Today we shed some light on the recently published IMF Article IV on Nigeria. The consultations with Nigerian officials on economic developments and policies for the 2020 Article IV ended in mid-November. The publication commends the authorities for the measures taken to address the health and economic impacts of the COVID-19 pandemic which have exacerbated pre-existing weaknesses. However, it emphasised the need for urgent policy adjustments and more fundamental reforms to sustain macroeconomic stability as well as boost growth and employment.
For national output, the Fund projects a GDP contraction of -3.2% for 2020, with a weak recovery likely to keep per capita income stagnant and no higher than the 2010 level in the medium term. We estimate a contraction of -2.5% y/y for 2020 and a fragile recovery of 2.0% this year.
The projected weak recovery for Nigeria this year is partly driven by expectations of subdued global growth and decarbonisation trends which are expected to limit the increase in oil prices. In addition, OPEC quotas which are negatively impacting oil-related activities, fiscal revenues and export proceeds.
There are potential near-term downside risks: a global and domestic resurgence of the pandemic, which might prompt a sharp drop in oil prices, renewed lockdowns, a decline in remittances and a surge in borrowing costs. In this scenario, the Fund estimates that GDP could contract by -1.7% in 2021, pushing back the recovery.
Based on the report, in the short run, the recommended policy mix is heavily tilted towards exchange rate adjustments given constrained capacity on the monetary and fiscal fronts. In the medium term, revenue mobilisation should be top priority.
The report noted that multiple exchange rates, limited flexibility and fx shortages pose some challenge. The Fund recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime, with the near-term focus on allowing for greater flexibility and removing the payments backlog.
A clear exchange rate policy would help attract larger capital inflows, including foreign direct investments, which have significantly dropped in recent years.
In light of increased poverty level, IMF staff recommended revenue measures that are progressive and efficiency-enhancing, drawing on previous IMF technical assistance recommendations. These include: increasing the VAT rate to at least 10% by 2022 and 15% by 2025; rationalising the pioneer status system and other tax exemptions and customs duty waivers; increasing excise rates and broadening the revenue base; developing a high-integrity taxpayer register, and improving on-time filing and payment.
The combined gains from these measures could increase revenues by 7% of GDP over the 2021-25 period.
The report stressed the importance of well-targeted and adequate social policies to protect the poor from the negative impacts of the aforementioned recommended reforms. Nigeria's social safety net suffers from limited coverage, poor targeting, and inadequate monitoring.
The report noted that the recently ratified African Continental Free Trade Agreement (AfCFTA) holds huge prospects for job-rich growth through regional trade and economic integration. However, Nigeria needs to embrace more open trade and competition policies to rejuvenate growth.