11, 2020
Mission context and key observations
- IMF staff team led by Jesmin Rahman conducted a virtual mission from October 30 to November 17, 2020, in the context of the 2020 Article IV Consultation with Nigeria.
- The COVID-19 global pandemic has:
- Exacted 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.
- Contributed, together with low oil prices and sharp capital outflows, to significant balance of payments (BOP) pressures, large output contraction, increased unemployment, and supply shortages that pushed up headline inflation to a 30-month high.
- The authorities adopted a revised budget in July which removed fuel subsidies and prioritized spending to make room for a support package, including higher subsidies on CBN credit intervention facilities and regulatory forbearance measures.
Economic outlook and projections
- Real GDP:
- Projected to contract by 3¼ percent in 2020 under current policies.
- Recovery projected to start in 2021 with subdued growth of 1½ percent.
- Output projected to recover to its pre-pandemic level only in 2022.
- Inflation:
- Projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range absent monetary policy reforms.
- Headline inflation noted at a 30-month high due to supply shortages.
- Fiscal and BOP pressures:
- Significant decline in revenue collections—from levels already among the lowest in the world—leads to projected elevated fiscal deficits in the medium term.
- Significant downside risks to the near-term outlook arise from the uncertain course of the pandemic both globally and in Nigeria.
Policy findings and recommendations — exchange rate, fiscal, and revenue
- Exchange rate and market reforms:
- 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 recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning.
- The mission welcomed earlier adjustments in the official exchange rate and recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.
- Revenue mobilization:
- 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.
- With high poverty rates and only a gradual recovery, initial revenue measures should rely on progressive and efficiency-enhancing actions; higher VAT and excise rates should await a stronger economic recovery.
- Fiscal financing and public finance management:
- The mission welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term.
- Complete removal 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.
Monetary policy and financial sector recommendations
- Monetary stance:
- The mission agreed with the CBN that the accommodative monetary stance remains appropriate in the near term given constrained fiscal space, large fiscal financing needs and strained sovereign external market access.
- 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, policy strategy and communication should be strengthened to establish the primacy of price stability.
- Banking sector and financial stability:
- The banking sector has been resilient thanks to ample pre-crisis buffers, but vigilance and corrective actions were recommended to prevent increased financial stability risks from rising non-performing loans.
- 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.
- Progress welcomed on narrowing gender and regional gaps in access to financial services via financial literacy, agency banking and fintech.
Transparency, governance, and structural reforms
- Fiscal transparency:
- The mission welcomed fiscal transparency measures introduced to facilitate tracking and reporting of budget emergency funding.
- New budget lines created, with information on monthly expenditures using emergency funding posted on the Ministry of Finance’s Transparency Portal.
- The Bureau of Public Procurement issued guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting Portal has been publishing related procurement contracts.
- Further steps needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership.
- Petroleum Industry Bill (PIB):
- The mission welcomed the recent submission of the Petroleum Industry Bill to the Parliament.
- The Fiscal Framework chapter of the bill appropriately rebalances the government take in onshore/offshore production to provide a fair share to the government while remaining attractive to investors.
- Structural policy priorities:
- Approval of the power sector recovery program financing plan, ratification of the African Continental Free Trade Area (AfCFTA), and completion of key road projects are positive steps.
- Recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including lifting trade restrictions, to unlock Nigeria’s strong growth potential.
- Continued strengthening of the anti-corruption framework and implementation of plans to improve the effectiveness of the AML/CFT framework were identified as critical.
Mission closing
- The IMF mission thanked the authorities and other counterparts for frank and thoughtful discussions and cooperation.
- The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board; staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
Source: IMF press release, December 11, 2020.