Nigeria: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 19, 2021
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- Published: November 19, 2021
Current macroeconomic situation and near-term recovery
- The economy exited the recession in 2020Q4 supported by government policy support, rebounding oil prices and international financial aid.
- Output rose by 5.4 percent (y-o-y) in the second quarter, driven by base effects in transport and trade and strong IT-sector growth; manufacturing and oil sectors remain weak due to FX shortages, and security and technical challenges.
- Headline inflation peaked at 18.2 percent y-o-y in March 2021 and has since declined aided by the new harvest season and opening of land borders.
- Reported unemployment rates have not yet fallen, though COVID-19 monthly surveys indicate employment is back at pre-pandemic levels.
COVID-19 management and social impact
- Authorities adopted proactive measures including a robust infection tracking system and a national vaccine procurement and rollout strategy, helping to keep infection rates and fatalities lower than in many other countries.
- Less than 3 percent of the eligible population has been fully vaccinated due to limited vaccine supply, delivery bottlenecks and high vaccine hesitancy.
- The pandemic’s economic and social impacts include rising food insecurity and increased poverty among vulnerable groups.
Outlook and risks
- Real GDP is projected to grow by 2.6 percent this year and continue in the range of 2.6-2.7 percent per annum over the medium term, implying stagnant per capita income in the medium term.
- Inflation is projected to remain in double-digits absent monetary policy reforms.
- Near-term downside risks: uncertain pandemic course and domestic security situation.
- Medium-term upside risks: faster-than-expected ramp-up of the Dangote refinery’s production capacity and effective implementation of the 2021 Petroleum Industry Act (PIA).
Fiscal policy: priorities, projections and recommendations
- General government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP and remain at that level in 2022, despite higher oil prices, reflecting implicit fuel subsidies and higher security spending.
- Without bold revenue mobilization, fiscal deficits are projected to stay elevated above pre-pandemic levels with public debt increasing to 43 percent in 2026.
- General government interest payments expected to remain high as a share of revenues, leaving the fiscal position vulnerable to real interest rate shocks and dependent on central bank financing.
- Recommended near-term measures:
- Complete removal of regressive fuel subsidies and move to market-based pricing in early 2022 as stipulated in the 2021 Petroleum Industry Act.
- Implement cost-reflective electricity tariffs as of January 2022.
- Provide well-targeted social assistance to cushion the poor.
- Recommended revenue measures:
- Implement e-customs reforms with efficient procedures and controls.
- Develop a VAT Compliance Improvement Program.
- Improve compliance across large, medium, and micro/small taxpayers.
- Rationalize tax incentives and customs duty waivers.
- Fiscal consolidation impact:
- Cumulative net savings from recommended measures, after making room for additional social assistance, could amount to 5.1 percent of GDP over 2022-26.
- Such consolidation would keep public debt below 40 percent of GDP and reduce dependence on central bank financing of the deficit.
- The mission welcomed passage of the PIA and stressed timely implementation; preliminary assessments suggest approved fiscal terms will increase investment incentives but reduce fiscal take from new and converted fields.
Exchange rate policy and trade regime
- The mission welcomed discontinuation of the official exchange rate but warned that continued administrative measures to address FX shortages sustain uncertainty and risk sudden large adjustments.
- Advice: move to a unified and market-clearing exchange rate without further delays, accompanied by clear communications, macro policies to contain inflation, and structural policies to attract investment.
- Benefits of unified market-clearing rate: help build FX buffers through higher capital inflows.
- Despite SDR allocation and a successful Eurobond issuance, gross reserves remain significantly below IMF recommended adequacy levels.
- The mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate.
- Trade regime observations and recommendations:
- Current trade regime remains protectionist and restrictive with numerous products prohibited from FX access for imports, high tariff and non-tariff barriers, and difficult trade logistics.
- Recommend decisive actions to reduce barriers to trade and reliance on import substitution to harness AfCFTA opportunities and improve trade facilitation.
Monetary and financial sector policies
- Monetary policy guidance:
- Remain supportive of the nascent recovery while closely monitoring for exchange rate pressures or resurgent inflation.
- Beware of adverse feedback loops between persistent high inflation and periodic exchange rate adjustments if monetary policy becomes excessively loose.
- The out-of-cycle and discretionary use of the cash reserve requirement (CRR) poses regulatory and operational uncertainties for the banking system.
- Medium-term monetary framework recommendations:
- Modernize the 2007 CBN act to establish the primacy of price stability.
- Strengthen monetary transmission by integrating interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool.
- Scale back credit intervention programs as part of broader monetary structural reform as recovery firms up.
- Banking sector resilience and risks:
- Systemwide NPL ratio has improved; profitability resilient; capital buffers above regulatory minimum.
- Stress tests indicate a severe shock requiring loan reclassification could erode buffers; restructured loans represent less than a quarter of the overall loan portfolio and may become delinquent.
- Tighter market liquidity due to CRR debits and restricted access to the CBN discount window may raise bank funding costs and restrict credit growth at individual banks.
- Financial inclusion and digital currency:
- Financial exclusion remains large, especially in rural areas and among women and youth.
- Prioritize provision of financial access points in remote areas and leverage new technologies.
- Launching of eNaira could significantly increase financial inclusion and delivery of social assistance if coverage is extended to those with a mobile phone.
- Financial stability recommendations (time-bound debt relief supported):
- Let pandemic-related loan restructuring expire as planned in March 2022 in line with the economic recovery.
- Timely action against chronically undercapitalized banks and use new BOFIA provisions to bolster corporate governance.
- Additional regulation for sound practices and consumer protection in digital payments and lending.
- Introduce additional macroprudential instruments to manage systemic and cyclical risks in the context of Basel III implementation.
- Central bank to assess impact of eNaira on monetary policy transmission and financial stability.
Structural policies, jobs and governance
- Jobs and agriculture:
- Large number of projected new labor force entrants and stagnant living standards require growth that increases jobs and improves worker welfare.
- Agriculture accounts for almost half of current employment; job-rich growth will rely considerably on agriculture in the near term.
- Welfare of agricultural workers (per capita consumption) remains far below other workers due to lower productivity.
- Recommendations: increase supply and usage of inputs, promote storage, create farm cooperatives to reduce food loss, and increase access to credit to boost productivity, jobs, incomes, food security and agroindustry-driven diversification.
- Transparency and governance:
- Progress: NNPC published its last two annual statements; Corporate registry began publishing information on persons with significant control in newly established companies; whistleblower legislation is being presented to Parliament.
- Shortcomings: perception of corruption remains high in the civil service, lowering tax compliance and reform buy-in; slow implementation of RFI transparency and accountability measures; uneven access and quality of COVID-19 spending information on the Ministry of Finance’s Transparency Portal; COVID-19 spending audits are just starting and publication of procurement contract recipients is incomplete.
- Need to build public trust to implement difficult but necessary reforms.
Closing acknowledgement
- The IMF mission thanked the authorities and counterparts for frank and thoughtful discussions and cooperation.
IMF Staff Concluding Statement, November 19, 2021.