Five Questions About Nigeria’s Road to Recovery

IMF News, February 8, 2021

Source details

Authors: Ari Aisen, Jesmin Rahman, and Jiaxiong Yao, IMF, African Department.
Date: February 8, 2021.
Key findings:
- Nigeria entered the COVID-19 crisis with falling per capita income, high inflation, and governance challenges.
- Under current policies, Nigeria’s recovery is expected to be weak and gradual.
- Real GDP growth in 2021 is expected to turn positive at 1.5 percent.
- Real GDP is expected to recover to its pre-pandemic level only in 2022.
Downside risks identified:
- Pandemic-related developments, including Nigeria experiencing a second wave.
- Over the medium term, a subdued global recovery and decarbonization trends expected to keep oil prices low and Organization of the Petroleum Exporting Countries quotas in place, restricting oil-related activities, fiscal revenues, and export proceeds.
- Non-oil growth expected to remain sluggish due to inward-looking policies and regulatory uncertainties.
Structural challenge:
- Foreign direct investment has dropped significantly in recent years.

Problem statement:
- The current system creates uncertainties because of multiple exchange rates and non-transparent rules for foreign exchange allocation.
- Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment.
Recommended benefits of reform:
- Unifying the various rates into one market-clearing rate would establish policy credibility.
- An appropriately valued exchange rate and a clear exchange rate policy would help instill confidence and support a private sector-led recovery.
- Policy clarity is important to attract larger capital inflows, including foreign direct investments, and successful diversification.

Current situation:
- Nigeria has one of the lowest revenue levels as a share of GDP worldwide.
- A large share of revenues is spent on public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.
Near-term priority:
- Mobilizing revenues through efficiency-enhancing and progressive measures.
Suggested measures:
- Revisiting tax exemptions and customs duty waivers.
- Increasing and broadening the base for excise taxes.
- Developing a high-integrity taxpayer register.
- Enhancing digital infrastructure.
- Improving on-time filing and payment.
Medium-term recommendation:
- Once economic recovery takes root, increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025—the average in countries belonging to the Economic Community of West African States—to create effective fiscal space.

Current export structure:
- Hydrocarbon products still account for 90 percent of the country’s exports today, as they did in the 1970s.
Rationale for diversification:
- Successful economic diversification requires trade openness and competitive discipline.
- Experience of Malaysia, Indonesia, and to some extent India shows a shift toward export-oriented industrialization can boost GDP.
- Limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest Nigeria needs to change course.
Labor market challenge:
- To accommodate a growing number of young people entering the labor market, Nigeria will need to create at least 5 million new jobs each year over the next decade.
Policy direction:
- Embrace more open trade and competition policies to help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.

Measures adopted:
- The government has created new budget lines with monthly expenditure information on emergency funding, which are posted on the Ministry of Finance’s Transparency Portal (users have found it difficult to access the data).
- The Bureau of Public Procurement has issued guidelines on COVID-19 emergency fund use.
- The Nigeria Open Contracting Portal has been publishing related procurement contracts (some contract details on beneficiary ownership are yet to be completed).
Recommended next steps:
- Further embrace transparency reforms by expanding the monitoring and reporting of all public spending.
- Ensure easy public access to spending data.

International Monetary Fund — “Five Questions About Nigeria’s Road to Recovery” (Ari Aisen, Jesmin Rahman, Jiaxiong Yao; February 8, 2021).