The Nigerian economy is recovering from a historic downturn benefitting from government policy support, rising oil prices, and international financial assistance, said the International Monetary Fund (IMF).
As a result of the recent economic developments in the country, the global financial institution believes Nigeria has the capacity to repay its loan.
This follows the conclusion of the Article IV consultation [1] with Nigeria by the Executive Board of IMF on Monday last week.
“Directors noted that Nigeria’s capacity to repay the Fund is adequate,” the Fund said in a statement on Monday. “They encouraged addressing data gaps to allow timely and clear assessments of reserve adequacy.”
According to the IMF, Nigeria exited the recession in the fourth quarter of 2020 and its output rose by 4.1 per cent (y-o-y) in the third quarter, with broad-based growth except for the oil sector which is facing security and technical challenges.
While growth was projected at 3 per cent for 2021, it stated that headline inflation rose sharply during the pandemic, reaching a peak of 18.2 per cent year-on-year (y-o-y) in March 2021, but has since declined to 15.6 per cent in December.
The institution attributed this to the new harvest season and opening of land borders, although it noted the reported unemployment rates (end 2020) that have yet to come down.
It, however, confirmed that more recent COVID-19 monthly surveys have shown that employment was back at its pre-pandemic level.
“Despite the recovery in oil prices, the general government fiscal deficit is projected to widen in 2021 to 5.9 per cent of GDP, reflecting implicit fuel subsidies and higher security spending,” the Fund said. “Moreover, the consolidated government revenue-to-GDP ratio at 7.5 percent remains among the lowest in the world.
“After registering a historic deficit in 2020, the current account improved in 2021, and gross FX reserves have improved, supported by the IMF’s SDR allocation and Eurobond placements in September 2021.
“Notwithstanding the authorities’ proactive approach to contain COVID-19 infection rates and fatalities and the recent growth improvement, socio-economic conditions remain a challenge. Levels of food insecurity have risen, and the poverty rate is estimated to have risen during the pandemic.”
Increase VAT Rate
In their assessment, the directors, however, said the outlook remained subject to significant risks, including from the pandemic trajectory, oil price uncertainty, and security challenges.
They also stressed the need for major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.
The directors highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks and called for significant domestic revenue mobilisation, including by further increasing the value-added tax rate, improving tax compliance, and rationalising tax incentives, in that regard.
They also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources.
“Directors welcomed the removal of the official exchange rate and recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favourable conditions,” said the statement.
“They noted that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy. Directors considered it appropriate to maintain a supportive monetary policy in the near term, with continued vigilance against inflation and balance of payments risks. They encouraged the authorities to stand ready to adjust the monetary stance if inflationary pressures increase.
“Directors recommended strengthening the monetary operational framework over the medium term—focusing on the primacy of price stability—and scaling back the central bank’s quasi-fiscal operations. Directors welcomed the resilience of the banking sector and the planned expiration of pandemic-related support measures. They agreed that while the newly launched eNaira could help foster financial inclusion and improve the delivery of social assistance, close monitoring of associated risks will be important. They also encouraged further efforts to address deficiencies in the AML/CFT framework.
“Directors emphasised the need for bold reforms in the trade regime and agricultural sector, as well as investments, to promote diversification and job-rich growth and harness the gains from the African Continental Free Trade Agreement. Improvement in transparency and governance are also crucial for strengthening business confidence and public trust. Directors called for stronger efforts to improve the transparency of COVID-19 emergency spending.”
