World Bank IMF and Dev Agencies | |
World Bank IMF and Dev Agencies | |
2628 VIEWS | |
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Friday, December
11, 2020 10:38 PM /by IMF/ Header Image Credit: IMF
An International Monetary Fund (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.
At the conclusion of the mission, Ms. Rahman issued the following
statement:
"The COVID-19 global pandemic is exacting 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. Low
oil prices and sharp capital outflows have significantly increased balance of
payments (BOP) pressures and, together with the pandemic-related lockdown, have
led to a large output contraction and increased unemployment. Supply shortages
have pushed up headline inflation to a 30-month high.
"Under current policies, the outlook is challenging. Real GDP is
projected to contract by 3¼ percent in 2020. The recovery is projected to start
in 2021, with subdued growth of 1½ percent and output recovering to its
pre-pandemic level only in 2022. Despite an expected easing of food prices,
inflation is projected to remain in double-digits and above the Central Bank of
Nigeria's (CBN) target range, absent monetary policy reforms. Following a
significant decline in revenue collections-from levels that were already among
the lowest in the world-fiscal deficits are projected to remain elevated in the
medium term. There are significant downside risks to this near-term outlook
arising from the uncertain course of the pandemic both globally and in Nigeria.
"Recognizing the gravity of the situation, the Nigerian authorities have
undertaken commendable and timely measures to counter the pandemic's impact on
lives and livelihoods. The Federal Government adopted a revised budget in July
which removed fuel subsidies and prioritized spending to make room for a
support package, which included higher subsidies on CBN credit intervention
facilities and regulatory forbearance measures to ease debt service in affected
sectors. The authorities have also taken courageous steps to remove costly and
untargeted subsidies in the power sector, which were largely benefiting
better-off households.
"But more needs to be done. 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 Nigeria's recurrent BOP problems requires
recalibrating exchange rate policies to reduce BOP risks, instill market
confidence and facilitate private sector planning. The adjustments in the
official exchange rate made earlier this year are steps in the right direction
and the mission recommended a multi-step transition to a more unified exchange
rate regime, with a market-based, flexible exchange rate.
"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 in prospect, revenue mobilization will need
to rely initially on progressive and efficiency-enhancing measures, with higher
VAT and excise rates awaiting until stronger economic recovery takes root.
"The mission welcomed this year's reduced dependence on central bank
financing of the budget and recommended its complete removal in the medium
term. This 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.
"The mission also welcomed fiscal transparency measures introduced to
facilitate tracking and reporting of budget emergency funding. New budget lines
have been created, with information on monthly expenditures using emergency
funding posted on the Ministry of Finance's Transparency Portal. The Bureau of
Public Procurement has also issued guidelines on COVID-19 emergency fund use,
and the Nigeria Open Contracting Portal has been publishing related procurement
contracts. Further steps are needed to ensure more consistent access to the
Transparency Portal and publication of contract details relating to beneficiary
ownership.
"The mission welcomed the recent submission of the Petroleum Industry
Bill (PIB) to the Parliament. The Fiscal Framework chapter of the bill
appropriately rebalances the government take in onshore/offshore production,
with the aim of providing a fair share to the government while remaining attractive
to investors.
"The mission agreed with the CBN that the accommodative monetary stance
remains appropriate in the near term given the constrained fiscal space, large
fiscal financing needs and strained sovereign external market access. However,
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, along with policy strategy and
communication, should be strengthened to establish the primacy of price
stability.
"While the banking sector has been resilient thanks to the ample
pre-crisis buffers, the mission recommended vigilance and corrective actions to
prevent an increase in financial stability risks arising inter alia from
increasing non-performing loans. In this connection, 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. Regarding
financial inclusion, the mission welcomed notable progress in narrowing gender
and regional gaps in access to financial services, including through fostering
financial literacy, agency banking and use of fintech.
"On the structural front, the approval of the power sector recovery
program financing plan, the ratification of the African Continental Free Trade
Area (AfCFTA), and the completion of key road projects are positive steps.
Going forward, the mission recommended decisive actions to tackle governance
weaknesses and implement regulatory and trade-enabling reforms, including the
lifting of trade restrictions, to unlock Nigeria's strong growth potential.
Moreover, it is critical to continue strengthening the anti-corruption
framework and implement plans to improve the effectiveness of the AML/CFT
framework.
"The IMF mission would like to thank the authorities and other
counterparts for the frank and thoughtful discussions and cooperation."
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